The Indian Contract Act (Act 9 of 1872) is a fundamental statutory enactment that regulates contractual relationships in India. It was drafted in the nineteenth century when the country was under British rule. The Act assumes that people will negotiate, prepare the document, and engage in judicial interpretation. There has also been a rising trend of smart contracts, self-executing contracts coded and deployed on segregated blockchain networks with a digital framework, and self-operation without human intervention.

This article critically examines how the principles of the Indian Contract Act- particularly those relevant to the offer, acceptance, consideration, capacity to contract, and consent of the parties- can be interpreted and understood in the context of smart contracts. The article also looks at the judicial views, gaps, and the need for reform and provides examples of relevant statutory provisions and case laws.

Understanding Smart Contracts: Technical and Legal Overview

The trendy term "smart contract" was coined by Nick Szabo in 1994. He described it as a computerized transaction protocol that executes the terms and conditions of a contract. Modern-age smart contracts are distributed to digital platforms, and their performance is based on "if-then" logic.

They are characterized by:

• Automation (self-execution)
• Immutability (code cannot be changed post-deployment)
• Decentralization (no central controlling authority)
• Transparency (recorded on public ledgers)

These contracts provide various functions, from transferring cryptocurrency (Bitcoin, Ethereum) and executing decentralized finance (DeFi) transactions to automatically payout the insurance and manage the bond deed agreements.

Applicability of Contractual Elements under the Indian Contract Act

The Indian Contract Act explains and provides the essential elements of a valid contract. The relevant provisions that are interrelated to the smart contracts are as follows:

• Offer and Acceptance (includes Sections 2 and 3–9)
• Consideration (includes Section 2(d))
• Capacity to Contract (includes Section 11)
• Free Consent (includes Section 14)

1. Offer and Acceptance in Smart Contracts Under the Indian Contract Act, a valid contract is formed when a party makes an offer, and the other party accepts that offer, creating consensus ad idem (meeting of minds). Hence, it also represents the parties' intentions to enter a contractual relationship. However, this process is less specific and more generalized in the context of smart contracts. The deployment of a smart contract is an offer. In contrast, the execution of a transaction (such as digital signing using a private key or a password or interaction with the contract) may be understood as acceptance. In Trimex International FZE Ltd. v. Vedanta Aluminium Ltd. [(2010) 3 SCC 1], the Supreme Court recognized the enforceability and applicability of electronic contracts. The Court observed that the communication of acceptance through electronic form would be understood as communication in the normal course within the scope of Section 4 of the Indian Contract Act. However, issues arise when:
   • The party does not completely understand the code (it raises concern about the meeting of minds criterion—consensus ad idem).
   • The understanding of natural language description and code, meaning if there was something that could be easily understood through human language rather than code, which is full of complicated and complex terminology.
   • Acceptance is automated, with either minimal or no human intervention.
      
2. Consideration in Digital Transactions According to Section 2(d) of the Indian Contract Act, Consideration means "when at the desire of the promisor, the promise or any other person has done or abstained from doing or does or abstains from doing or promises to do or abstain from doing, something, such act or abstinence or promise." However, in smart contracts, cryptocurrencies like Bitcoin or Ethereum, non-fungible tokens, or automated services may act as considerations. Recognizing cryptocurrencies as legal and valid considerations remains a clear-cut question. In the Internet and Mobile Association of India v. Reserve Bank of India [(2020) 10 SCC 274], the Supreme Court struck down the Reserve Bank of India's ban on cryptocurrencies and implicitly legitimized their usage. While the judgment did not explicitly recognize cryptocurrency as a legal property, it opened the doors to further explore the legal acceptance of these digital assets as valid consideration under the Indian Contract Law, as per Section 2(d). Also, the consideration in smart contracts may include digital performance, which means a code executing functions like releasing funds or transferring access. Under the Indian Contract Act's broad interpretation of the term "consideration" as something of value, these digital actions could pass, provided they are legitimate, recognized legally, and traceable.
    
3. Intention to Create Legal Relations Although it has not been expressly stated in the Indian Contract Act, the Indian Courts have regularly held that the intention to create a legal obligation is essential for the enforceability of the contract. In the commercial agreements, this intention is already assumed. But in the context of the smart contracts:
   • The commercial aspect (DeFi Platforms) often hints at legal intention.
   • Explicit declarations already instilled in the code or the accompanying documentation may also demonstrate this legal intent.
   • The effort and complexity of deploying these smart contracts can showcase seriousness and enforceability.
   However, the courts must tussle with scenarios where this code executes the obligations without apparent intention, particularly in open-source environments or where the parties lack legal worldliness.
    
4. Capacity to Contract in Digital Environments Section 11 of the Indian Contract Act states: "Every person is competent to contract who is of the age of majority according to law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject." The bogus nature of these blockchain networks complicates and makes it difficult to verify the age, the identity, and the capacity to contract. The complications that arise include:
   • Verification of identity: The smart contracts are based on cryptographic addresses, not the legal identity of the party.
   • Automated agents: Many contracts interact with bots (autonomous programs on the internet or another network that can interact with systems or users), raising questions about whether such non-human entities have the capacity.
   • Cross-border Participation: Participants may be regulated by different legal regimes, making it difficult to determine the jurisdiction and capacity assessments.
   In Mohori Bibee v. Dharmodas Ghose [(1903) 30 IA 114], the Privy Council held that a contract entered into by a minor (less than 18 years of age as per the Indian Majority Act) is void ab initio, meaning the agreement was null and void from the start. If we apply this concept to smart contracts, it would be difficult to determine whether a minor initiated the transaction through a pseudonymous wallet without any identity authentication layer.
    
5. Free Consent and Automated Execution Section 14 of the Indian Contract Act states that Consent is said to be free when it is not caused by coercion (Section 15), undue influence (Section 16), fraud (Section 17), misrepresentation (Section 18), or mistake (Sections 20, 21, 22). This concept faces stress in smart contracts due to their unchangeable and automated nature. The key concerns include:
   • Asymmetry of the Information: The users may not understand the code to which they are giving consent, highlighting the complexity of the code.
   • The divergence between Code and Explanation: The natural language of a contract (typically a summary) may not wholly and accurately reflect what the code is showcasing.
   • Immutability: Once out, smart contracts often cannot be altered, even if the user discovers that they were misled.

In LIC of India v. Consumer Education and Research Centre [(1995) 5 SCC 482], the Supreme Court opined that courts must always protect the weaker parties in unconscionable contracts. If this reasoning can be extended to smart contracts, some could argue that this extends to users of smart contracts who are not technical users, who may have consented to enter these contracts in a way they did not fully understand.

Legal Challenges and Jurisprudential Gaps

1. Jurisdiction and Enforcement

   Smart contracts operate on decentralized platforms and are not confined to territorial boundaries. This raises intricate questions under Section 20 of the Civil Procedure Code, defining the jurisdiction for civil suits. The case of State of Maharashtra v. Dr. Praful B. Desai [(2003) 4 SCC 601] stressed courts' need to adapt to current-age technology. However, blockchain's borderless nature demands more evolution, and it is possible to introduce new concepts like virtual presence or digital nexus to determine the case's jurisdiction.
    

2. Privity of Contract

   Under the traditional rules, only the parties to a contract can sue or be sued under it. However, smart contracts may involve multiple and unknown participants, third-party oracles that feed data, and DAOs, where collective action replaces the agency of individuals. The Supreme Court in M. C. Chako v. State Bank of Travancore [AIR 1970 SC 504] upheld the doctrine of privity (only the parties directly involved in a contract can enforce its terms or be held liable for its breach). However, it acknowledged that there are certain exceptions in modern law. These exceptions need to be expanded to broaden the horizon of decentralized digital ecosystems.
    

3. Mistakes, Fraud, and Misrepresentation

   Smart Contracts can execute actions even when based on erroneous or malicious code:
   • In the DAO attack in 2016, a fault in the smart contract code allowed an attacker to suck funds. Was this a legitimate use or exploitation?
   • Oracles that feed external data to smart contracts can be manipulated, which leads to false executions.

The Madras High Court in the Indian Bank v. Blue Diamond Detergents Ltd. [2009 SCC OnLine Mad 1735] held that "fraud vitiates all solemn acts," meaning that any act or transaction that is tainted by fraud, regardless of its solemnity or importance, is rendered invalid or void. In unchangeable environments, reversing the code that has been fraudulently executed can be technically impossible without agreement from the blockchain networks.

Judicial Approaches and Comparative Trends:

While the Indian Courts have yet to rule directly on the smart contracts, some related precedents do exist:

• Anvar P. V. v. P. K. Basheer [(2014) 10 SCC 473]: The Supreme Court established the requirements for electronic evidence, which could be applied to blockchain records.
• Societe Des Products Nestle v. Essar Industries [AIR 2006 Delhi 321]: The Delhi High Court pointed out that the definitions of documents evolve with tech, potentially incorporating smart contracts.

Internationally, the courts are gradually adapting the concept of smart contracts:

• The United Kingdom Jurisdiction Taskforce issued a legal statement recognizing smart contracts' enforceability under English Law.
• B2C2 Ltd. v. Quinoe Pte Ltd. [2019 SGCA(I) 01]: The Singapore Court of Appeal applied the traditional doctrines of contract to algorithmic transactions, i.e., code.
• Several US states, such as Arizona and Tennessee, have enacted statutes recognizing and giving legal importance to smart contracts and blockchain signatures.
   

Statutory and Regulatory Landscape in India

The legality of smart contracts in India is a big question. Several connected legal frameworks shape the status:

• Indian Contract Act, 1872: Guides through the traditional doctrines and principles of legal agreements but lacks provisions directly addressing smart contracts or digital agreements.
• Information Technology Act, 2000:
  • Section 4: Grants legal recognition to electronic records, potentially encompassing smart contract code.
  • Section 5: Recognizes electronic signatures as legally equal to handwritten ones, possibly extending to cryptographic signatures used in blockchain transactions.
  • Section 10A: Provides for electronic contract formation, supporting enforceability of smart contracts.
• Indian Evidence Act, 1872: Section 65B addresses the admissibility of electronic records, aiding in the introduction of blockchain records as evidence in disputes.
• Reserve Bank of India Regulations: The shift from a cryptocurrency ban to exploring central bank digital currency affects smart contracts utilizing crypto.
• Consumer Protection Act, 2019: Includes provisions addressing e-commerce, potentially applicable to consumer-facing smart contract applications, especially regarding unfair practices and consumer rights.
   

Recommendations for Legal Reform:

1. Judicial Interpretation
   Since a comprehensive legislative reform is absent, the judiciary needs to step in and provide guidelines or reforms that could be crucial in determining the legality of smart contracts. The Indian Courts should interpret the Indian Contract Act as essential for forming a contract. These essentials shall be satisfied as equivalent to blockchain actions demonstrating substantive elements of an agreement.
   
   The smart contracts, including code and natural language components, should be treated as expressions of the intent to enter into a contract. When the question of consent arises in smart contracts, the courts should scrutinize the information asymmetry, meaning having more information than the other party, between technical and non-technical parties. If multiple parties are in the smart contract, such as DAOs, courts should develop approaches to address this and attribute rights and responsibilities. The technology could be incorporated into contract law by focusing on the substantive elements of agreement rather than just bookish knowledge.
    
2. Amendments to the Indian Contract Act
   The Indian Contract Act should be amended to include the definition of smart contracts and give legal validity and explicit recognition. When the specific requirements under Section 10 of the Act have been fulfilled, the contract, when done digitally, should be recognized as a valid contract. Section 2 of the Act should be amended to define intention in electronic form as a manifestation through electronic actions such as cryptographic signs and blockchain transactions.
   
   Also, clause (d) of the same section should be amended to include digital assets as a valid consideration. Section 14 of the Act should be amended to address consent in technically intricate and complex agreements specifically. Sections 73-75 could be changed to consider remedies for breaches of smart contracts, noting their technical characteristics. Such amendments would allow innovations in technology while allowing for the essentials.
    
3. Dedicated Legislation
   There is a specific need for legislative frameworks to deal with smart contracts beyond the amendments to the Indian Contract Act. A separate statute should address the technicalities and legitimacy of issues raised by smart contracts. Such could draw inspiration from Arizona's approach while adapting to traditional and commercial practices. The framework for digital assets would clarify the status of tokens, cryptocurrencies, and assets as property, security, or currency.
   
   Specifically designated rules for the record of evidence in blockchain records would establish the accuracy and standards for expert testimony in disputes. Technical standards could draw on emerging ISO standards for blockchain tech while adapting to Indian requirements. Additionally, there should be a specific framework for smart contract dispute resolution and remedial systems. This would provide some legal certainty without hindering technological advancement by implementing transparency in rules and procedures while still allowing issues surrounding legal principles of contracts to remain.
    
4. Capacity Building
   Judges should be trained to keep them on par with blockchain technology, the functionality of smart contracts, and the technicalities necessary for adjudicating related matters. The courts should establish panels of experts who guide the functionality. The current legal education system should update its curricula to include smart contracts and their application to traditional legal practices.

Regulatory agencies like the Reserve Bank of India and the Securities and Exchange Board of India will also have to build capabilities in Blockchain Technology and its implications. This means the regulators will ensure that legal reforms are effectively implemented since judges, advocates, and regulators will have that level of knowledge to apply legal principles to inform the same.

Conclusion
While the traditional principles of the Indian Contract Act demonstrate adaptability, smart contracts will require evolution and technological innovation. Updates should be made that reference smart contracts while keeping the basic principles of the Act intact. The recommended directions and reforms would quickly outline how emerging technologies can appropriately be regulated while allowing traditional legal practices to adopt their more traditional-based systems and qualities.

Therefore, the shift from the Contract Act of the nineteenth century to the smart contract of the twenty-first century demonstrates innovative thinking in the scope of legal principles, which is a reminder that law must evolve regarding technological progress. By reasonably applying the concepts of the Act while developing new tools, India can create a regulatory framework that benefits and preserves the essential protections the Act has provided for centuries.