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The use of smart contracts as opposed to paper based traditional contracts continues to increase in commercial activity and practice. With the advent of Web 3.0 technologies, smart contracts may become a standard form of contract since the characteristics of automated self- execution, operability on a decentralized blockchain and speedy execution of contractual obligations are more suitable to the needs of commercial transactions, and as well as for eliminating breaches in day- to day commercial transactions. However, the possibility of disputes exist in every contractual transaction and smart contracts are no exception to it. Considering that the regulation of smart contracts is at a nascent stage across jurisdictions, with India, having no legal framework at place, the idea of resolving smart contract disputes in a Civil Court is still implausible. But, at the same time, the possibility of solving smart contract disputes through arbitration is feasible due to the possibility of party autonomy in several crucial aspects such as choice in law, choice of forum, choice of procedure and the like, to be applied in the arbitration proceedings. Therefore, this blog attempts to examine the arbitrability of smart contract disputes in India with an aim to expose challenges and provide solutions in the current legal framework that may pave a path to better arbitrability of smart contract disputes in India.
Understanding Smart Contracts
A smart contract is an agreement between two or more parties in the form of computer codes which automatically executes either a portion or the entire contract between parties on the fulfilment of pre- determined parameters that have been added to the code. The execution of smart contracts happen on a blockchain network for which transaction fees referred to as “gas fees” are paid by the executing party. Since the idea of having smart contracts was to alleviate breach of contract, smart contracts are irreversible. In order to illustrate in a better way, a diagram with an example is being provided below:
The diagram above showcases an example of a transaction of sale of goods by the manufacturer to the wholesaler using a smart contract. However, smart contracts in the practical sense tend to be more complex involving pre- determined parameters for aspects such as non- acceptance of delivery, delay in transportation, termination of contract and the like.
Nature of Smart Contract Disputes
Now that a basic idea of smart contract transactions along with an example has been discussed, it is important to discuss the nature and manner in which smart contract disputes may arise. Contrary to the general perception, although smart contracts self- execute on pre- determined parameters, the scope of breach of contract is quite high. Disputes may arise on account of error in the code leading to non- execution, change in law resulting in illegality of contract, defect in goods or deficiency in service and many more similar reasons. Due to this, it is necessary for an adequate dispute resolution mechanism to be used for resolving smart contract disputes. Arbitration is the most-suited dispute resolution method for smart contract disputes since blockchain arbitration as well as standard arbitration methods already exist and are being used in few jurisdictions to solve disputes arising out of smart contracts.