SMART CONTRACTS : Do they constitute legally enforceable agreements?

By George Tserkezis, Dr.Jur., Attorney at Law Nov. 2018
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It is the blockchain technology that allowed users to insert contractual terms into its blocks. Once smart contracts stored on the blockchain, transactions are executed automatically without any further parties’ interference. But do they operate in the same way as legal contracts?
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It is the blockchain technology that allowed users to insert contractual terms into its blocks. It seems likely that blockchain-enabled smart contracts’ breakthrough was due to their digital automatic execution. The potential of this technology has already been recognised by central banks, governments, and major financial institutions.
Within the blockchain context, smart contracts are scripts stored on the blockchain. Since they reside on the chain, they have a unique address. While the transaction is executed by electronic means, without the need to use paper documents or traditional signatures, the performance of each party’s obligations is subject only to the rules established in the smart contract by its prewritten software program. Smart contracts’performance cannot be stopped by the parties either voluntarily or by court order. In case of smart contracts, unlike traditional contracts, acceptance comes through performance. However,the question is do they operate in the same way as legal contracts when it comes to seek legal redress for breach of contract before a court of justice? How do courts respond to contract terms written in code form as legal issues arise?
For a smart contract to be enforceable, it would need to meet all of the traditional requirements of a valid contract under law. In a smart contract the same input will always produce the same output. Furthermore,a properly written smart contract should describe all possible outcomes of the contract. What does it happen when the outcome of the smart contract doesn’t comply with the law? If a dispute arises, how can an aggrieved participant to a permissionless blockchain identify the other party to a smart contract in order to bring legal proceedings against it? A court could hardly consider a smart contract hosted on a blockchain as having legally binding effect if it is simply not possible to identify who the other contracting party to it is or if that party has the legal capacity to stipulate a contract. As blockchain technology intends to keep secrecy of the identities of the users,it could enable those who are legally not permitted to consent. Even if that problem is solved by means of an e-signature, in a public blockchain, it is conceivable that a user could be contracting, deliberately or randomly, with an entity that is not recognized by the law or worst that is prohibited by law. Even if the counterparty’s identity can be determined, user’s location would still need to be known for purposes of determining jurisdiction and the governing law in the event of a lawsuit. Smart contracts function in a distributed network which cannot be assigned to a specific geographical location when all kind of legal systems always seek to assign legal disputes to a specific jurisdiction.
It is also worth pointing out that enforceability of smart contracts could still be an issue since there are contractual terms which cannot be performed through a computer running code. A lot of detailed transaction terms that often parties use to prevent predictable or unforeseeable changes in the market are not included into the contractware. In such case,smart contracts don’t allow parties to get out of their commitments or to modify them,as it could be in case of traditional contracts. Subsequent change of circumstances or intent of the parties to it is irrelevant.
Upon computer verification, legally relevant processes such as transfer of assets, entry and stockage in the blockchain database are generated automatically. Mathematics and cryptography do the rest. They implement the rules governing how the network executes and confirms transactions in computer code. Smart contracts are technically binding for all the parties to it, by excluding human discretion from contract execution and definitely they do not rely on the state for enforcement. Smart contracts’ performance cannot be stopped by the parties either voluntarily or by court order. A smart contract is already executed by the time a court hears the case.
It would be in parties mutual interest to change the contract, or maybe even to get out of the contract entirely, when things have been changed. To date, smart contracts are not able to implement flexibility, as they only react on predefined code. Furthermore, it is hardly conceivable that any agreement can provide for all contingencies. A smart contract is not smart enough to do that, unless the parties embody into the smart contract code at the beginning the possibility for that modification. smart contracts, There is still a number of unexplored legal issues concerning smart contracts that needs to be cleared before litigation inevitably arises.