As the digital revolution is becoming a reality, almost every day there are new technological developments. For this reason, the UK P&I Club issued a briefing looking at blockchain contracts. The contracts are also known as ‘smart contracts’, and the Club describes their benefits as well as legal issues that may arise.
Traditional contracts have numerous terms and conditions, which will work as triggers for information to be exchanged and for physical performance to be conducted. These actions involve several manual steps, which have information junctions that can create delays and increase costs.
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What blockchain does is that it converts the contractual terms and conditions into self-executable computer software which automatically implements and polices the terms and conditions between the parties to the contract. Blockchain contracts are capable of mimicking and following the logic of regular contractual clauses. The more advanced this technology gets, the more automation that can be introduced into the processes.
Legal issues and risks for smart contracts
Smart contracts come with some legal issues and risks, which need to be clarified:
- Jurisdiction: Because of the cross jurisdictional nature of the majority of blockchain contracts, basic contractual concepts such as ownership or title to goods can raise obstacles in their execution. This could be solved by using an exclusive law and jurisdiction clause. However, even then there would be no certainty that claims would not be brought in contravention of such a clause.
- Contract formation: The recognition of blockchain contracts by key jurisdictions will be vital to securing parties’ rights of enforcement. If a contract is not formed, the blockchain code which purports to represent it may not be enforceable.
- Enforcement: One of the key benefits of smart contracts is the automation into contractual performance. However, parties may not want disputes to be resolved automatically by the inclusion of a code which. This would especially be the case in a blockchain environment where there is no central overseeing authority. In such a case, parties would then resort to the traditional courts for the resolution of their disputes.
- Liability and responsibility: Another consideration is that users of smart contracts are unlikely to be responsible for delivering the blockchain protocol themselves. Thus, there are risks which will be included in the quality of the codes used in the smart contract. As the UK Club said: “It remains unclear what responsibility the vendors of blockchain solutions would be prepared to accept in relation to such risks.” This could be possible averted if a smart contract is implemented over a private blockchain, where there is a degree of control.
The future of smart contracts
Some expect that smart contracts will start with a natural language contract with encoded payment mechanism, and will eventually reach a point where the entire contract is just code.
However, before that there will be some intermediary stages where the natural contract still exists, but its payment and performance mechanisms are encoded, and then maybe the traditional contract will exists but it is fully mirrored in the code, the UK Club concludes.
See more details in the PDF herebelow
