This article is written by Pratiksha Kulshrestha, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
Table of Contents
Introduction
Contracts form the backbone of modern economic relationships. They are the most significant tool available to parties for formalizing their relationships for achievement of a desired objective. However, merely executing a contract does not guarantee its performance or certainty of an outcome. There may be several developments during the lifecycle of the contract such as one party may no longer be desirous of performing the contract, the parties may disagree on the interpretation of the provisions of the contract, parties may delay performance of obligations. Such developments may render the performance of the contract difficult, if not impossible.
In 1994, Nick Szabo offered a solution in the form of smart contracts where agreements were recorded as computer codes, which were activated automatically when certain conditions were met. The contracts self-executed on a trusted network completely controlled by computers and did not rely on trust between parties or the intervention of third-parties for performance of the contractual obligations. Recently, the concept of smart contracts has garnered considerable interest from businesses and governments alike as the development of blockchain technology has facilitated practical application of the concept of smart contracts.
What is a contract
The Indian Contract Act, 1872 (hereafter referred to as ‘The Act’) defines ‘contract’ as an agreement enforceable by law.[1] The term ‘agreement’ refers to “every promise and every set of promises, forming the consideration for each other.”[2]
To be enforceable by law, an agreement should[3]:
- be made by parties that are competent to enter into a contract;
- by free consent of parties, which must be duly communicated in words or through actions, in acceptance of the proposal made by one party to another;
- be backed by lawful consideration and serve a lawful object; and
- not be expressly declared to be void by law.
What is a smart contract
A smart contract comprises automated processes and protocols which are pre-determined by the parties. In a smart contract, the parties translate the terms and conditions and the reciprocal promises forming their agreement into ‘if then’ conditions and record them as lines of code. The code is typically stored and processed on a blockchain over a distributed ledger and any resulting change is also recorded in the distributed ledger.
The occurrence of an event or performance of a promise which is defined as a predetermined condition in the code, automatically triggers the performance of the reciprocal promise. Thus, enabling the contract to self-execute.
A smart contract has three component or objects[4]–
- the signatories, who are party to the contract. They typically use digital signatures to signify their consent to the contractual terms as well as the acceptance or non-acceptance of the performance of contractual terms;
- the subject of agreement or contract; and
- the specific terms.
Benefits of smart contracts
- Certainty and Stability
In smart contracts, each party understands its obligations, the manner of performance, consequences of performance or non-performance and converts it into a code. Once the smart contract is executed, its terms cannot be changed. The code automates the performance of the contract. The transactions that take place are irreversible. Thus, the execution of the code avoids any uncertainty that may arise due to the possibility of ambiguity or contradiction in the terms of the contract written in natural language. They also leave little room for subjective decision-making and issues resulting from partial, total non-compliance or late compliance of the contractual obligations.
- Reduce delay
Smart contracts allow digital verification, confirmation, control and execution of contracts. This enables the parties to reduce the delays caused in performance of the contractual obligations, obviate the need for separate physical documentation of the performance and its submission to the other party. For example, where a project is divided into phases, the system can digitally capture and verify the extent of performance of a project and automatically release payment for tasks completed and grant permissions for carrying out work in the next phase of the project.
- Savings
As the human interface in the performance of the contracts is minimal, smart contracts eliminate the role of intermediaries through digitalization and automation, resulting in savings.
- Backup
Blockchain technology operates on a distributed-ledger and all documents are duplicated multiple times allowing recovery of files.
- Safety
Data related to smart contracts can be protected by use of encryption and cryptography.
- Accuracy
As business processes are automated and standardized in smart contracts. The possibility of errors is minimized by reducing the need for manual work.
Challenges and Limitations of smart contracts
Technological Challenges
- Considerable computing power is necessary to process all blockchain transactions. An institution implementing smart contracts may face system constraints in arranging the required computing power.
- Data being stored by organizations needs to be standardized and confined in its scope to limited elements such as demographics, age, gender of patients in order for the technology to be scaled up to create a national or international network of healthcare blockchains.
- Costs of migrating to and operating blockchain technology. In order to make the move to a blockchain-based system, an organization will either have to completely overhaul the existing system or integrate its system with the blockchain technology.
- The organization may face transitional challenges as the blockchain solutions opted by an organization may not be able to handle all functions needed by the organization and dependence of legacy systems may continue for such functions.
Legal Challenges
- Validity of contract
Under the Indian Contract Act, 1872, a contract exists where there is an offer, communication of its acceptance, lawful consideration and lawful object for the agreement. No particular form of agreement is prescribed under the Act. It is not even necessary that the contract should be recorded in writing. In fact, the Courts in India have held that even oral agreements are contracts. [5]
Smart contracts comprise of offer, acceptance and consideration albeit in electronic form. Section 5 and 10 of the Indian Information Technology Act, 2000 legally accept digital signatures and find a contract to be legitimate and enforceable by electronic means. Section 65B of the Indian Evidence Act, 1872 states that contracts digitally signed shall be admissible in the courts. Therefore, smart contracts can be said to fall within the ambit of the Indian Contract Act, 1872.
- Evidentiary Challenges and Legal Remedies
While smart contracts may be permissible under Indian law, the legal system to regulate smart contracts is not in place and ample protection may not be available to the parties in case of breach of the contract. Numerous peculiar challenges may be faced by parties while seeking specific enforcement of smart contracts, giving evidence regarding the specific terms and conditions of the agreement, establishing the legality and validity of the contract and establishing the extent or alleged defect in performance of the contractual obligation.
- Regulatory Regime relating to Crypto-currencies
The Reserve Bank of India (RBI) had issued a “Statement on Developmental and Regulatory Policies” on April 5, 2018 and a circular dated April 6, 2018, prohibiting parties from dealing with crypto-currencies or virtual currencies and providing “services for facilitating any person or entity in dealing with or settling virtual currencies”. The circulars were challenged before the Supreme Court. The Supreme Court vide order dated 04.03.2018 has set aside the circular on the ground of proportionality but did not set aside the Statement.[6] In the aftermath of these developments, there is considerable ambiguity regarding the regulation of the use of virtual currencies, which forms an integral part of a smart contract.
- Localization
Smart contracts built on blockchain technology store data across a distributed ledger which need not necessarily be confined to geographically defined territory. Owing to this, smart contracts may not be able to meet the localization requirements imposed by the Government through statutes, policies, notifications, circulars or contracts.
- Amendment of contracts
Since smart contracts are codes that function based on predetermined conditions and immutability is a key feature of these contracts, it is difficult to amend the contracts even if the parties to the contract consider an amendment necessary.
- Jurisdiction, Governing law and venue
Smart contracts function on a distributed ledger. The performance of the contract takes place on a decentralized global platform involving multiple jurisdictions. This could lead to difficulty in determining the governing law and the venue for dispute resolution and the jurisdiction of a court competent to deal with disputes relating to smart contracts.
The National Strategy on Blockchain published by the Ministry of Electronics and Information Technology, Government of India recommends that a robust legal and regulatory framework for creating a National Blockchain infrastructure as a National Resource and offering Blockchain as a Service be evolved. It also underpins the need to focus on Infrastructure, Research, building India’s own Technology Stack, Testing and Certification and Capacity Building for promoting the use of Blockchain Technology.[7]
Until the legal and regulatory system is strengthened and better equipped to deal with smart contracts, the parties seeking to implement smart contracts may find it advisable to enter into a contract to record their mutual contractual rights, obligations, considerations and objects. The smart contract comprising the code may be treated as a supplementary agreement or a mode of execution of the contract. In this fashion, the parties will be able to seek legal remedies based on the contract, if the smart contract fails to remedy a situation.
Application of smart contracts in health sector
While smart contracts have the potential to benefit any industry, it is particularly useful for the healthcare industry.
A typical blockchain transaction in healthcare takes place as under:
- A patient interacts with a healthcare organization and creates a new record of his information such as age, gender, address. The information would be stored on a blockchain and the patient would be assigned a private key.
- The healthcare organization would provide services to a patient. The data relating to the procedure performed, doctor’s note, medicine dispensed by pharmacist etc. would be captured in the patient’s public ID.
- The transaction between the patient and the healthcare organization is completed and uniquely identified.
- Each transaction is encrypted and given an identity that is stored on the blockchain, containing the patient’s public (non-identifiable) ID.
- Health organizations and institutions can submit requests for the data via APIs and use the patient’s public (non-identifiable) ID on the blockchain to retrieve the encrypted data which can be analyzed for medical research.
- The patient can share his private key with new health organizations to allow them to use it to decrypt his data. The private key links the patient’s identity to blockchain data and without the key, the data remain non-identifiable.[8]
Sector-specific examples of application of Smart Contracts in Healthcare
Health Insurance
Smart Contracts can enable a patient to buy health care insurance policy using smart contracts, the patients’ health information will be stored on blockchain. Based on permissions given, the information could be easily shared with the hospital where the patient chooses to obtain treatment. Similarly, the relevant information of the treatment undergone and medicines prescribed and purchased by the patient will be stored on blockchain and can be shared by the hospital and pharmaceutical store with the insurance company. The payment of the bills of the hospital, pharmaceutical store and generation of insurance claim and reimbursement by insurance company will be automated, eliminating the need for filing separate claims.
Telemedicine and telehealth solutions
Technological developments and use of wearable smart health monitoring devices are enabling doctors to effectively monitor the patient’s medical parameters. Smart contracts can ensure security of the data by storing it on a privately owned blockchain and using encryption and cryptography to protect the data.
Transfer of patients
As data is stored on distributed digital ledger in smart contracts, patients seeking transfer to other medical facilities or further advice will be able to easily change doctors and hospitals without the need to physically transfer their health records and fill numerous forms.
Medical Research
The patient information can be easily shared by hospitals, clinics and pharmaceutical companies to enable medical research institutions to carry out in depth research and monitor the patients progress. This could be very useful in handling major health care crisis caused by epidemics and pandemics and can be used to monitor and implement effective vaccination programmes.
Control Counterfeit Drug
As transactions on smart contracts are immutable and irreversible, the pharmaceutical companies and drug control regulators can be enabled by the technology to identify each drug, validate its authenticity, trace its journey from manufacturer to the patient and thereby monitor, and prevent use of counterfeit drugs.
Effective Supply Chain Management
About 28% of drugs sold are temperature controlled. Every year products of billions of dollars are lost to temperature deviations and shipping errors. Smart contracts can use block technology to identify contamination of such products with step-by-step visibility of cold chain sensor data from manufacture to delivery. If products undergo temperature deviation or cargo undergoes path deviation, the financial responsibility of the concerned party can be fixed and damages can be recovered.[9]
Can smart contracts help in maintaining data integrity of patients
Presently, most healthcare organizations use database management systems to store the healthcare records of patients. Organizations also spend considerable resources for maintaining security systems to protect the data against malicious attacks.
However, patients do not necessarily obtain medical assistance from one institution and the medical data of a patient remains distributed across the databases of various healthcare institutions. Typically, a patient seeking medical assistance from another healthcare institution obtains all records from various institutions and makes them available to the new institution. Data being collated and transmitted in this fashion may lead to loss of data or data inconsistency. In smart contracts, the data is stored on a blockchain over a distributed ledger.
The data can be directly made available to another healthcare organization. As every member included in the chain has a complete copy of the full medical record of every individual, malicious attacks or corruption of data stored on one system or location does not result in loss of data and data can be retrieved and restored from another block on a blockchain. Further, any change made to the records is broadcast to the entire network. Thus, data integrity of patient information can be more effectively maintained in smart contracts.
Conclusion
Smart Contracts hold tremendous potential for revolutionizing every industry. The healthcare industry can benefit from effective data sharing, tracking and regulation of healthcare products and services. The patients can benefit from interoperability. All parties stand to benefit from expeditious performance and certainty of outcome. However, the concerns regarding privacy of an individual, adoption of appropriate consent mechanisms, state of regulations and compliances for Blockchain applications and challenges in enforcement of smart contracts remain to be addressed. Further research and development in the technology and clarity and certainty in regulatory and legal regimes would cement the position of smart contracts in the everyday life of the people. However, until then smart contracts would only play a supplemental role as a tool in contract management rather than an independent contract.
References
[1] Section 2 (h), Indian Contract Act, 1872
[2] Section 2 (e), Indian Contract Act, 1872
[3] Section 10, Indian Contract Act, 1872
[4] Smart Contracts available at https://corporatefinanceinstitute.com/resources/knowledge/deals/smart-contracts/
[5] See Nanak Builders and Investors Pvt. Ltd. vs. Vinod Kumar Alag AIR 1991 Delhi 315; Alka Bose vs. Parmatma Devi & Ors, Civil Appeal No. 6197 OF 2000 and S.V. Narayanaswamy vs. Savithramma 2013R.F.A. No. 1163 of 2002 c/w R.F.A.No.1164 of 2002 Karnataka High Court
[6] Internet and Mobile Association of India v. Reserve Bank of India, WP (C) 528 of 2018 before Supreme Court of India at https://main.sci.gov.in/supremecourt/2018/19230/19230_2018_4_1501_21151_Judgement_04-Mar-2020.pdf
[7] National Strategy on Blockchain, Government of India, Ministry of Electronics and Information Technology, available at https://www.meity.gov.in/writereaddata/files/NationalStrategyBCT_%20Jan2021_final.pdf
[8] Suboh M Alkhushyni, Du’a M Alzaleq, and Nadine L Gadjou Kengne, Blockchain Technology applied to Electronic Health Records, EPiC Series in Computing Volume 63, 2019, pg 36 at https://easychair.org/publications/ open/3fW3
[9] The pharmaceutical industry on blockchain, available at https://www.ibm.com/blockchain/resources/transparent-supply/pharma/
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