Smart Contracts as a Means to overcome failures in the Judicial System

by: Shira Lifshitz

Doing business could be so simple if not for humans! Imagine, contracts that enforce themselves, and are not interpretable by lawyers seeking loopholes, endlessly arguing over clauses, or finding every instance of non-compliance to complicate what should be a straightforward process. Smart contracts are bits of code that self-execute under pre-determined circumstances that provide a detour around these and other human inefficiencies.

Like Bitcoin’s ability to circumvent the control of central governments, smart contracts are similarly founded upon complex blockchain technology that enables parties to create contracts that preempt the control of, among other formerly important institutions in contracts, the judiciary. Although this is especially necessary in jurisdictions where the judiciary is perceived to be unfair or corrupt, even in seemingly fair jurisdictions the positive externalities of smart contracts have become evident, particularly in reducing uncertainty and increasing efficiency.

The judiciary can have many roles in the contractual system, including assessing fairness of terms and liability for breach. However, where justice is not accessible, either due to corruption or lack of access for disenfranchised populations, smart contracts can provide a more equitable solution than the status quo. Even when the judicial system is functioning, the costs of litigation may make it difficult for some parties to obtain the remedies they seek when they feel they have been wronged.

A smart contract, however, overcomes this problem since each infringement is met with an immediate and automatic reaction as programmed into the contract. For example, clauses in a smart contract could determine that each delay in making a payment by one of the parties would incur an automatic compensation by way of a designated bank account.

While some challenges to unfairness in contracting might be answered by these technological developments, there are legal and practical concerns that may limit the use of smart contracts under some conditions. For example, it is sometimes necessary to include human decisions in a contract; breaching a contract may often be the best possible outcome for all parties. Moreover, there are concerns that smart contracts will be used to circumvent useful legal limitations on otherwise unenforceable, void, contracts: Smart contracts do not allow for legal remedies commonly associated with mistake, confusion, lack of consideration, mitigation, lack of capacity, fraud, interpretation of ambiguities, and inequalities that are exploited by unequal parties.

Even with these concerns, there are numerous instances where smart contracts benefits far outweigh the concerns. However, to make smart contracts work even in instances where their utility is obvious, challenges to their acceptance may require the development of best practices, universal customs, or even outright regulation by national or international bodies. However, regulation has to be proportionate, enabling on the one hand the realization of emerging technologies' potential, and, on the other, protecting the rights and interests of all parties.