Introduction
In recent years, more and more businesses have begun to use automated “smart contracts” to handle transactions. These contracts, which are based on blockchain technology, execute automatically and are seen as a way to digitize transactions more efficiently. However, there are questions about the enforceability of these contracts and what legal ramifications may arise in the future. This article will explore these questions and provide real-life examples of where smart contracts can be used.
What Are Smart Contracts?
To understand smart contracts, it is important to know that they are not simply digitally signed agreements. They are computer programs built on blockchain technology. The terms of the agreement are handled through code, allowing for full automation. Once a smart contract is created, it is stored as a block of data on the blockchain. When the conditions of the contract are met, it will execute the terms. For example, in the case of a purchase agreement, once the agreed-upon product is delivered, the payment is released automatically. Smart contracts are an innovative way to handle complex agreements and may even shape the future of contracts due to their automated nature.
Benefits of Smart Contracts
One of the main benefits of smart contracts is the automation of the contract execution process. Smart contracts can automatically execute the terms of an agreement, such as releasing payment once goods have been delivered, without the need for manual intervention. This can save time and resources for businesses and reduce the likelihood of errors.
Smart contracts also provide increased security and transparency. Since the terms of the contract are stored on a blockchain, they are tamper-proof and easily accessible to all parties involved. This can increase trust and accountability between parties, and make it easier to resolve disputes.
Another benefit of smart contracts is the ability to incorporate complex logic and business rules into the contract. For example, a smart contract can automatically adjust the terms of an agreement based on external factors such as changes in market conditions or the performance of a specific asset. This can make it easier to handle complex agreements, such as financial derivatives.
Real-Life Applications of Smart Contracts
There are many potential real-life applications of smart contracts, including:
Enforceability of Smart Contracts
Given the unique nature of smart contracts, there are concerns about their enforceability. In general, smart contracts are enforceable as long as they follow the basic rules of contractual agreements. These include:
Offer, Acceptance, Consideration
As with any contract there must be an offer, an acceptance of that offer and consideration. Offer refers to one or both parties offering the terms of the agreement. Acceptance refers to both parties accepting the terms as offered. Consideration refers to something of value being offered to each party. If any of these components are lacking, it is not a legally enforceable contract.
Legally Permissible Terms
In general, you cannot use a contract to bind parties to terms that are illegal to enforce. For instance, asking parties to waive certain rights that cannot be legally waived will likely nullify that section of the agreement. This may present a special challenge for smart contracts since making sure such terms are severable from the rest of the agreement—which cannot be edited once executed—may be more difficult than it would be with a paper contract.
Legal To Sign Electronically
Finally, smart contracts need to be legally eligible for electronic signatures. Some types of agreements cannot be signed electronically, including wills and other estate documents; court orders; product recall notices involving health and safety; documents required to accompany hazardous substances being transported; notices of cancellation of utility services; and eviction notices.
Challenges with Smart Contracts
Smart contracts execute automatically, and once they are set in place, they cannot be modified. This creates challenges in the event of disputes or unenforceability.
Automatic Enforcement
If it turns out that the terms of a smart contract are not legal to enforce, it creates a more difficult situation than one would have with a traditional paper contract. Once the contract is programmed and agreed upon, it will execute automatically, which may lead to some difficulty in remedying any unlawful enforcement.
Modifying the Contract
Making modifications to the contract can also be a challenge, at least once it is set into motion. Once a smart contract is in force, it cannot be modified. This means if any changes are desired, the entire contract needs to be canceled and redrawn. For this reason, maintaining a backup copy of the code is recommended.
Handling Disputes
Due to the difficulty of adjusting a smart contract once it is in place, it is important for parties to consider how disputes will be handled.
Conclusion
Smart contracts are an innovative way to handle complex agreements, but their enforceability is not without challenges. To ensure that a smart contract is legally enforceable, it must follow the basic rules of contractual agreements, including offer, acceptance, and consideration, and contain legally permissible terms. Additionally, it must be legally eligible for electronic signatures. While smart contracts offer many benefits, including automation and efficiency, it is important to consider the potential challenges and plan for how to handle disputes and unenforceability. It is recommended to maintain a backup copy of the code to ensure that changes can be made if necessary. As the use of smart contracts continues to grow, it will be important to closely monitor legal developments and best practices to ensure their enforceability and effectiveness.
In real-life applications, smart contracts can be used in industries such as supply chain management, real estate, and insurance to automate and streamline processes, reduce errors, and increase transparency and security. As blockchain technology continues to evolve and be adopted, we can expect to see smart contracts being used in an even wider range of industries and applications and, arguably, applicable to any relationship requiring a legal framework.