Smart contracts – how important are they to the future of legal practice? Part 2

The challenges of putting smart contracts into practice

Clients are not going to want to enter into smart contracts unless they are legally binding because even if they are self-enforcing things can still go wrong.

The code could not work the way the parties or the author intended[1] or the author could have “fat fingers” and make a mistake without realising[2].“Moreover, given the capacity for computer programs (and their coding) to spontaneously corrupt, in which case neither party is necessarily ‘responsible’, there is potential for disputes as to liability to arise if the risk of technical error eventuates.”[3]

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Globally countries have not legislated for smart contracts specifically[4] and it is expected that smart contracts will be adapted into traditional contract law[5] and laws related to electronic transactions that have been introduced in many jurisdictions.[6] Smart contracts will not necessarily fit neatly within regular contract law.[7] Potential incompatibility could undermine the prevalence of smart contracts.

Living in Australia where a former Justice of the High Court has said, “I am incapable of sending or receiving emails…The consequence is that I read emails only after they have been printed out for me…”[8] there are likely going to be serious issues for judges and legal teams to be able to actually interpret code or the implications of code to be able to formulate judgements and legal strategies respectively.[9] They will inevitably need experts to assist them, creating additional costs and time spent on matters.

 

Additionally any attempt to reference materials that the code was based on could be hampered at least in Anglo-American Common Law jurisdictions by the “parole evidence rule which prohibits reference to such materials where the express terms have been reduced to a final written agreement.”[10]

It is important to note the exact opposite argument has also been put forward with some arguing “Courts are going to be more likely to enforce smart contract terms because the courts will have more certainty as to party intent because the parties explicitly laid out their terms.”[11] The validity of this argument will likely depend on the complexity of the terms.

 Finding a solution

 It has been proposed that those writing smart contracts will be incentivised to write them in line with legal expectations.[12] This does appear to be the case with some smart contract developers seeking legal consultation to ensure compliance.[13] For example, following English Common Law and ensuring that both parties to the contract are named.[14] There is also the possibility of dispute resolution existing within its own dispute mechanism rather then being spread across jurisdictions, an analogy being drawn with maritime disputes that are tried in their own courts in London[15] or sporting disputes decided by Court of Arbitration for Sport in Lausanne. Given how well blockchain facilitates the creation of contracts across the world this could be the key development that will allow the growth of smart contracts and ensure its viability as a platform. Thus making it very important to the legal profession in the future.

  

[1] Mark Giancaspro ‘Is a ‘Smart Contract’ Really a Smart Idea? Insights from a Legal Perspective’ (2017) 33 Computer Law & Security Review 825.

[2] Jenny Cieplak and Simon Leefatt, ‘Smart Contracts: A Smart Way to Automate Performance’ (2017) 1(2) The Georgetown Law Technology Review 417.

[3] Giancaspro, above n 1, 829.

[4] Norton Rose Fulbright, ‘Can Smart Contracts be Legally Binding?’ (Working Paper, November 21 2016) <http://www.nortonrosefulbright.com/files/r3-and-norton-rose-fulbright-white-paper-full-report-144581.pdf>.

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8] See https://www.theguardian.com/australia-news/2015/aug/31/dyson-heydon-i-read-emails-only-after-they-have-been-printed-out-for-me

[9] Giancaspro, above n 1.

[10] Ibid 832.

[11] Max Raskin, ‘The Law and Legality of Smart Contracts’ (2017) 1(2) The Georgetown Law Technology Review 305, 328.

[12] Ibid.

[13]Mattereum, ‘How to Make Smart Contracts Legally Binding?’ (13 December 2017) YouTube <https://www.youtube.com/watch?v=z5dX-8jdTKM&gt;.

 

[14] Ibid.

[15] Ibid.

 

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