Revisiting The Concept Of Consideration Un-der Indian Law Vis-A-Vis Smart Contracts

1st March, 2022 - 12:42 pm Categories: Intellectual Property Technology 0 Comments

Over the years, the nature of contract has undergone a significant change, i.e., from conventional written contracts to digital smart contracts. Previously, contracts used to be in a written form duly signed by the parties and in exchange of tangible consideration. However, with increasing global trade and technological development, conventional contracts are being replaced by more effective digitized smart contracts.

With such a significant transformation, the law is also supposed to change and adapt to the new trends. However, it can be found that contract law has barely changed to incorporate the transformation, especially in India. The practice however is not significantly restricted by the absence of cooperative law and is still carrying on with the positive hope that the law would not nullify the transactions.

Smart contracts can be understood as agreements, the execution of which is automated by systems such as blockchain. These contracts are self-executing contracts that ensure performance without recourse to the courts and without involvement of human discretion. One of the simplest examples of a smart contract is that of a vending machine which upon insertion of money dispenses the product. In a smart contract, the terms of the agreement between the buyer (Promisee) and the seller (Promisor) are written directly into lines of code. This code is contained in a distributed and decentralized blockchain network. Additionally, the code contains the information that executes the transaction and ensures that the same is tracked and is irreversible. In a nutshell, a smart contract can be considered a type of computer protocol aimed at digitally performing the function of facilitation, verification as well as the performance of the contract.

ISSUES IN THE EXISTING CONTRACT LAW

A contract is understood as an agreement enforceable by law. There are some essentials for making a valid and enforceable contract. These essentials are as follows:

1. A legitimate offer and its acceptance;
2. Lawful consideration;
3. Competency of the parties to enter into a contract; and
4. Consent of parties to all aspects of the agreement.

Smart contracts fulfil all of the above-mentioned essentials. However, the issue arises with respect to the consideration. Every contract requires consideration. In case of smart contracts, the consideration used is a digital/crypto currency such as Bitcoin, Ethereum, Litecoin, etc. The Indian Contract Act 1872 is the main legislation dealing with  contracts in India. In accordance with Section 10 of the Act, a consideration must be lawful. Section 23 of the same Act lays down the conditions for lawfulness of a consideration. It states that a consideration is lawful when it is not forbidden by law, would not defeat the provisions of any law, is not fraudulent, does not involve or imply injury, and is not immoral or against public policy.

Therefore, in order to make a contract enforceable, the consideration must fulfil the aforesaid conditions. The term ‘law’ has been interpreted by the Supreme Court to include only the existing and operational legislations and not bills of the parliament. For a smart contract to be enforceable, its consideration i.e., cryptocurrency must fulfil all the conditions of Section 23. It is asserted by the author that cryptocurrency does fulfil all the conditions necessary for a lawful consideration.

Firstly, there is no existing law in the country which declares cryptocurrency as unlawful; secondly, it does not defeat the provisions of any law; thirdly, it is not injurious, and instead it is beneficial for public as well as the state on account of its remarkable features such as user autonomy and discretion, decentralisation, accessibility, encryption, and so on, leading to efficiency, security, and promotion of free trade and technology transfer; and lastly, it is not regarded as immoral, fraudulent or against the public policy. Therefore, cryptocurrency fulfils all the essentials of a lawful consideration and thus smart contracts are legal and enforceable under Indian law.

However, the issue arises when one thinks of cryptocurrencies such as Bitcoin, Ethereum, etc., being declared illegal by any law. The same can be anticipated based on the previous stances of the government such as in the Bill of 2019, through which cryptocurrency was proposed to be banned entirely.

Cryptocurrencies operate in a grey area with no legislations regulating it. The stance of countries regarding cryptocurrency has been mixed— with some countries welcoming it with open arms, some others completely banning it, and the rest cautiously skeptical about it and calling for its regulation. In India, transactions involving cryptocurrencies such as Bitcoin are operating at a fairly good scale and are expected to rise in future. However, the stance of Indian government has been somewhat strange.

Earlier in 2019, the government introduced the Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 which proposed a complete ban on the cryptocurrencies. Subsequently, the bill of 2021 proposed to ban all private cryptocurrencies. However, it proposed for Reserve Bank of India to launch its own digital currency. Since the fate of cryptocurrencies and transactions involving them is yet to be formalised, there is a way to protect smart contracts involving cryptocurrencies by other means.

Foreign Law on the Issue

The stance of many developed countries has been in favor of cryptocurrency and therefore, their laws have paved the way for its proper utilisation. In United States, the contract law includes the State common law, judicial precedents, and principles codified as ‘Restatement of Contracts’. Consideration forms essential condition for a contract. However, there are no specifications laid down for such a consideration. It is not specifically mentioned that the consideration must be lawful unlike in Indian law. US law fully recognises and enforces smart contracts. Similarly, in United Kingdom, the consideration is defined as something of value and the law commission has expressly declared the accommodation of smart contracts under UK law. Therefore, under both the US and UK law, smart contracts based on cryptocurrencies are legal and completely enforceable.

The Singapore International Commercial Court in B2C2 Ltd. v. Quoine Pte Ltd. has observed that cryptocurrencies may not be legal tender but they do have the “fundamental characteristic of intangible property as being an identifiable thing of value”. This implies that although cryptocurrencies may not be legal tender but their use in business transactions as consideration does fulfil the objective behind having a consideration in a contract.

Suggestive Measures

Firstly, there is no need to ban cryptocurrencies as the same would be detrimental for the Indian market and would do more harm than good, as it would result in illegal usages, zero accountability, and tax evasion besides other issues; furthermore, it would restrict free trade, technology transfer, and so on, thus, impacting on the economic growth of the country. There is definitely a need to regulate the crypto market, by bringing supporting regulations such as strict KYC norms, taxability and reporting; however, completely banning it is not an appropriate option. Even if banned, the smart contracts can be protected by amending the Indian Contract Act 1872 and replacing the term ‘lawful consideration’ with ‘consideration’. This will imply that the consideration must be of any value and accepted by both the parties. Cryptocurrency already has a phenomenal value and the same is expected to rise in the future, therefore it qualifies as a proper consideration. In this way, smart contracts and the rights of parties would not have to depend on the fate of cryptocurrencies. Thus, smart contracts can be enforced independently of cryptocurrencies.

Requiring a consideration to be lawful does not make any sense as the same will discourage people from entering into innovative/non-conventional transactions which the law is yet to recognise. Further, there is nothing illegal about cryptocurrencies; the only issue is that it operates in a grey area and remains unregulated in most countries. Cryptocurrency has value and can be regarded as property in the same way other assets are. Since property and assets can form a valid consideration for a contract, so can cryptocurrencies. Moreover, the parties entering into smart contracts do not have any issue in having cryptocurrency as consideration for their contracts. Hence, the law should not make the issue complicated and instead should work as per the convenience of the parties.

Conclusion

There are huge predictions in support of India’s phenomenal benefit on account of conducive cryptocurrency market. However, in order to reap those benefits, the country’s legal system needs to improve and remove impediments in the process. Cryptocurrencies must be approved and properly regulated to ensure that transactions which people are entering into do not go to waste. Smart contracts are majorly dependent on cryptocurrencies. However, the former can be legalised even without legalising the latter as legal tender. This can be done by removing the ‘lawful consideration’ requirement in Section 10 of the Indian Contract Act and substituting it with ‘consideration’ only.

Smart contracts are the future of business and therefore it is the need of the day to make the contract law more conducive to its development in order to reap its benefits to the fullest. India is really moving forward with the recent move of introducing its own digital currency. However, there is a lot to be recognised and done in the legislative and technical arena.

Author: Shawaiz Nisar- a student at Rajiv Gandhi National University of Law, Punjab, in case of any queries please contact/write back to us via email vidushi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.