Smart Contracts

Introduction

In an article published by Clifford Chance in December 2017, the question has been raised – whether smart contracts, are contracts at all?

So, what is a contract? A contract has been described as a written or verbal agreement that is intended to be enforceable by law.

What would  a smart contract be? According to Clifford Chance, “Smart contract technology –  the implementation of electronic contracts, embodied in code and performed automatically by computers – is maturing fast.”

Furthermore, it is predicted that the development of smart contract technologies may herald the beginning of a general transformation of contracts from paper documents to self- executing code-agreements. 

This is an all-important question to answer, specifically because if smart contracts are not contracts, then it should logically follow that they may not be legally enforceable. 

Smart Contracts

The concept of smart contracts is still a fairly new concept. As such, the exact details of what successful implementation and enforcement will ultimately look like remains to be seen. 

Despite this, there are a number of questions that need to be addressed and the most pressing from a legal perspective would be – is whether a smart contract  is a contract at all? 

Clifford Chance phrased this question quite well: “We all have an understanding, in a general sense at least, of what a contract is, on the one hand, andof what computers do, on the other – but do we have a clear understanding of where the boundary between the two lies?

This definition is particularly useful for the purpose of our discussion because it is flexible as to the extent to which smart contract implementation may be fully implemented by computer code or instead combine aspects of traditional contracts and computer code. The definition is as follows: (1)

“A smart contract is an automatable and enforceable agreement. Automatable by computer, although some parts may require human input and control. Enforceable either by legal enforcement of rights and obligations or via tamperproof execution of computer code”

A smart contract, therefore, is an agreement. 

Comparisons

A contract as already established is an agreement between two or more persons who intend to be bound by law. In most instances formalities must also be complied with.

A smart contract on the other hand, has two key additional features that distinguishes it from a “traditional” contract. First, whereas a traditional contract is an inert text or verbally. Execution relies on the actions of the parties independently / respectively.  A smart contract is capable of at least partial performance by computers, without the parties. The second, is that enforceability can take the form of legal enforcement or a tamper- proof execution of computer code. This on the basis that the smart contract is driven by blockchain technology. Not only is  blockchain an unalterable ledger, but once the smart contract is initiated it cannot be interfered with. In that context execution is affected. 

Traditional contracts are performed or executed by the parties to the agreement and if they fail or refuse to do so by a court.  The normal processes in regard to execution then follow.

This issue of whether a smart contract is an enforceable contract at all, stems from a more fundamental issue: computer code and legal drafting are two fundamentally different things and pose very different challenges to the contracting parties. The languages are different as are their interpretations. Although both a traditional contract and smart contract can be executed, it fundamentally looks very different. Technological execution and legal execution through a court system are worlds apart.

So, how is this bridged? It remains to be seen.

Conclusion 

Smart contracts could make contracting and transacting much more time efficient and cost effective than traditional alternatives.  Besides the fact that the technology is fairly new or foreign to many people, based on some of the legal aspects that need attention, it is not suitable for all transactions.. This might change sooner than we can imagine. 

  1. Smart Contract Templates: foundations, design, landscape and research directions by Christopher Clack, Vikram Bakshi and Lee Braine.

Mrs Nicolene Schoeman-Louw
Managing Director
Schoemans Law Inc.


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