What are smart contracts?

IBM defines smart contracts as “programs stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss. They can also automate a workflow, triggering the next action when conditions are met.”[1]

How do these smart contracts work?

Smart contracts work by following simple “if/when…then…” statements that are written into code on a blockchain. A network of computers executes the actions when predetermined conditions have been met and verified. These actions could include releasing funds to the appropriate parties, registering a vehicle, sending notifications, or issuing a ticket. The blockchain is then updated when the transaction is completed. That means the transaction cannot be changed, and only parties who have been granted permission can see the results.

Within a smart contract, there can be as many stipulations as needed to satisfy the participants that the task will be completed satisfactorily. To establish the terms, participants must determine how transactions and their data are represented on the blockchain, agree on the “if/when…then…” rules that govern those transactions, explore all possible exceptions, and define a framework for resolving disputes.

Then the smart contract can be programmed by a developer – although increasingly, organizations that use blockchain for business provide templates, web interfaces, and other online tools to simplify structuring smart contracts.[2]

What are the advantages of smart contracts?[3]


Safety is an integral part of Smart Contracts which is possible through encryption and the distributive ledger systems that ensures complete data security or protection. Each block or piece has information that is unhackable due to the interconnectedness of all the blocks.  

Speedy Process

It’s one of the fastest mechanisms to get the task done smoothly and swiftly with great accuracy. Since these are focused on reducing human intervention the accuracy points increase as time spent in processing and administrative work becomes negligible. Algorithms have the ability to totally eradicate these errors.



The contract is based on an already inputted program which is determined by algorithms. It can automatically process the data at every step involved in the process. A series of networks interconnectedly work together to bring about the output which reduces the possibility of bias or manipulation or one-sided deals that could be harmful. One-sided deals often lead to lots of disputes if parties have negligently negotiated.


All types of fees, administrative formalities, procedural costs or any sort of paper wastage is cut. Not to forget the costs of human error as well. Any kind of ancillary or third party costs can also be eliminated because everything is governed by a program.

Laws governing smart contracts:

Section 10 of the Indian Contract Act, 1872 says – “All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.” 

If two parties sign a contract with or without third party involvement it will be considered legal. By definition, we could say that the Indian Contract Act 1872 allows Smart Contracts.

Sections 5 and 10 of the Indian Information Technology Act, 2000 legally recognize digital signatures and consider e-contracts as valid and enforceable under the law.
Smart Contracts use cryptography for coding into the ledger-based system. These could also use digital signatures for authentication purposes. But the problem is digital signatures created as a part of blockchain technology, are auto-created and are not authorized under the IT Act, 2000. This amounts to being invalid.


[2] Ibid

[3] Rachit Garg, White paper on smart contracts : an Indian perspective, iblogpleaders (February 14,2021),

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