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A Lawyer’s Perspective: Can Smart Contracts Exist Outside the Legal Structure?

Editor's Note: This is a guest post by Richard Howlett, Solicitor at Selachii LLP London.

There can be no debate that technological development has never been as fast, as complex or as creative as it is today. The only problem is, as with all revolutions, when things are moving this fast one has to be very careful when it comes to separating innovation from irritation; as more new tech is made available we have to develop that sixth sense that will allow us to separate what will actually help us from what definitely won’t. 

Let’s take fintech (and I’d include Bitcoin and blockchain under that umbrella) as an example:  

This is an area that commercial litigation firms are coming into contact with more and more. Given that we are currently in the midst of a digital revolution, the scale of which we have never seen before and will probably never see again, I think we all agree digital currency and digital transactions aren’t only progress but an inevitability.  

Yes, there are – as there are with all new ideas – some legal and accounting wrinkles to iron out, but the initial take-up for digital currency would suggest it has some fairly muscular legs to grow into.

However, on the fringes of the fintech world we have seen some worrying developments. Buzzwords that long-term could prove to be as damaging as they are misleading in the short-term. 

"Smart contracts" seem to be the buzzwords that are gaining increasing traction in the digital market. It is a sound enough idea, a contract that will rewrite itself according to commercial circumstances surrounding it by using a complex series of rules embedded in its coding. 

The ideas behind it are equally as sound theoretically. Less input from the contracting parties means that smart contracts will come into being quicker and, therefore, allow for transactions to be raised and completed more quickly.  Also, the fact that smart contracts require less input from both the parties involved and their lawyers, will make commerce more fluid and more cost-effective both in terms of time and legal fees.

The only potential problem is that once you get past the theory and examine the practical with a legal eye, you start to see that it is actually difficult to consider a smart contract as either smart or a contract and that it is probably more accurate to drop the term smart contract; instead, referring to them as automated computer code. 

For those among you who think my stance may come from the fact that I’m a solicitor who is worried smart contracts might eat into my practice, I shall explain why smart contracts – in their current form at least – are not fit for purpose.  

The first thing to consider is why a contract is required in the first place: It is there to protect the personal and/or commercial interests of the parties, which means it is contingent on two key sources:

  1. The prior agreement of the parties on the heads of terms included within the contract.
  2. The legal experience required to turn those heads of terms into a viable legal document.

Once that contract is in place, coding could provide continued support for that contract and, indeed, for similar contracts involving similar terms for similar transactions. I would even suggest the code could probably even be taught to make small alterations as long as those alterations were foreseeable and logical.  

However, I am highly cynical about a code’s ability to make more complex binding/sustainable legal decisions required to build the foundations of a robust commercial contract or negotiate the best possible terms for all of the parties involved. This means that in the first instance at least, a lawyer will still need to be involved.

Also, code works on linear decision-making and probability, but more often than not, finding the right answer to settle a particular contractual nuance is a much more lateral process and requires a level of creativity and flexibility that can come only from real-life experience.  To inject that depth of practical experience into code is, I would suggest, a nigh on impossible task. 

This takes us on to another potential failing: If things turn sour between the contracted parties, who is there to sort things out? There is a common myth that a smart contract cannot be litigated, but I would disagree. As long as the heads of terms that sit behind the contracts are clear – and have clearly been accepted by the parties – there is scope to litigate if the code is deemed not to be fit for purpose or has affected the transactions it is meant to support and/or the payments associated with those transactions.

This is, however, where things could get more complicated.  As there is currently no international internet law, the original contract would have to set out the jurisdictions of the parties and which country’s law the contract is reliant upon. Again, these aren’t decisions that code can make, so these definitions and agreements would have to be made by people, quite possibly with specialist legal advice.  

And that is why I don’t believe that smart contracts in their current form can be considered smart or contracts. As I said earlier, I don’t want this to come across as just another defensive letter of self-preservation from a lawyer in fear of losing fees. As an experienced litigator who has fought for years to ensure my clients always get the best possible protection from their commercial contracts, it concerns me is that an idea or even just a buzzword could lead numerous businesses into difficult and potentially very costly situations just because they had bought into the next big thing.

Richard Howlett

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