Smart Contracts: Functioning and Legal Enforceability In India

Abstract

In the words of Milton Friedman, the 1976 Nobel Laureate for Economics, “The three primary functions of a government are law and order, defence, and contract enforcement.” The last function is generally performed through deterrence, wherein penal provisions are set for parties who violate the terms and conditions laid down in the contracts; and such provisions are enforced through adjudication, upon their violation. However, keeping the traditional methods of contract enforcement aside, there exists a lot of potential in technology to revolutionise the way contracts are performed. Smart contracts provide the platform to do exactly that.2 They are essentially self-executing, digitally encrypted contracts, which make use of block chain technology to ensure due performance and execution of contracts virtually, so as to provide a smooth and trouble-free experience. Although so far, there is no concrete legislation which deals with smart contracts, the Telecom Regulatory Authority of India (TRAI) released a notification in 2018 which briefly defined the term. It stated that they work on a programmable code which can implement predetermined tasks or rules so as to check regulatory compliance in advance, in the absence of human intervention. Further, it mentioned that such contracts are suitable for a DLT (Distributed Ledger Technology) system to formulate a digital agreement, with certainty (owing to cryptography) that the agreement has been executed in the ledger of every party to the agreement.