by Taayo Simmonds
Whether your legal dispute relates to a business matter, estate litigation, or real estate transactions, contractual obligations are often part of the equation. From a transfer of title for a property to the transfer of funds for a service completed, contracts are everywhere. However, the world of contracts has barely changed for generations and could be in for a shock with smart contracts. Before we jump into smart contracts, let us take it back to the law library and start with the fundamental question: What is a contract?
A contract must have the following elements:
- An offer and acceptance;
- Consideration for the offer, or some value exchanged; and
- Certainty of the terms of the contract.
Naturally, this is easy to understand. However, with rapid technological advancements and the ever-increasing use of blockchain, smart contracts offer a refreshing new perspective to contract law.
What is a Smart Contract?
A smart contract, by definition, is an agreement in a digital form built on a blockchain which can be self-executed and self-enforcing. There is no middle person, but rather when the terms of the contract are met, the blockchain will approve the contract and transfer the funds, coins, or other digital currency between the parties. Smart contracts can be used in anything from friendly wagers on sports to sophisticated transactions transferring ownership of physical or digital assets.
Let’s consider a smart contract with a sports betting example. Steve wants to bet his friend, John, that the Toronto Maple Leafs will beat the Ottawa Senators on Saturday. Both individuals set up a smart contract linked to the game’s score. Instead of “shaking on it” they each put their $20 bet in a cryptocurrency which sits in escrow. Upon the completion of the game, the smart contract will transfer the winner $40 automatically. This might seem simple, but the applications are limitless.
Smart Contracts in the Real World
Smart contracts are being increasingly adopted by individuals and businesses across the world. In fact, platforms such as Kaleido.io allow users to create and deploy smart contracts. While this new technology increases contractual performance there is still opportunity for legitimate disputes. For example, a business owner and website developer could enter a smart contract for a new website. However, to ensure quality assurance the contract may provide the business owner a dispute resolution mechanism if the website is of poor quality or otherwise substandard. Platforms like Kleros.io allow parties to quickly resolve smart contract disputes through a clever online arbitration process.
Smart Contracts in the Legal System
I have seen an increase in the use of delay tactics meant to ground litigation to a halt and wear down plaintiffs. Some defendants couple these tactics with a lowball settlement offer which can be enticing in the midst of a prolonged legal battle.
Smart contracts would end this practice as the contract is automatic and cannot be delayed unless the very terms of the agreement are not met. Parties would no longer be able to rely on a slow and costly court proceeding as a negotiating strategy to withhold payment. Thus, smart contracts are a welcome tool to alleviate the costly and time-wasting tactics that some shrewd litigants use to take advantage of the justice system.
Expect smart contracts to gain traction as they facilitate global transactions without the need to establish trust among the parties. Since contractual performance is programmed into the agreement, parties need not wonder whether the other party will fulfill his/her obligations.
There is much more to come, but based on the emergence of blockchain technology, the smart contract is here to stay and its applications are far-reaching.
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