Are SMART CONTRACTS a real advance in contractual practices?

2019 01 28 smart contract

On paper, the idea of a SMART CONTRACT is one of the most innovative advances enabled by blockchain. In a regulatory context where many countries have relaxed their requirements for contractual formalities (particularly by implementing legislation on electronic signatures), blockchain has introduced the notion of a self-generating “smart” contract.

SMART CONTRACTS are programmes which enable automatic, fully autonomous execution of the terms and conditions defined and recorded in the blockhain, based on an if/then approach. In theory, this approach seems satisfactory given that it systematically implements the syllogism (legal rule, specific case and conclusion) which constitutes the basis of any legal demonstration. It may also be reassuring for the parties if the consequences for any contractual obligation are also applied automatically, with no prior complaint process.

These new contracts thus do meet our society’s clear need for speed and security.

But does that make them universal solutions?

We don’t believe that it does.

First, we should note that the methodology used is not as innovative as it seems. On the legal IT solutions market, software that can draw up contracts based on a postulate using an “if/then” approach similar to that used in blockchain has existed for a long time.

However, experience quickly showed the limits of these solutions in legal practice. Their binary logic is a poor fit for the unique nature of each transaction, whether it results from the object of the transaction or the nature of the parties.

To express this difficulty in more mathematical terms, a contractual relationship is based on not one but several syllogisms, all of which interact with one another, and no matter how high-performing the IT protocols used, it is very unlikely that they could ever address all the parameters involved in a specific contractual relationship.

It would be interesting to see how this type of contract would manage concepts as circumstantial as force majeure, or the degree of severity of a breach of contract, which are some of the most frequently contested issues in litigation.

Finally, we should bear in mind that these solutions remain vulnerable to hacking - which recent experience has shown that no one is fully immune to.
It is true, however, that these new approaches do generate clear savings in terms of time and costs, and that SMART CONTRACTS are doubtless an appropriate solution for simple, low-stakes contractual relationships.

These technologies also have the advantage of encouraging legal professionals to rethink their existing procedures, which are often overburdened with formal requirements which no longer serve their original objective of legal security.