Oct 1, 2021

How smart are your contracts?

There is some debate as to whether a smart contract fulfils the requirement that a contract must be signed. The debate centralises on the issue of when the private key (used in lieu of a traditional signature) is applied. It is done with the necessary intention to authenticate the document. Further as the document would be signed by a key rather than a named individual, it permits contracting parties to remain anonymous to one another.  

Are smart contracts practical?

Just as there is an endless number of use cases for smart contracts, there is an endless number of situations in which smart contracts are not practical.

For example:

  • Contracts often use terms that are ambiguous, such as ‘sufficient cause’, ‘reasonable efforts’ or ‘best efforts.’ One party might believe that the ‘reasonable efforts’ threshold is met, while the counter-party disputes that idea. A smart contract is not reliably capable of this type of determination.
  • Sometimes computer code fails and this should be anticipated with failsafe measures. For example, the programmer can include code demanding human intervention if there is some sort of failure.
  • The addition of the word ‘smart’ in the term ‘smart contracts’ implies some sort of intelligence on the part of the code. This is a misnomer because smart contracts are actually pretty dumb. The smart contract code simply checks certain conditions and parameters, and then follows the code to self-execute. A truly ‘smart’ contract would take into account all of the surrounding contextual circumstances, sense the spirit of the contract and make determinations that are fair and contemplated, even in murky circumstances.

Will smart contracts ever truly replace pen and paper?

Contractual interpretation can be a minefield and has always needed humans or the courts to determine meaning. However, the court may be limited in its ability to interpret the intention of the parties or the contract itself due to the unambiguous nature of computer code.

A potential favourability towards smart contracts is the possibility of them becoming a separate category of contract. Such a sub-category may provide for unambiguous working to be included in a contract to avoid any disputes over the interpretation of certain working. However, in commercial practice, such wording is unlikely to be available and may cause further disputes to arise.

For all questions regarding the topics raised in this blog, please contact a member of our team of digital asset legal experts.

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