Smart Contracts and Dispute Resolution

A smart contract is a program that executes the terms of a bargain automatically when a defined condition is satisfied: the payment releases when the shipment is scanned, the security is transferred when the funds arrive. Because performance is automatic, it is sometimes said that such a contract cannot give rise to a dispute. That is not so. The code may not match the bargain, the data on which it acts may be wrong, and the law may intervene for reasons the code cannot know. What changes is not whether disputes arise but when: they arise after performance rather than before it.

The four points at which a dispute arises, what Indian law supplies, and what it does not

1. What a Smart Contract Is, and Is Not

In law a smart contract is not a separate species of contract. It is an ordinary agreement, part or all of whose performance is automated by code, usually running on a distributed ledger. Two features distinguish it in practice. Performance is self-executing, so no party need be willing at the moment of performance. And the record is immutable, so the fact of performance is not usually in dispute even where its correctness is.

It follows that the ordinary law of contract applies: offer and acceptance, consideration, capacity, free consent and lawful object under the Indian Contract Act, 1872. Sections 4, 5 and 10A of the Information Technology Act, 2000 recognise electronic records, electronic signatures and contracts formed by electronic means, so the form presents no difficulty.

2. Where the Disputes Come From

1. The code does not express the bargain. A coding error, an ambiguity the parties resolved differently, or a term that was never reduced to code at all. The question is then one of construction: what did the parties agree, and does the code reflect it?
2. The oracle is wrong. A smart contract acts on data supplied from outside the chain. If the feed reports a delivery that did not happen, or a price that is disputed, the code executes on a false premise.
3. The law intervenes. Frustration, illegality, misrepresentation, undue influence, a statutory right of a consumer, or an insolvency moratorium. None of these is visible to the code, and each may make an executed transfer wrongful.
4. Performance is complete but wrongful. This is the distinctive problem. In a conventional contract a party resists performance and sues; in a smart contract the transfer has already happened, and the aggrieved party must recover it. The remedy sought is therefore restitution rather than specific performance.

3. Resolving Them

4. The Difficulties under Indian Law

• Writing and signature. Section 7(4)(b) of the Arbitration and Conciliation Act, 1996 accepts an agreement by electronic means which provides a record, so a clause embedded in code and accepted electronically is in writing. The award is a different matter: Section 31(1) requires it to be in writing and signed by the members of the tribunal, which an automated output does not satisfy.
• The seat. A distributed ledger has no place. Without a seat there is no curial law, no supervisory court, no forum for a challenge and no nationality for the award, so Part I and Part II both become difficult to apply. The answer is to name a seat in the clause.
• The tribunal. Sections 11 and 12 contemplate an identified person who discloses his independence and who may be challenged. An anonymous panel selected by algorithm cannot make those disclosures, and the parties cannot test them.
• Reasons. Section 31(3) requires reasons unless the parties agree otherwise. A vote produces an outcome, not reasons, and an award without them is open to challenge.
• Enforcement abroad. A foreign award under Section 44 must be made in a notified territory. An award made nowhere in particular cannot satisfy that condition.

5. The Regulatory Setting

India has no statute dealing specifically with smart contracts or with distributed ledger technology, and no provision recognising a decentralised panel as an arbitral tribunal. Three further points of the general law bear on the subject. The tax treatment of virtual digital assets does not confer legality on every transaction in them, and a contract whose object is unlawful is void under Section 23 of the Indian Contract Act, 1872 however it is coded. A consumer cannot be deprived of the remedy before the consumer commissions by a clause in a standard form contract, whether written in prose or in code. And a party that cannot be identified cannot be sued or made subject to an award, so pseudonymity on a chain is a practical bar to enforcement rather than a legal protection.

6. Related Topics and Provisions