Smart Contracts have gained popularity not only in the legal world but also amongst the techie millennial. This article summarizes and explores the potential and the possibility of usage of smart contracts and blockchain arbitration and exploits various startup opportunities through the bridging of gap between the legal and the tech world. It also analyzes the potential of the popular concept in India as well as the legal challenges it faces along with possible solutions. Conclusively, the extent of the technology is examined in both the legal as well as the tech fraternity.
A smart contract is not a contemporary concept but can be traced back to a technological discovery bycomputer scientist Nick Szabo in 1990 by envisaging the possibility of employing strong cryptographic agreements that would reconcile an unbreachable contractual agreement. Such a contract can be drafted by writing a code through cyptography instead of a human readable language. In a smart contract, a computerized algorithm automatically performs the contractual obligations.It is pertinent to acknowledge the fact that drafting of the whole contract along with the arbitration clause or agreement requires special technical knowledge with respect to coding. The consent the consent of the parties, the seat of arbitration i.e the applicable law, appointment of a tribunal which are familiar with both contract law and have a specialized knowledge in coding, determining the enforceability of the awards in the particular jurisdiction, the manner of enforcement and the aspect of confidentiality must be decided first hand while drafting a smart contract.
An example of a smart contract would be an insurance policy where once the data of insurance claim approval is submitted in the insurance office, the claim is automatically paid out saving the time for formalities and minimizing human error.
Smart Contract vis-à-vis Traditional Contract
A smart contract does have its perks in comparison with traditional contracts like avoidance of human error and tampering, self-executing in nature, minimum paper work and formalities and the automatic execution increases reliability along with being extremely secure. Whereas, the downside would that it eliminates the possibility of modification according to the desire of the parties as one party does not control the blockchain network upon which the smart contracts are based. It also extremely difficult to terminate the contract unless the contract has some incorporated logic which terminates the contract upon contingencies.
Dispute Resolution for Smart Contracts:
For smart contracts to work, there needs to be some sort of dispute resolution system as the potential problems which can arise in a smart contract can be three fold pertaining to three parties in the contract i.e a buyer, a seller and the platform on which the code is created. The issues may arise in the formation stage, performance stage or after the implementation of the contract.Since international transactions are involved and most of the times, the parties don’t personally know each other, a centralized administrator could take advantage and there could be a possibility of scams. Therefore, an alternate system would be a blockchain arbitration. Since arbitrations are already based on a contract, they are capable of being drafted in a programming language. The terms of the contracts need to be translated into a block code and stored on the blockchain(1). The whole process of the blockchain arbitration can be automated including submission of claims, evidence or simply communication with the tribunal. Blockchain arbitration could be a game changer in times like these where a globally accessible online court is the need of the hour. It would impart transparent justice universally without any prejudice (2).
Blockchain Arbitrations are potentially an essential weapon for global dispute resolution with the rise of commercial transactions along with the advancements in technology. However, in order to be in par with the global advancements, it is important to analyze the enforceability of the awards rendered by the blockchain arbitrations in India. In order to understand the enforceability of a blockchain arbitration award, it is important to analyze whether the agreement in itself in enforceable or not. Section 7 of Arbitration and Conciliation Act 1996(3) provides for an arbitration agreement to be in writing which has been amended by the virtue of Section 7 of Article 2 of New York Convention(4) embedded in Section 3(5)of the Amended act of 2015 which allows for Electronic means to be introduced for an arbitration agreement. Along with that Section 10(A) of the Information technology Act(6) validates the contract formed through electronic means.
However, enforcement of an arbitration award might not be easily adaptable by the Indian Courts as specific technical knowledge is required to understand the whole dispute arising out of smart contracts. Since arbitration agreement is a form of a contract and an appeal cannot be made from the awards passed by an arbitrator of smart contracts, the technologists are rushing towards the idea of decentralized arbitration where a specialist is appointed with the knowledge of the blockchain tailored procedure and the technicality of coding. The awards passed by such an arbitrator would be automatically enforceable without the intervention of a third party i.e the courts.
Smart Contracts Practice in India
By understanding the nature of enforceability of smart contracts in India, it can be observed that smart contracts are considered legal in India which means that they can be enforced in India by mutual consent of the parties but at the same time, there is no legislation in place for the disputes arising out of smart contracts. Since the contracts are in cryptographic form and the transactions are also cryptic in nature, a regulatory framework for crypto-currency needs to be well established in India and the recent judgment on crypto-currency gives some hope in that matter. It will further gain clarity once the Crypto-currency bill is passed in the favor of usage of cryptic currency is by the parliament. In India, there is only one known example of the usage of smart contracts which has been executed between Bajaj Electronics and Yes Bank(7)which is focused on blockchain vendor financing. Meanwhile, RBI has published a white paper on Distributed Ledger Technology, Blockchain and Central Banks(8) which promises potential use of the technology by the financial institutions and is a step forward in innovation and the use of the emerging technology by India.
Smart Contracts- A basis for tech legal startups
Because of the features like transparency, hacking proof and fraud resistance, blockchain has created a lot of buzz in the tech world and thousands of companies are being created on the basis of this technology. The evolving concept of smart contracts and blockchain arbitration could be a great opportunity for tech legal startups where an automated solutions can be coded for transactions which have exposure to the risk of human error. The startups can be based on outsourcing of drafting of legal agreements of smart contracts and arbitrations to companies and legal firms which do not operate on blockchain on a regular basis. For example, a company called Jincorewhich develops a platform which allows any business to work with smart contracts and cryptocurrency payments where the data is written and stored in private Jincore Blockchain.
The smart contracts and blockchain arbitration positively impact the international trade as well as International Dispute Resolution Process. It has a great potential to combine the legal and tech world and create a revolution in the legal domain. With efficiency, transparency and trust among the legal professionals, the technology can really help the legal world along with opening doors for tech startups. Even though the future of smart contracts look promising, their full potential can only be exploited if they are adapted not only by the Indian Courts and the legal fraternity but also by the general public engaged in business and the wide gap between the legal community and the tech savvy fraternity needs to be abridged. On one hand, the legal fraternity needs to be more open minded and prejudice free whereas, the tech community needs to exploit their full potential and accumulate enough knowledge in the field of arbitration and smart contracts and only then the gap can be abridged.
1. Nevena Jevremović (Association ARBITRI), 2018 In Review: Blockchain Technology and Arbitration, January 27, 20 <http://arbitrationblog.kluwerarbitration.com/2019/01/27/2018-in-review-blockchain-technology-anarbitration/?doing_wp_cron=1592497010.7746310234069824218750> Accessed 19th June 2020
2. The OpenLaw Team, ‘OpenCourt: Legally Enforceable Blockchain-Based Arbitration’, Oct 18, 2018<https://media.consensys.net/opencourt-legally-enforceable-blockchain-based-arbitration-3d7147dbb56f>Accessed 19th June 2020
3. Arbitration and Concilliation Act 1996
4. Article 2 New York Convention 1958
5. Article 3 Arbitration and Concilliation(Amended) Act 2015
6. Section 10(A) Information Technology Act 2000
7. Several Author(s), Overview: ‘The Enforceability of Smart Contracts in India, 12 Dec 2019’, <https://www.stalawfirm.com/en/blogs/view/enforceability-of-smart-contracts-in-india.html>, Accessed on 19th June 2020
8. RBI Bulletin, ‘Distributed Ledger Technology,Blockchain and Central Bank’, Feburary 2020