SMART LEGAL CONTRACTS
What's the difference?
In contrast to smart contracts, there are much fewer definitions of smart legal contracts. A reputable source from the Chamber of Digital Commerce defines smart legal contracts as smart contracts that are capable of self-executing the terms of an agreement between two or more parties on a legally-enforceable basis [13]. Differentiating a smart contract from a smart legal contract is important because the latter can be reasonably taken to court or have legal repercussions that a regular smart contract may not. Self-executable contracts may be difficult to create at the moment; creating an autonomous system that will execute sets of instructions agreed upon by its parties requires a clear understanding of the instructions themselves which may not always be possible, especially during a transition to blockchain. The definition of a smart contract’s self-executing nature may therefore evolve over time to define smart contracts as instruction-abiding, rather than being fully autonomous.
TRANSLATING TRADITIONAL CONTRACTS INTO SMART LEGAL CONTRACTS
What are some problems associated with the term "smart contract"?
The term smart contract indicates that the legal application concerns a “contract” and that it can also be seen as a “smart” solution. This can be misinterpreted. The legal application of the technology behind a smart contract is not necessarily a “contract”.
A smart contract makes it possible for one to automatically perform a transaction between two parties as soon as several obligations have been fulfilled. In this case, it is understandable that the transaction and its execution can be seen as a contract (agreement), as it does not differ that much from a traditional paper-based contract (agreement) with the exception of the added characteristics of automation and immutability.
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What constitutes a standard legal contract?
In order to comprehend and evaluate the extent to which a smart contract is legally enforceable, it is necessary to understand the components of a standard legal contract. A traditional legal contract, under most common law jurisdictions, must contain the following four elements in order to be legally enforceable [14]:
What constitutes a standard legal contract?
Offer and Acceptance
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Offer: An offer is an expression of one party's assent of certain definite terms, provided that the other party involved in the bargaining transaction will likely express their assent to the identically same terms.
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Acceptance: In order to fulfil the criteria of acceptance, two sub-criteria must be met:
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​An agreement must be reached by the counterpart to each independent term of the contract
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The counterpart must then accept these terms using the procedure required by the offer and within its time period
Consideration​
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Consideration refers to the court considering whether value (tangible or intangible) has been exchanged, or if there will be some kind of mutual benefit or burden.
Intention to Create Legal Relations​
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Under US, English, and Australian laws, both parties’ intentions are assessed in reference to a set of objective criteria. First, the status of their communication is analysed based on the content communicated by the parties, either through words or conduct. Then, the aforesaid communication is objectively analysed to conclude whether the parties intended to create legal relations.
Certainty of Terms​
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This criterion necessitates that any and all requirements and/or stipulations for the execution of a contract must be known to all parties involved in the contract before the contract is signed.
How do smart contracts fulfill these requirements?
Offer and Acceptance
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Smart contract software code on a distributed ledger is likely to constitute an offer if other participants on the ledger are entitled to interact with, and execute, the software code. The offer in a smart contract (within the ledger) may indicate their acceptance by signing the transactions with a private key, which acts as a password or signature unique to each party.
In Canada, the Personal Information Protection and Electronic Documents Act (PIPEDA), outlines the requirements for electronic signatures which can be extended to private keys.
Furthermore, each Canadian province has created legislation based on the Uniform Electronic Commerce Act (UECA), which maintains that a contract cannot be deemed invalid simply because it is not in traditional paper form but in electronic form. For example, British Columbia has enacted the Electronic Transaction Act, Ontario has enacted the Electronic Commerce Act, and Quebec has enacted An Act to Establish a Legal Framework for Information Technology. These policies may allow for a smoother transition to legal enforceable distributed ledgers.
Consideration​
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Legal professionals have argued that smart contracts tend to fall into a gray area where consideration is taken into account.
The consideration criterion’s main goal is to create a difference between enforceable contracts and unenforceable gifts. The difference between the two is that, while all promises may create moral duties, all promises do not create a legal obligation from one party to another. There exists no test for consideration for smart contracts.
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While a typical contract will include some consideration that induces a reciprocal promise, there does not exist a mechanism to block a party from encoding a gift promise into the smart contract. The irrevocable nature of the blockchain would also prevent anyone from being able to prevent the execution of the promise.
Intention to Create Legal Relations​
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In the case of legally enforceable smart contracts, it may be quite difficult for one party to assert no intention to create legal relations towards the opposing party. Smart contracts have the ability to create subsequent smart contracts that stem from the initial smart contract signed by both parties. For example, a bank and a borrower might agree on a primary agreement, whereby if the borrower’s bank balance drops below a pre-agreed threshold, the software will automatically issue a loan request to the lender. The loan request will automatically be accepted, provided that certain pre-programmed conditions are met. This implies the creation of new loan transactions from time to time. Given that the parties made the initial decision to enter into the smart contract, one could argue that they indirectly agreed to be bound by the system in which it operates. One could also argue that if the parties intentionally coded a smart contract to be self-executing and hence autonomous in making its own decisions, they must have intended to accept those decisions as their own.
Certainty of Terms​
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Smart contracts are, at least in part, written in programming language and are published on distributed ledgers in a form that can only be read by computers. This can raise the question as to whether or not the smart contract can provide commitments that are determinable to the parties.
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In order to tackle this issue, legal professionals recommend that all commitments should be described in a manner that is understandable to every party. A downside of this solution is that agreements which are made in software code but also translated in natural language may have discrepancies between the two versions.
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Even though the parties can agree to express specific terms of their agreement in software code, it is important that this expression is admissible in any judicial proceedings that can arise out of that agreement. It is, however, reasonable to suppose that the usual rules relating to contract formation will likely apply to determine the legal status of a smart contract.
​It is important to recognise that while smart contracts may meet the requirements of a traditional contract according to contract law, it will serve a fundamentally different purpose. The purpose of contract law is not to ensure the performance of the contract but to resolve any grievances that may arise after the fulfilment of the contract. While smart contracts may seem to alleviate the need for resolutions by seemingly allowing no possibility of breach, the needs of those involved in the making of the contract do not disappear as far as smart contracts are concerned. Promise-oriented disputes and grievances cannot and will not disappear but may be slightly changed. For example, if both parties cannot (or will not) represent all possible outcomes of the smart contract prior to making it, the results of the smart contract may diverge from their actual intent. Once one appreciates the overall function of contract law, it is easy to understand that any reports regarding the death of contract law or the end of needing lawyers are categorically untrue [14].