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SPECULATING SMART CONTRACT VALIDITY, LEGALITY AND ENFORCEABILITY



Smart contracts have been defined in a number of ways but suffice it to say that it refers to a contractual agreement, whether reduced to writing or agreed to orally, which is transcribed into code which executes all or parts of the contract, without human intervention, stored on blockchain technology in a distributed ledger.


It is said to be the future on which all transactions will be concluded, saving time and transaction costs as intermediaries, such a legal practitioners, financial institutions and third party agencies, are not required given that the transaction embodied in the transcribed code is self-executing, in whole or in part.


However, the question that remains is whether smart contracts would be legally binding and stand up in court, a question that remains vague and amounts to mere speculation as no smart contract case has yet to make its appearance within the confides of our judiciary.


Despite the potential benefits of smart contracts, promising reduced transaction fees and speedier executions, smart contracts have a number of legal uncertainties which have yet to be clarified by legal precedent.


Most obviously is the fact that legal practitioners don’t speak code and coder’s don’t speak legalese. Although most individuals are capable of understanding the basic provisions of any agreement, the finer details require knowledge and experience of our legal landscape. Accordingly, it is not possible for contracting parties merely to conclude an agreement and ask for a coder to transcribe same, as a coder cannot decipher or ensure that the parties true intention is accurately digitized. Additionally, there is uncertainty as to how contracting parties would know that their agreement has been transcribed correctly in code, truly giving effect to their intention and not that of the coder, given that no warranty or guarantee is provided when the contract has been "successfully” transcribed into a seemingly bizarre combination of zeros and ones. Lastly, certain individuals may be at a disadvantage where their tech knowledge is not as advanced as the other contracting party and thus may not fully grasp the consequence of a certain coded provision, expecting one thing when the code provides for another.


The smart contract itself, a self-executing binary code, undecipherable to the average person, together with the outcomes it has executed, serve as the only objective evidence of the contracting parties alleged intention. Where same is the only evidence of parties alleged intention, difficulties arise in proving consensus and the true meeting of the minds.


Furthermore, a smart contract does not provide analogous self-help remedies to contracting parties as code requires specific, precise exactitude's. Thus a smart contract cannot, like its traditional counterpart, permit leniency under certain conditions and does not provide either contracting party with the ability to voluntarily cancel the agreement or use the threat of same as a bargaining power to renegotiate contractual terms. The rules of smart contract and its associated code is basic, if X does not happen then Y will not happen or Z will come into effect. Period, no excuses, no exceptions.


Due to the exactitude's required by code, parties cannot leave any contractual provision ambiguous to be argued at a later date in their favour or agree to deal with unexpected eventualities if and when they arise. Additionally, any amendment as agreed between the parties require additional code transcriptions which ultimately increase transaction costs given the immutable characteristic of the blockchain platform and precision's required by the law of code.


Apart from the above, given the public ledger of previous transactions as an integral part of the software used by parties to conclude smart contracts, questions regarding privacy and confidentiality are also called into question. This is apart from the potential and possible risk of hacking and cybersecurity breaches which supporters of smart contracts dismiss on the proclaimed immutability of blockchain technology. However never say never.


“Coding requires human input and all human activities are susceptible to mistakes (and misrepresentation/fraud)” as so well articulated by Sir Geoffrey Vos, a member of the UK Jurisdiction Taskforce (UKJT), one of the taskforces created by the LawTech Delivery Panel (LTDP), who has been tasked to ensure the full growth and realisation of the legal systems full potential in the UK given the increasing role of technology and future of the law. Hacks and similar cyber security breaches are based on the exploitation of unintended coding errors, which given the nature of coding is not prima facie and generally only discovered once the unintended error encapsulated in the code is exploited, thus once harm has already been imposed or data already stolen. This raises questions of who would carry the burden of potential risks and liability for unintended coding errors, whether resulting in hacks and monetary loss or in the improper execution of the parties true contracting intentions.


There are numerous other considerations which render the legality and enforceability of smart contracts vague, considerations on which countries laws' will be applicable where a smart contract is concluded internationally on blockchain technology that extends into international territory , touching base in different countries with different legal regimes and judicial systems. With questions hanging up in the air on the interoperability of the numerous nodes and blockchain platforms available globally, operating in the lacuna of international standards for blockchain platforms and node software.


So although smart contracts holds promises for speedier and less costly transactions, the legal lacuna within in which it will operate must firstly be filled by precedent, legislation, regulations and policies before one could truly start speculating as to its validity, enforceability and legality.


If you are intrigued by possibilities of smart contracts, whether you are cheering them on or dead set against them, join the Jur Legaltech Webinar - Smart contracts, ODR and Blockchain with Futures Law Faculty, Cape Town Legal Hackers and international experts on Friday, 22 May 2020 at 12:00. Register online - https://app.livestorm.co/p/d7df3484-a501-4b83-ad8b-2ff70ce1d4f6




1. “ An Introduction to Smart Contracts and Their Potential and Inherent Limitations” Stuart D. Levi and Alex B. Lipton, Skadden, Arps, Slate, Meagher & Flom LLP – 2018 -https://corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and-inherent-limitations/

2. “ Smart Contracts: Is the Law Ready?” Smart Contracts Alliancean , initiative of the Chamber of Digital Commerce - September 2018 - https://digitalchamber.org/smart-contracts-whitepaper/

3. “ Smart contracting technology is ready for use” Tracey Summerell and Mark Macaulay – 2019 - https://www.dentons.com/en/insights/articles/2019/december/16/smart-contracting-technology-is-ready-for-use

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