Smart Contracts and the Indian Contract Act: Reconciling Algorithmic Rigidity with Statutory Equity and Digital Governance

Introduction

“Code is law” has transitioned from a cypherpunk maxim into the beating heart of global digital commerce, yet when an immutable smart contract executes an erroneous transfer of funds, it leaves traditional legal systems scrambling for a human defendant. The Indian Contract Act, 1872 defines a contract as an agreement enforceable by law.¹ An agreement becomes a contract only when it is enforceable by law, and it is enforceable when it complies with the requirements of law. Section 10 of the Indian Contract Act lays down these requirements, providing that all agreements are contracts if they are made:

1. By the free consent of parties;
2. Between parties competent to contract;
3. For a lawful consideration and with a lawful object; and
4. Which are not hereby expressly declared to be void.

Smart contracts, meanwhile, are digital contracts stored on a blockchain that are automatically executed when predetermined terms and conditions are met.² The term was first coined by cryptographer Nick Szabo,³ who used it to denote digital protocols that facilitate, verify, or enforce contractual performance.⁴ Smart contracts can be classified as either fully automated contracts or hybrid contracts. A fully automated contract is executed entirely via code, with no manual intervention, whereas a hybrid contract combines coded instructions with traditional contractual terms, which assist supply-chain and asset-tracking systems.⁵ At present, the Indian Contract Act does not recognise or define smart contracts; instead, Section 10A of the Information Technology Act, 2000 recognises electronic contracts.⁶ Smart contracts can be considered a form of electronic contract.

When Section 10 of the Contract Act is applied to smart contracts, they clearly fulfil its requirements. However, a gap remains. The first challenge concerns the very foundation of a contract — offer and acceptance. This raises a question of free and informed consent under Section 14 of the Act, since the offer and acceptance here are completed through a pre-determined algorithm. In real-life contracts, free and informed consent typically emerges through dialogue and negotiation; the absence of such interaction in smart contracts makes it far more difficult to ascertain the free nature of consent.⁷

Another gap arises when dealing with blockchain technology. Section 10A and Section 2(ta) of the IT Act validate electronic contracts, but they do not directly address smart contracts that utilise blockchain technology. This is a significant gap in the legislative framework surrounding blockchain technology. The gap persists because the legal regime governing electronic contracts is still evolving, and there remains considerable room for clear guidelines specifically regulating smart contracts.

Critical Evaluation of Legal Challenges in Smart Contracts

Consensus ad idem, an essential element under Section 13 of the Indian Contract Act, is particularly significant for smart contracts, which operate on “if-then” binary logic.⁸ Once a transaction is triggered through interaction with the code, it executes instantly and becomes irreversible, which can cause serious legal difficulties if a bug, network congestion, technical glitch, automation error, or any other fault causes an erroneous transfer of funds. Section 20 of the Act provides relief where both parties are under a mistake as to a matter of fact essential to the agreement. Since blockchain technology is immutable and decentralised, a rollback is generally not possible; consequently, the mistake of fact under Section 20 cannot easily be pleaded unless there is network-wide consensus to reverse the transaction. This raises a significant unresolved legal question: can the doctrine of “code is law” prevail over statutory equitable remedies under Indian contract law, or will courts intervene to award restitution for algorithmic mistakes?

Under contract law, parties who breach an agreement generally remain liable only for compensatory damages, or may seek a mutually agreed modification of terms. But smart contracts defy this logic, since code deployed on a blockchain cannot be modified or halted once active, unless a manual override has been pre-coded into it. Thus, where an unforeseen market disruption or other serious difficulty arises, a party cannot easily terminate the contract. This technical rigidity conflicts with the doctrine of frustration under Section 56 of the Act, creating a complex set of challenges for commercial entities operating in highly volatile digital markets.⁹

Another significant challenge arises in fixing legal liability when a smart contract fails. Who would bear accountability for it? An even more pressing question is against whom a suit could be filed. Traditional contracts rely on identifiable legal entities, whether natural or artificial persons. Smart contracts, however, are often deployed on public blockchains by anonymous developers or open-source contributors, without any centralised structure. If malicious exploitation or an illegal transaction occurs, it becomes nearly impossible to identify a defendant or determine who should be held accountable.

Section 63 of the Bharatiya Sakshya Adhiniyam, 2023 (formerly Section 65B of the Indian Evidence Act, 1872) deals with digital evidence.¹⁰ Under this section, blockchain contracts could be classified as digital records, yet compliance requirements pose a major challenge — largely attributable to the decentralised nature of blockchain technology. The difficulty lies in identifying a “person in control” of a blockchain system for the purpose of certification, complicating the use of blockchain records in court proceedings.¹¹ Thus, while blockchain enhances reliability, the applicable legal provisions may limit judicial acceptance of such records.¹²

Comparative Perspectives and Regulatory Adaptation

These gaps are not unique to India — jurisdictions worldwide have introduced reforms to address them. In its landmark report on smart contracts, the Law Commission of England and Wales found that English common law is capable of effectively recognising and enforcing smart contracts without the need for extensive legislative change, provided they are treated as standard code-based instructions.¹³ Similarly, various U.S. state amendments — particularly in Nevada — have expanded the Uniform Electronic Transactions Act (UETA) framework to explicitly recognise electronic agents and blockchain records.¹⁴ Arizona was the first U.S. state to legislate specifically on smart contracts, amending its Electronic Transactions Act to recognise them, and several other states subsequently followed suit.¹⁵ India can learn from these frameworks by adopting clear statutory recognition to ensure that decentralised code operates consistently with existing civil liability rules.¹⁶ Italy, too, has introduced legislative provisions recognising Distributed Ledger Technologies (DLTs).¹⁷ This legislation provides that smart contracts may fulfil the legal requirement of being in writing, provided the parties are identified through a compliant electronic identification mechanism, thereby granting such contracts legal validity under Italian law.

Recommendations and the Hybrid Contract Model

Bridging the gap between immutable blockchain automation and traditional contract jurisprudence requires a comprehensive reform strategy. One recommendation is that the Ministry of Electronics and Information Technology (MeitY) and the Law Commission of India should issue targeted guidelines clarifying that smart contracts are a specialised sub-category of electronic contracts under Section 10A of the IT Act, while explicitly outlining mechanisms for applying equitable doctrines such as mistake and frustration — just as England and Wales have done. MeitY issued a National Blockchain Framework in 2025, but it did not classify smart contracts under Section 10A of the IT Act.¹⁸ Practical implementations, such as automated supply-chain tracking systems like the Aushada medicine-tracking initiative and document-verification chains, demonstrate that administrative systems are adapting to increasingly automated, code-driven workflows. MeitY and the Law Commission could coordinate technological rollouts with clear statutory guidelines under the Contract Act, ensuring that automated execution layers are backed by transparent legal frameworks.

Pending comprehensive legislative reform, corporate entities should avoid deploying standalone, unguided code and instead adopt a Hybrid Contract model. By drafting a comprehensive Master Agreement that governs the parties’ intentions, risk allocation, dispute resolution mechanisms, and the governing law and jurisdiction, parties can navigate legal complexities and render their contracts more robust and enforceable. In addition, smart contract code should be used strictly for automated financial transfers or asset movements.¹⁹ To mitigate the challenges posed by Section 63 of the BSA regarding digital records, the legislature should clarify certification standards for decentralised ledger outputs. Given that public blockchains lack a centralised “person in control” to issue authenticity certificates, the framework should permit cryptographic proof-of-integrity and independent third-party technical audits as acceptable substitutes to satisfy judicial admissibility requirements. Commercial entities must also mandate the use of decentralised, verified, multi-factor signature networks to ensure that external data fed into smart contracts is accurate and precise. These codes should also incorporate escape hatches, pause mechanisms, or multi-signature oversight teams to allow human intervention in the event of technical bugs or unforeseen market crises, thereby safeguarding parties from irreversible algorithmic lock-in.

Conclusion

Smart contracts represent an inevitable evolution in digital commerce, offering unmatched efficiency and automated execution through decentralised networks. While they can technically satisfy the broad structural requirements of an agreement under Section 10 of the Indian Contract Act and Section 10A of the Information Technology Act, their absolute technical rigidity creates critical friction with foundational doctrines such as free consent under Section 14, relief for mistakes under Section 20, the doctrine of frustration under Section 56, and admissibility challenges under Section 63 of the Bharatiya Sakshya Adhiniyam, 2023.

As with international regulatory practices in jurisdictions such as the UK, the US, and Italy, proactive legal coordination is crucial. While India’s indigenous technological advancements, such as the National Blockchain Framework and the Vishvasya Blockchain Stack, successfully drive e-governance and secure document verification, they remain completely silent on civil and contractual liability. Ultimately, code can streamline the mechanics of a transaction, but it cannot entirely replace the protective, equitable principles of Indian contract jurisprudence. To secure a robust digital economy, the legislature and executive must issue statutory clarifications, while corporate entities must adopt hybrid contracting frameworks that integrate traditional contractual safeguards with automation. Harmonising technological automation with these statutory safeguards is vital for the future of digital contracting in India.

Endnote(S):

1. Section 2(h) of the Indian Contract Act, 1872.
2. IBM, What are Smart Contracts?, IBM Think, https://www.ibm.com/think/topics/smart-contracts.
3. Nick Szabo, Smart Contracts: Building Blocks for Digital Markets (1996).
4. Swati Suman & Sheershadeb Das, Smart Contracts & Indian Law — Legally Binding or Technically Blinded, 11(7) International Journal of Law 68, 68–70 (2025).
5. Ibid.
6. Sections 2(ta) and 10A of The Information Technology Act, 2000 (Act No. 21 of 2000).
7. Satish Kumar, Doctrine of Free Consent in Automated E-Contracts: Re-Evaluating Indian Contract Law in the Age of Algorithmic Negotiation, 5(1) International Journal of Civil Law and Legal Research 142–149 (2025).
8. Section 13 of the Indian Contract Act, 1872.
9. Section 56 of the Indian Contract Act, 1872.
10. Section 63 of the Bharatiya Sakshya Adhiniyam, 2023 (Act No. 47 of 2023).
11. Shruti Vasani & Priyanka Vanvari, Blockchain-Enabled Smart Contracts: Legal Status, Challenges, and the Way Forward in India — A Comparative Study, 8(1) Indian Journal of Law and Legal Research 7544 (2026).
12. Understanding Blockchain Evidence in Indian Courts: Admissibility and Section 65B, Vidhi Sastras: Blog (Feb. 3, 2026), https://vidhisastras.com/blog/understanding-blockchain-evidence-in-indian-courts-admissibilityandsection-65b/.
13. Law Commission of England and Wales, Smart Contracts: Consultation Paper, CP No. 229 (2018), https://webarchive.nationalarchives.gov.uk/ukgwa/20241223105348/https://lawcom.gov.uk/project/smart-contracts/#related.
14. Sv Karthik, Smart Contracts: Are They Legally Backed and Applicable in India, 2(6) International Journal of Law Research & Analyses 1, 10 (2022).
15. H.B. 2417, 53rd Leg., 1st Reg. Sess. (Ariz. 2017), https://www.azleg.gov/legtext/53leg/1r/laws/0097.pdf.
16. See Law Commission of England and Wales, Smart Contracts: Consultation Paper, CP No. 229 (2018), supra note 13.
17. Comparative Study on Electronic Transactions and DLT, PILnet (2023), https://www.pilnet.org/wp-content/uploads/2023/07/Italy.pdf.
18. Ministry of Electronics and Information Technology (MeitY), Government of India, National Blockchain Framework: Strengthening Governance through Blockchain Technology (Press Information Bureau Backgrounder, Oct. 24, 2025).
19. See Law Commission of England and Wales, Smart Contracts: Consultation Paper, CP No. 229 (2018), supra note 13.

Reference(S):

1. Ministry of Electronics and Information Technology (MeitY), Government of India, National Blockchain Framework: Strengthening Governance through Blockchain Technology (Press Information Bureau Backgrounder, Oct. 24, 2025).
2. National Informatics Centre (NIC), Vishvasya National Blockchain Technology Stack, Centre of Excellence in Blockchain Technology (2024–2025).
3. Law Commission of England and Wales, Smart Contracts: Consultation Paper, CP No. 229 (2018).
4. Satish Kumar, Doctrine of Free Consent in Automated E-Contracts: Re-Evaluating Indian Contract Law in the Age of Algorithmic Negotiation, 5(1) International Journal of Civil & Legal Research 142 (2025).
5. Stuart D. Levi & Alex B. Lipton, An Introduction to Smart Contracts and Their Potential and Inherent Limitations, Harvard Law School Forum on Corporate Governance (May 26, 2018), https://corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and-inherent-limitations/.
6. Swati Suman & Sheershadeb Das, Smart Contracts & Indian Law — Legally Binding or Technically Blinded, 11(4) International Journal of Law 68 (2025).
7. Sv Karthik, Smart Contracts: Are They Legally Backed and Applicable in India, 2(6) International Journal for Legal Research & Analysis (2022).
8. John Cartwright, Contract Law: An Introduction to the English Law of Contract for the Civil Lawyer (Hart Publishing, 3rd ed. 2016).
9. Sir Jack Beatson et al., Anson’s Law of Contract (29th ed., Oxford University Press 2010).
10. Dr. Manveer Kaur & Dr. Inderpreet Kaur, E-Contracts in India: Legal Framework and Emerging Issues, 12(11) Journal of Emerging Technologies & Innovative Research (JETIR) (2025).