Are Smart Contracts Legal?

in blockchain •  last year

To create a legally binding contract, one needs to comply with a number of factors. It appears on the surface, that simply because the name of this merger of various technologies contains the word “contract”, it does not automatically imply legal validity. Let’s take a closer look at blockchain powered smart contracts from a legal perspective

Where exactly the legality starts:

Traditionally, for a number of reasons it seemed more efficient and, in a way, more reliable to have some kind of third party to have total control over contractual issues. Indeed, the work of such parties could be truly automated, where parties could log in, strike a bargain, and rely on the trusted third party to validate the bargain and assets, safeguard the transactions, and preserve the transaction records. 

When it came to matters of enforcement, there were two options. The first, is when the third-party intermediary was responsible for the enforcement of such arrangements. In the second option, and by far the more widely spread practice, especially when substantial sums of money were at stake, the enforcement issues were handed over to the legal system. In this context, the legal system here stands not only for litigation, or other alternative forms of dispute resolution, but also includes expert consultations. There, an expert determines whether the disputed issue requires an evaluation or technical assessment of who did what, and how well. This is particularly true when the issue arises from a narrow and specialized field and falls out of the scope of something that may be easily understood by a person without a special background, as a typical judge may be. 

Factors determining the legality of smart contracts:

  1. Types of contracts in line with the jurisdiction when it is to be enforced is of immense importance. If, in the majority of jurisdictions, few limitation on commercial and sale of goods contracts exist, then any form or forum is acceptable as long as it is satisfactory for the parties. Therefore, some jurisdictions may see it as a problem when a smart contract regulates specific issues such as wills or successions.
  2. The technology within which it is deployed may sometimes give rise to problems in relation to legal enforceability. For example, there may be no central administering authority to settle a dispute. However, this is not a problem when it comes to smart contract creation for platforms such as Confideal, where built-in arbitration addresses the peculiarities of this particular kind of deal and is introduced as a part of a smart contract ecosystem. 

One conclusion that may be drawn:

Prior to the mass adoption of smart contracts, their legal status needs to be assessed in order to choose the appropriate smart contract model suitable for a particular jurisdiction. To put it simply, code is not law, but smart contracts created on a platform enabling the execution of said contracts and dispute resolution may be one.

So, once again: are smart contracts legal? They definitely are.

A few words of consolation for lawyers. 

It may seem as if legal professionals may form an opposition to the ongoing smart contract revolutions, since a fair share of a lawyer’s work is related to contracts: writing them, challenging their validity, and creating dozens of new types. Though it may sound irrational, this is far from the reality. Smart contracts will shift the focus of lawyer’s work from a formal and quite technical approach to a new paradigm, where it will be the norm to have a lawyer create a smart contract template or even write contracts in code. In addition, it will not be all that different from what they write nowadays, since few non-lawyers can read and understand what is going on. So there is no need to worry, dear lawyers, in the technological future to-come there is still a place for your services! 


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