Enforceability of Smart Contracts

There has been a lot of buzz word around NFT’s, smart contracts, and web3 etc. By this time most of us are aware that a smart contract is a digital contract that is self-executing and self-enforcing. To put it simply, smart contract is basically a computer program/code that automatically executes the terms of a contract when certain conditions are met. For instance, a vending machine. This post deals with the challenges concerning the enforcement of smart contracts.

Smart contracts have the potential to revolutionize many industries, including finance, insurance, and supply chain management. However, the legal enforceability of smart contracts is still a topic of debate among legal scholars and practitioners. One of the main concerns about the enforceability of smart contracts is their reliance on technology. Smart contracts are executed by computer programs and could be subject to errors and bugs. There is also an inherent risk that a smart contract may not execute as intended or may not execute at all due to some unforeseen result. This could result in disputes between the parties to the contract, and it may be difficult to determine who is at fault and how to remedy the situation.

For example, if a smart contract is intended to automatically transfer funds from one party to another when certain conditions are met, but the contract fails to execute due to a technical error, the parties may end up in a dispute over who is responsible for the error and how to rectify the situation. In such cases, it may be difficult to determine whether the contract is legally enforceable, and how to resolve the dispute.

Another concern is the lack of standardization in the development of smart contracts. Different parties may use different programming languages, platforms, and standards, which can make it difficult to ensure that the contract will work as intended. This can lead to compatibility issues and a lack of interoperability between different smart contracts.

For example, if party A uses a smart contract platform based on the Ethereum blockchain, and party B uses a different platform based on the Hyperledger blockchain, it may be difficult for the two contracts to interact with each other and execute as intended. This can create complications and uncertainties for the parties and may make it difficult to enforce the contract.

Furthermore, the decentralized nature of blockchain technology, on which most smart contracts are based, raises questions about jurisdiction and governing law. Blockchain networks are global and decentralized, which means that it may be difficult to determine which laws and regulations apply to a particular smart contract. This can make it challenging to enforce the contract and resolve disputes.

For example, if a smart contract is executed on a blockchain network that is based in a jurisdiction with lenient regulations, but one of the parties to the contract is in a jurisdiction with strict regulations, it may be difficult to determine which laws and regulations apply to the contract and how to enforce it. This can create confusion and uncertainty for the parties and may make it difficult to enforce the contract.

Despite these challenges, there are steps that can be taken to improve the legal enforceability of smart contracts. One approach is to use standardized templates and protocols for the development of smart contracts. This can help to ensure that the contracts are interoperable and can be executed as intended.

For example, if all parties to a contract agree to use a standardized smart contract template and protocol, it can help to ensure that the contract is written in a way that is compatible with the different platforms and standards used by the parties. This can reduce the risk of technical errors and compatibility issues and can make it easier to enforce the contract.

Another approach is to use third-party oracles, which are entities that provide external data and information to the smart contract. This can help to ensure that the contract is executed based on reliable and verifiable data and can reduce the risk of errors or bugs.

Additionally, the use of smart contract governance frameworks can help to define the rules, processes, and procedures for the development, deployment, and execution of smart contracts. This can provide a clear and transparent framework for the parties to the contract and can help to reduce the risks and uncertainties associated with smart contracts.

It may also be a good idea to supplement a smart contract with a traditional legal contract in some cases. While smart contracts have many advantages, such as automation, transparency, and cost savings, they are not always suitable for every situation and a traditional legal contract may be necessary to address the challenges and risks associated with the use of smart contracts. However, it is important for the parties to carefully consider their options and to determine the best approach for their specific situation.

One reason to supplement a smart contract with a traditional legal contract is to address the challenges and risks associated with the reliance on technology. As mentioned earlier, smart contracts are executed by computer programs, which are subject to errors and bugs. There is a risk that a smart contract may not execute as intended or may not execute at all. This could result in disputes between the parties to the contract, and it may be difficult to determine who is at fault and how to remedy the situation.

In such cases, a traditional legal contract can provide additional legal protections and remedies. It can specify the obligations and responsibilities of the parties and can provide a mechanism for resolving disputes and enforcing the contract. This can help to address the risks and uncertainties associated with the use of smart contracts and can provide additional legal protections for the parties.

Another reason to supplement a smart contract with a traditional legal contract is to address the challenges and risks associated with the lack of standardization in the development of smart contracts. As mentioned earlier, different parties may use different programming languages, platforms, and standards, which can make it difficult to ensure that the contract will work as intended. A traditional legal contract can provide additional clarity and certainty. It can specify the terms and conditions of the contract and can and can provide a clear and transparent framework for the parties to the contract. It can also help to ensure that the contract is written in a way that is compatible with the different platforms and standards used by the parties and can reduce the risk of technical errors and compatibility issues. This can provide additional legal protections and remedies for the parties and can help to ensure that the contract is enforceable.

Another point to consider is that supplementing a smart contract with a traditional legal contract can also help to ensure that the contract is legally enforceable in different jurisdictions. It can specify the governing law and jurisdiction for the contract and can provide a mechanism for resolving disputes and enforcing the contract in a particular jurisdiction. Additionally, it can provide further legal protections and remedies for the parties.

In summary, supplementing a smart contract with a legal contract can be a good idea for several reasons. First, it can provide a mechanism for the parties to the agreement to modify the terms of the contract if necessary. Second, it can provide additional legal protection in case the terms of the smart contract are challenged in a court of law. Finally, it can help to ensure that the parties to the agreement have the flexibility to adapt to changing circumstances while still being bound by the terms of the contract.

In conclusion, the legal enforceability of smart contracts is a complex and evolving area of law. While there are challenges and risks associated with the use of smart contracts, there are also opportunities to improve their enforceability using standardized templates, supplementing it with legal contracts, use of oracles, and governance frameworks. By addressing these challenges and taking advantage of these opportunities, it may be possible to increase the reliability and effectiveness of smart contracts and make them more widely adopted.

By, CHANDAN GOSWAMI.