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

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.


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.


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 or at Khurana & Khurana, Advocates and IP Attorney.

Leave a Reply



  • July 2024
  • June 2024
  • May 2024
  • April 2024
  • March 2024
  • February 2024
  • January 2024
  • December 2023
  • November 2023
  • October 2023
  • September 2023
  • August 2023
  • July 2023
  • June 2023
  • May 2023
  • April 2023
  • March 2023
  • February 2023
  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • February 2011
  • January 2011
  • December 2010
  • September 2010
  • July 2010
  • June 2010
  • May 2010
  • April 2010