Are Smart Contracts Legally Binding?

By Adrian Cruce

Smart contracts are pretty much the talk of the town when referring to blockchain technology and cryptocurrencies. They are widely presented as being the best part of the new technology since the need to work with intermediaries can be eliminated.

If you do not know much about smart contracts, Block Geeks has a really good article for beginners that you can read here.

On the whole, smart contracts are really interesting. They will reduce transaction costs as enforcement and monitoring are cut out. People are allowed to bind themselves without an intermediary. This automatically raises the question:

Are Smart Contracts Legally Binding?

The truth is that society, most likely, does not really want the smart contract to be completely legally enforceable. Enforcement need is eliminated, especially litigation. People can be forced to keep commitments and companies can easily attract new users through the promise of not abusing personal information. A smart contract makes such a commitment a lot stronger.

Unfortunately, smart contracts are not contracts and they should not be considered as being smart. There are many huge advantages of using smart contracts but a smart contract cannot really adapt to ambiguity. A smart contract is only as smart as the person that codes it. Also, it is not a contract since the contract is an agreement. An agreement will not live on a hard drive. The smart contract is practically a programmatically-executed transaction. It is technology that enforces an agreement.

Smart Contracts Are Great

Nobody can really deny this. A smart contract is wonderful when it works. However, when we mention “contract law”, we talk about what will happen in the event something does not work. Lawyers get involved and someone decides who is right and who is wrong. If ambiguity appears, lawyers work around it to represent clients.

Contract law needs to figure out different things, like:

  • What is the agreement between the parties?
  • Who are the listed parties?
  • Was value flowing in both directions?
  • Are there excuses for contract breach?
  • Is performance partial?
  • Was the breach strategic?

There are situations in which contracts cannot be enforced. Any contract becomes invalid when there is no mutual consent. Also, mutual consideration might be lacking. If this happens, courts are not going to agree with claims since the contracts are one-sided. Basically, in many cases contracts can be void.

The point of the smart contract is to avoid intermediaries and the law. So, making it legal is quite a paradox.

Smart Contracts Are Not Contracts

This is, perhaps, the most important thing to remember. The smart contract is an enforcement mechanism for an existing contract. It does not matter if the smart contract does not correctly execute or if it is just bugged. The court can have something to say about everything. It can infer agreement from code content/advertising/documentation. This basically means that the smart contract has always been legally enforceable but directly through its terms.

Basically, it all depends on how you look at things. A smart contract can be legally binding if you get the court involved but what is present in the smart contract can easily end up being something that leads to the unwanted result in the first place. If you are involved in litigation, the smart contract has little impact. It can be used as evidence in the heads of people. However, in many cases it is totally unenforceable, which is a good thing for the entire industry.