Pacta Servanda Sunt: The Legal Issues of Smart Contracts Application
The legal aspect of smart contracts is one of the hardest questions when we talk about their implementation. Without any doubt smart contract is the best existing tool to provide fulfilment of any agreement. However, there are still number of legal problems, regarding their implementation.
This article aims to answer basic questions about the legal side of smart contracts implementation and next week we will take a closer look at regulation of smart contacts in different countries.
All transactions under Blockchain come with auditable trails of cryptographic proofs. With smart contracts, legal relationships can be reduced neatly into code-whereby clauses that are automatically enforced once the pre-programmed conditions are satisfied. Instant and automatic fulfillment of obligations is not the only interesting opportunity brought by smart contracts. Decentralized storage of transaction data brings heightened security to any agreement, and let’s also not forget that data cannot be lost or altered on a block. Rather than simply hoping that the parties will behave honorably, smart contracts are inherently built with the properties in the system, in such a way that they will keep functioning with the guarantees that we expect. Also, from a legal standpoint, conflicts between parties should be minimized because of the automatic enforcement of the obligations, and therefore costs to ensure enforcement are essentially cut to zero.
Almost flawless execution of smart contracts is truly great feature. However, there are some legal challenges. As you can technically program your smart contract to execute an infinite number of obligations, you are not necessarily allowed to enforce and execute those by law. This could create smart contracts that go against existing laws or that are simply unenforceable, even though the code will automatically enforce its obligations. It’s utterly important to make sure that the actual legal agreement on which your smart contract is built upon, is legally compliant with your situation and your jurisdiction.
It is important to understand that smart contracts are not necessarily legal contracts. The word “contract” is often misleading. Smart contracts can embody many kinds of legal and non-legal relationships. Legal contracts are just the most prominent example of that. Also, a smart contract may be just an implementation mechanism for an actual legal contract. Consider carefully what kind of a legal tool you want to use in a given case.
Lawyers realize that smart contract technology will be the unstoppable disruptive force for the profession. Some authors suggested even a new term „lex cryptographia”, to denote an emerging branch of law comprising self-enforcing contracts and decentralized autonomous organizations. They claim that the distributed ledgers can yield a new digital revolution connected with decentralization of the Internet. For the legal environment, this would be a breakthrough that can be compared to the invention of the print. For example, a ledger with the inalterability of the data, mixed with smart contracts could help clients create an immutable, time-stamped and legally-defensible record of when a trademark or copyright is first used. Thus, should a client pursue registration of a said mark, the evidence would be there to leverage the option in their favor. Blockchain is the perfect mechanism for achieving these goals because by nature records in a Blockchain network are time-stamped, secured and scalable
After this, you might want to ask: “Can smart contracts replace lawyers?”. The answer is both yes and no. Consider a land purchase where you may get a deed or title, but the title itself is forged, or the land in question has been designated as government property — the smart contract will execute as soon as the condition is met, but you will still end up having to go to court to contest the sale.
Lawyers will be needed until we can automate every aspect of our business and financial dealings. Moreover, there will probably be a high demand for legal tech specialists, that have knowledge in both law and programming. So, if a lawyer only prepares template contracts and supplying forms for various processes, a smart contract could easily replace him or her by furnishing the required documents as soon as a transaction is made. But lawyers who are actually practicing law are going to be in demand for the foreseeable future.
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