Smart Guarantees In India: Is Indian Law Ready For Contractual Liability In The Age Of Fintech And Blockchain?
- IJLLR Journal
- Jan 13
- 2 min read
Natasha Zulfikir Kumar, Jindal Global Law School
The age we live in now is one of technology, from barter to blockchain, the Indian financial sector has become an arena of rapid digital growth and development. With this transformation, however, we must also look at if our laws have the necessary dearth to deal with this growth. Sections 126 to 147 of the Indian Contract Act, 1872 (herein after ICA), governs the contracts of a guarantee, the question that we must ask now is if technological developments such as blockchain based smart guarantees, which though code allow for automated assurances, meet these tenets. This article looks at if the Indian contract law is adaptable enough to govern smart guarantees as well, and what the ripple effects will be on its jurisdiction, enforceability, and most importantly the protection of the customers.
As per the ICA, a guarantee requires three parties: the principal debtor, the creditor, and the surety. Section 126 defines a contract of guarantee as one to perform the promise or discharge the liability of a third person in case of default. Section 128 establishes that the liability of the surety is co-extensive with that of the principal debtor unless otherwise provided.
We see this principle guiding the lines of Indian jurisprudence such as in the case of State Bank of India v. Indexport Registered (1992), in which the Supreme Court held that it is immediately upon the default of the debtor that the liability of the surety is established. Similarly, the court emphasized in the case of SBI v. Mula Sahakari Sakhar Karkhana Ltd. (2006), that liability of the surety cannot be foregone unless it is discharged explicitly by variation of the contract (Section 133 of the ICA) or the release of the principle debtor (section 133 ICA) These laws were built to create a foundation for a human centric model of contracting, a paradigm that is being called into question due to the existence of smart guarantees.
