Implementation of the smart contracts’ technology represents a group of challenges when applied to conventional approaches of contract law. Furthermore, these challenges exhibit a universal nature which remain unchanged whatever the jurisdiction is. The most striking problem underline the fact that smart contracts are built to operate in a virtual echo-system that lies parallel to the legal system. Accordingly, the smart contract technology was innovated without considering the legal principles of fairness, lawfulness and protection of weak parties.
A group of researchers published a paper that outlined the divergence between the smart contract technology and conventional contract law. Let’s talk a look at some of the opinions presented in this paper:
Smart Contracts Don’t Establish Obligations In Its Classic Legal Meaning:
The concept of obligation is alien to a smart contract, yet it is a basic block of the Continental contract law. An obligation means that a person A (the debtor) has to take a predefined action for the benefit of another person B (the creditor) such as doing work, transferring ownership of a property, paying money…etc. There are two key elements for an obligation: its predefined future action and the “will” element. As obligation represents a legal bond between A and B, this bond entails that a specific action or inaction ought to be performed at a certain point of time in the future and A has a certain form of discretion whether or not to perform it.
To illustrate the obligation difference between classic law contracts and smart contracts, we can use contracts with a “vending machine” as an example. Although a vending machine operates automatically, the owner of the machine has the discretion when it comes to the contract performance as he can interfere in the process of operation of the machine (e.g. by pulling the plug off it) and so, he can change the contract’s outcome and obligations. On the other hand, within the context of a smart contract no party can ever alter the outcome of the contract by turning off his/her computer as all the transactions related to the smart contract will continue on existing and operating on the cyberspace of the blockchain.
Non-existence of obligations, as defined by the conventional legal system, in smart contracts can imply that all the legal concepts stemming from “obligations” are not applicable which include performance mode ( time and place of performance, who will perform….etc) along with consequences secondarily to non-performance. Such implication is still too early due to a number of reasons:
1- A smart contract between 2 parties means that both parties have expressed their will to fulfill the obligations of the contract which renders them bound by the consequences of their actions.
2- The problem with smart contracts is not absence of obligations, rather than reduction of certain party rights due to technical limitations of the technology.
A Smart Contract Can’t Be Breached By One Of Its Involved Parties:
This originates from the self-enforceability characteristic and logical result of its nature; “code is law”. Either of involved parties, in a smart contract, cannot breach it, even if a more profitable alternative, to performing the contract’s obligations, appear. Accordingly, all established actions taken in response to a contract breach, e.g. penalties, damages, incarceration….etc, are not applicable for smart contracts, unless these actions have been explicitly included within its code. As such, all guarantees and actions, which the creditor can rely on in the analogue world, are worthless within the digital echo-system of smart contracts. There is no need to reach out for enforcing the obligations of a smart contract by addressing the problem to third parties, whether judiciary or other forms of enforcement agencies.
Vitiated Consent Doesn’t Affect The Validity Of a Smart Contract:
Whether it was the result of a mistake, a fraudulent presentation, or illegal exploitation of the trust between parties, a vitiated consent is entirely irrelevant to the performance of smart contracts when compared to classic contracts, as such circumstances can serve as basis for judiciary interference under the umbrella of most legal systems. Smart contracts cannot comprise a collision between intention and the mode of its expression, what really counts is the intent expressed in the computer code used to script the smart contract in question. Such point of view can be considered a triumph of certainty and market protection.
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