Smart Contracts – The Next Gen Contracts in India


Smart contracts are the next generation contracts that deploy automation to execute on their own based on the fulfillment of the pre-defined stipulations of a contract. This is step forward from the traditional contracts and brings in the usage of technology and automated processing in this arena of legal world.

In simple terms, Smart contracts are snippets of code on a decentralized network like Blockchain and are automatically executed on fulfillment of certain conditions.  The code for these contacts are written by developers and the programs are made to execute as and when the terms of the agreement are fulfilled.

Smart contracts usage can be seen in simple as well as complex agreements. Simple application of smart contract can be seen in case of online registration of property.  More and more industry verticals like banking, insurance, E-Governance, Media and Telecom are seeing increase adoption of smart contracts.

Since these are self-executing pieces of code, they bring in transparency and reduce the involvement of any intermediary.

Additionally, these contracts bring in the agility in the systems apart from the advantages of being secure as well as cost saving. Since these are programmed based on predetermined set of conditions and each condition once fulfilled is verified, the chances of general disputes are negligible.

Background and Adoption in India

The most elementary example associated with Smart contract is that of a vending machine. This was often cited by Nick Szabo when he coined this term some 20 years ago. There is an offer to Sale with the display of food items in the machine, User provides consideration in the form of tendering money in the slot. The machine, in case the consideration is of the right value, accepts the money and provides the food article to the user by dropping it from the shelf to collection area. In case the consideration is of lower value, the vending machine rejects the tendered currency.  The machine is programmed to work in this standard pattern and has all the elements of valid contract inbuilt into its functioning.  Each of these actions conform to the Indian Contract Act of 1872.

This example has been further advanced in various use cases of Smart contracts in other business areas and industry verticals. Banking and Insurance are few of the sectors which have seen maximum adoption of Smart Contracts. Payments can be automated in these areas on the completion of certain pre-conditions without the need of manual intervention of paperwork. Simple contract of insurance is one such example. The advent of digital signature and its recognition in the Indian Evidence Act, governed through the provisions of the Information Technology Act, 2000 has only acted as catalyst in the use of this form of technology based contract system.

In India, as per the news reports, SBI has been the one of the pioneer banks in adopting Smart Contracts in its different use cases which would help the bank in reduction of lot of manual and unnecessary effort. The consortium of around 27 banks has been formed that will bring blockchain solutions and Smart Contracts into their functioning. Know your customer is example of one such solution.


Innovations and advancements in technology have made automation of contract management life cycle a reality. But there are certain inherent limitations in implementing smart contracts. The developers have no knowledge of the legal world and the lawyers have challenges on the programming side. Implementation of straight forward agreements or contracts would still be simpler and the algorithms can be discussed in plain language between programmers and lawyers before coding is done. The challenge lies in designing those Smart Contracts which are complex in nature which have multiple stipulations and if-then-else scenarios. Lawyers with deeper understanding of technology are the best bet in these cases as they bring in the requisite expertise needed for designing these contracts.

Moreover, the technological implementations of such complex contracts would have its own issues in terms of coding defects or missed scenarios during implementation which could result in major catastrophes for the parties to contract. At times the vulnerabilities of the network and IT systems may allow the hackers to get into these computer systems and compromise the integrity of the transactions.


To make the adoption of the technology optimal, it is advised that the contracts can be divided into two parts-

  • Programmable
  • Traditional

The part of the contract that is simple and easy to program should be designed into Smart Contract while the other part should continue to be enforced through the physical means of using paper.  Every programmable part of the contract should have well defined Entry and Exit criteria along with Risk Assessment plan. The parties to contract should also agree on the next steps in scenarios where there are coding errors or technology related issues. The forums and modes of dispute resolution in such cases should be pre-decided by the parties to the contract. If some of these issues can be forecasted and mitigated, the implementation of this mixed mode would be the way forward in future.

In summary, it is imperative that the pros and cons need to be weighed for each of the Use case where Smart Contract can be implemented. The benefits are immense and if these are adopted in right areas, Smart Contracts would undoubtedly ease the way contract management is done in future.