Diving into Smart Contracts

Can Smart Contracts Be Used to Develop & Negotiate Legal Contracts? Will They Hold Up in Court?
The Chamber’s Smart Contracts Alliance Releases Legal Examination into the Technology

By Amy Kim & Paul Brigner

Smart contract technology has the promise to transform the way in which we interact in innumerable ways. The ability to facilitate actions based on pre-programmed delivery terms and established price parameters offers significant economic potential due to their frictionless nature – both for personnel, time and, ultimately, money.  A seemingly limitless number of transactions can take place through smart contracts.  This concept is what motivates much of the excitement surrounding blockchain technology.

Despite their name, smart contracts may not be legal contracts; rather, they are computer code that can be used to create “smart legal contracts.”  Smart contract use cases span a variety of industries and could lead to significant economic efficiencies by eliminating the intermediaries required for many transaction types and can enable multiple automated functions.

In 2016, the Chamber of Digital Commerce launched the Smart Contracts Alliance, bringing together thought leaders and innovators from across the technology, legal and financial services industries to help educate and shape policy for smart contracts moving forward.  The Smart Contracts Alliance published its first white paper, “Smart Contracts: 12 Use Case Cases for Business & Beyond,” describing the potential applications of smart contract technology across various industries to convey the importance of this technology.

Now, under the leadership of co-chairs Mark Smith of Symbiont, Ronald Smith of Norton Rose Fulbright, and Jordan Earls of QTUM, the Smart Contracts Alliance is introducing its second comprehensive white paper, “SMART CONTRACTS: Is the Law Ready?”

The white paper breaks important ground analyzing the enforceability of laws governing smart contracts, including those governing electronic signatures and records. This paper assesses several legal regimes to answer the question of enforceability, to better understand whether smart contracts can in fact be used in legal contracts, and if so, whether they hold up in a court of law. The Chamber presents the white paper as a resource to industry, government, and the public. The Smart Contracts Alliance – which takes the position that existing laws provide an unquestionable legal basis for smart contract technology executing the terms of a legal contract – will continue to expand its knowledge on issues relating to smart contracts and, in so doing, and promote the adoption of smart contracts through education and advocacy efforts.

The Smart Contracts Alliance co-chairs conclude the white paper’s Foreword by saying:

This white paper explains that, under legislation of some jurisdictions, smart contracts are likely to be regarded as “electronic agents,” with enabling consequences in terms of legal or contractual effect. Where might we see the deployment of electronic agents? Artificial Intelligence (AI) is, at the moment, probably the most talked about developing technology. Put AI machine learning in combination with electronic agents such as smart contracts and you have functionality that can autonomously decide and then automatically perform, without the need for human intervention. Realizing business efficiencies, transforming business processes, enabling peer-to-peer interactions, and de-risking aspects of established commercial transactions — the potential of smart contracts is enormous…

The white paper offers a universal lexicon and a deep dive in Chapter One into when smart contracts can constitute legally binding contracts, including what are the required elements in both common law and civil code; their various models and associated nuances; applicable law; governance, enforcement mechanisms, and scope of liability. The paper concludes in Chapter Two that smart contracts may act as legally binding electronic agents under U.S. e-commerce legislation (ESIGN and UETA) using electronic records and signatures. Finally, the paper analyzes in Chapter Three the potential use of smart contracts in securitization procedures, security interests and their perfection under the UCC; various categories of blockchain-based assets for UCC purposes; and the issues associated with the use of wallets through an intermediary.

The paper was written by leading legal and smart contracts experts, including: Miren Aparicio Bijuesca of The World Bank; Joshua Boehm of Perkins Coie; Jenny Cieplak of Crowell & Moring; Fred Fedynyshyn of Perkins Coie; Patricia Fry of University of Missouri-Columbia School of Law; Phillip H. Griffin of Wells Fargo; Dax Hansen of Perkins Coie; Sean Murphy of Norton Rose Fulbright; Mark Radcliffe of DLA Piper; Margo Tank of DLA Piper; and David Whitaker of DLA Piper. A special thank you to those who dedicated their time to pull the paper together.

The Smart Contracts Alliance white paper, as viewed through a legal lens by renowned thought leaders in the blockchain ecosystem, is an essential step toward increasing the adoption of this transformative technology.

Is the law ready? Is enterprise ready? Are you ready?

Dive in.