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Is a ‘smart contract’ really a smart idea? Insights from a legal perspective

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Abstract

Swift developments in the emerging field of blockchain technology have facilitated the birth of ‘smart contracts’: computerised transaction protocols which autonomously execute the terms of a contract. Smart contracts are disintermediated and generally transparent in nature, offering the promise of increased commercial efficiency, lower transaction and legal costs, and anonymous transacting. The business world is actively investigating the use of blockchain technology for various commercial purposes. Whilst questions surround the security and reliability of this technology, and the negative impact it may have upon traditional intermediaries, there are equally significant concerns that smart contracts will encounter considerable difficulty adapting to current legal frameworks regulating contracts across jurisdictions. This article considers the potential issues with legal and practical enforceability that arise from the use of smart contracts within both civil and common law jurisdictions.
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Is a ‘Smart Contract’ Really a Smart Idea? Insights
from a Legal Perspective
Mark Giancasproa
Swift developments in the emerging field of blockchain technology have
facilitated the birth of ‘smart contracts’: computerised transaction protocols
which autonomously execute the terms of a contract. Smart contracts are
disintermediated and generally transparent in nature, offering the promise of
increased commercial efficiency, lower transaction and legal costs, and
anonymous transacting. The business world is actively investigating the use
of blockchain technology for various commercial purposes. Whilst questions
surround the security and reliability of this technology, and the negative
impact it may have upon traditional intermediaries, there are equally
significant concerns that smart contracts will encounter considerable
difficulty adapting to current legal frameworks regulating contracts across
jurisdictions. This article considers the potential issues with legal and
practical enforceability that arise from the use of smart contracts within both
civil and common law jurisdictions.
KEYWORDS: Smart Contract Law Enforceability Blockchain
Technology Computer Program Intermediary Ledger
1. Introduction
As long ago as 1994, American computer scientist Nick Szabo proposed what was then a fanciful
notion of ‘smart contracts’; computerised transaction protocols which execute the terms of a contract.
1
At that point in time, the existing economic and communications infrastructure was insufficient to
support such protocols.
2
Today, the requisite infrastructure is available and smart contracts are
increasingly being developed, tested and implemented across a variety of industries the world over.
This enthusiasm is unsurprising; smart contracts conceivably offer the promise of more efficient and
cost-effective transactions which remove the heavy dependence upon traditional intermediaries (such
as banks and credit companies). However, the use of smart contracts also gives rise to a number of
legal issues, along with practical concerns as to functionality, security and workforce impact.
This article contributes to the small body of literature addressing the concept of smart contracts by
considering the legal issues that do or may arise from their use. It begins by briefly introducing the
a LLB (Hons.), LP, PhD. Lecturer, Law School, University of Adelaide.
1
Don Tapscott and Alex Tapscott, Blockchain Revolution: How the Technology Behind Bitcoin is Changing
Money, Business and the World (Penguin, 2016).
2
Steve Omohundro, ‘Cryptocurrencies, Smart Contracts, and Artificial Intelligence’ (2014) 1(1) AI Matters 19,
19.
2
reader to blockchain and distributed ledger technology, and smart contracts generally. It then proceeds
to examine in detail the principal legal issues arising from the use of smart contracts, focussing upon
actual and potential conflicts with established principles of contract law. For comparative purposes,
the position under Australian contract law is measured against those in England, France and the
United States. Finally, the article concludes by cautiously welcoming the dawn of smart contracts but
foretelling of potential difficulties that lie ahead for commercial parties and lawmakers.
2. Blockchain Technology and Smart Contracts
Szabo’s notion of smart contracting attained greater attention following the publication of his seminal
paper ‘The Idea of Smart Contracts’ in 1997. In this paper, Szabo identified a purchase from a humble
vending machine as a primitive form of ‘smart contract’ in that it involved the autonomous transfer of
ownership of property, such as a confectionary item or can of drink, upon receipt of predetermined
input (i.e. money). Szabo also described a number of potential applications of smart contracts
including the automated transfer of digital property (such as shares) upon the occurrence of a
specified event; motor vehicle immobilisation (where the vehicle would not operate unless the
security protocols stipulated in the contract were satisfied); and peer-to-peer property lending (where
lent property would revert to the lender if the borrower defaulted on specified conditions). Thanks
largely to the advent of cryptocurrency platforms such as Bitcoin and Ethereum, these applications
and many others are now possible. To understand how, one must have a basic understanding of how a
‘smart contract’ actually operates.
As was mentioned a brief moment ago, smart contracts are constructed upon an underlying
cryptocurrency platform. A cryptocurrency is essentially ‘a decentralised system for interacting with
virtual money in a shared global ledger’.
3
That ledger is the ‘blockchain’, so called because the
transactions chronologically recorded within it by a network of computers are grouped into blocks.
4
‘Miners’, the name given to participants within the blockchain, can create smart contracts by posting a
transaction to that blockchain. A unique feature of this arrangement is that the transactions are not
validated by any central authority or trusted intermediary; rather, all transactions are validated through
a series of cryptographic screening procedures.
5
As such, the blockchain network is transparent in
3
Kevin Delmolino, Mitchell Arnett, Ahmed Kosba, Andrew Miller and Elaine Shi, ‘Step by Step Towards
Creating a Safe Smart Contract: Lessons and Insights from a Cryptocurrency Lab’ (18 November 2015)
University of Maryland, p 2. Available at https://eprint.iacr.org/2015/460.pdf.
4
Gareth W Peters and Efstathios Panayi, ‘Understanding Modern Banking Ledgers through Blockchain
Technologies: Future of Transaction Processing and Smart Contracts on the Internet of Money’ in Paolo Tasca
et al (eds), Banking Beyond Banks and Money: A Guide to Banking Services in the Twenty-First Century
(Springer, 2016) 239, 242.
5
Two of the leading cryptocurrencies, Bitcoin and Ethereum, for example, utilise ‘proof-of-work’ protocols to
authenticate transactions. These protocols involve the miner solving various cryptographic problems which,
when satisfied, allows the transaction to be coded to the blockchain.
3
nature and visible to all users within the network. Once authenticated through consensus of network
users, the transactions are then coded with algorithms before being added to the blockchain (which are
later decoded to produce the specified data) and timestamped. Blockchain technology is essentially,
therefore, a form of Distributed Ledger Technology (DLT).
Fundamentally, a smart contract is a computer program which verifies and executes its terms upon the
occurrence of predetermined events. Once coded and entered into the blockchain, the contract cannot
be changed and operates in accordance with its programmed instructions.
6
Delmolino, Arnett, Kosba,
Miller and Shi provide a useful and simplified example of a smart contract and how it might be coded
to accomplish its purpose.
7
In this example, two parties Alice and Bob engage in a speculative
financial swap. The parties each deposit equal amounts of the designated cryptocurrency before
making opposing bets as to the price of a stock on an exchange at some point in the future. Alice
believes the stock will be higher than an estimate provided whereas Bob thinks it will be lower.
When the deadline arrives, the stock price is queried by reference to some external pricing authority
(say the relevant stock exchange itself, reference to which is coded into the smart contract).
Depending on the stock price at that point in time, either Alice or Bob receives the entire sum of
money jointly wagered. Delmolino, Arnett, Kosba, Miller and Shi provide a graphic representation of
the coding thus:
It can be seen that this smart contract provides for the identities of the parties, the deadline for
reference to the exchange price of the stock wagered on, the precondition, and the logic for execution
of the program and determination of the outcome as framed by the precondition. This is but one
6
As will be discussed later in the article, this is one of several practical difficulties which stem from the use of
smart contracts.
7
Delmolino, Arnett, Kosba, Miller and Shi, above n 3, pp 4-5.
4
small-scale example of how smart contracts might be used to facilitate a wide number of transactions,
financial or otherwise. As will be discussed later in the article, the potential of blockchain technology
is only now starting to be realised and seized upon.
Blockchain technology enables such contracts to operate efficiently by providing a simple, cost-
effective mechanism for the secure control and transfer of digital property without the use of or,
perhaps more accurately, with reduced dependence upon intermediaries, and with the added
advantage of transparency stemming from decentralisation of data. Prior to the development of
blockchain technology, smart contracts could not feasibly operate. Within the last decade, however,
significant developments in this field have broadened the possibilities and heavy investment into, and
experimentation with, blockchain (distributed ledger) technology is now occurring.
8
There are obvious advantages to using smart contracts. For one, they offer the promise of increased
efficiency. Transactions facilitated through smart contracts operating on a blockchain are not validated
by a trusted intermediary but by consensus of the network’s users. Rather than a bank, credit provider,
insurance company or the like enabling the digital transfer of property on the terms of the agreement,
the coding of the smart contract does all of the work autonomously (once the transaction has been
verified through the completion of cryptographic protocols). The miners on the blockchain the
contract parties need only decide upon the content of their agreement and the contract effectively
executes itself. This process of disintermediation improves efficiency by allowing the blockchain to
address all critical aspects of the transaction from record-keeping to auditing, monitoring and
enforcement.
9
Subsequently, settlements can take place in far quicker time given that there is no
significant period of delay during which a traditional intermediary would authorise and process the
transaction. Transfers occurring on the blockchain are instant. With further refinement of distributed
ledger technology and smart programming, instantaneous settlement for even the most complex of
transactions becomes a very real prospect. Moreover, automating a number of key processes during
the life of a contract translates to reduced human involvement; if fewer hands’ are required to create
and fulfil a contract, efficiency is likely to be improved.
Smart contracts may also result in reduced transaction and legal costs. The absence of any central
authority or trusted intermediary in a blockchain, and the manner in which blocks of transactions are
openly verified and added to the chain by its miners, means that many of the numerous transaction
and legal costs that would normally be incurred through intermediated transactions are removed. Such
fees are typically in the nature of service or administration fees, or legal costs associated with the
8
In November 2016, it was reported that USD $1.4 billion had been invested in blockchain start-ups in 2016
alone. See https://news.bitcoin.com/1-4-billion-invested-blockchain-pwc/.
9
Brydon Wang, ‘Blockchain and the Law’ (2016) 19(1) Internet Law Bulletin 246, 252.
5
preparation, supervision and execution of written contracts. A common example is a contract formed
via credit card purchase: a consumer purchases an item from a merchant and pays via credit card; the
merchant then applies a surcharge (said to represent the cost to the merchant of accepting payment by
credit card); the credit card company similarly applies its fees. All of these costs are entirely avoidable
through the use of a blockchain.
10
The potential cost savings from utilising smart contracts are not
limited to the transactions themselves; given their relative simplicity, they are likely to significantly
reduce infrastructure costs.
11
Proverbially ‘cutting out the middle man’ through the use of smart
contracts is therefore a means for businesses, governments and consumers to potentially dramatically
reduce operational and commercial expenses. A consequential advantage of this reduction in
overheads is that the bar of entry for users is lowered.
12
A final opportunity presented by smart contracts is greater transparency and anonymity. With the
decentralisation of data through distributed ledgers such as blockchains comes greater transparency.
The lack of a central authority or trusted intermediary validating and collating all transactions, and the
transparent nature of the blockchain, means commercial arrangements conducted through smart
contracts within a public (unpermissioned) ledger are visible to all miners. With this transparency
comes greater confidence that one user can trust another. Miners also benefit from anonymity the kind
of which they would not enjoy in conventional commercial transactions. For example, trusted
intermediaries who facilitate many common sales agreements, such as credit card companies, require
proof of identity before a promise of future payment will be accepted and processed. As such, these
intermediaries store vast amounts of critically sensitive information personal to each consumer who
employs their services. This places them at risk of exploitation through theft. In April 2016, for
example, the Australian version of popular online shopping site Gumtree owned by online auction
giant eBay was hacked, with many users’ personal data being unlawfully accessed.
13
Transactions
utilising cryptocurrencies allow consumers to purchase items in an online environment without having
to provide their personal information.
10
There will, of course, be costs associated with participation on the blockchain network for such things as
computational power. There may also be some minor fees associated with specific transactions. Overall,
however, transactions completed through smart contracts on the blockchain will almost certainly be far cheaper
than conventional intermediated transactions.
11
Of course initial development and implementation of the computational infrastructure necessary to support
blockchains will attract costs. Those transition costs will, however, be offset by the significant long-term
savings enjoyed as a consequence of disintermediation. An interesting contrasting view is provided by Angela
Walch, who argues that the various risks associated with blockchain technology make it an unsuitable basis for
financial market infrastructure and that it might end up costing just as much or even more to accommodate or
rectify any operational issues that arise: Angela Walch, ‘The Bitcoin Blockchain as Financial Market
Infrastructure: A Consideration of Operational Risk’ (2015) 18 Legislation and Public Policy 837.
12
Delmolino, Arnett, Kosba, Miller and Shi, above n 3, p 1.
13
Jennifer Dudley-Nicholson, ‘Australian Gumtree Users Targeted in Hacking Attack, with Personal Details
Stolen’ (News.com.au, 29 April 2016) <http://www.news.com.au/technology/australian-gumtree-users-targeted-
in-hacking-attack-with-personal-details-stolen/news-story/56034ebce5c54a0d21aa4d5bce711ed2>.
6
A smart contract might be programmed to purchase a particular item at a certain price and on the
assurance that consumer guarantees and warranties are included. Rather than the vendor being
connected to the purchaser’s personal and financial information via a trusted intermediary, they are
connected directly to the purchaser’s digital ‘wallet’
14
meaning that the purchaser’s identity is never
released. Indeed, as Fairfield notes, ‘depending on the nature of the transaction and the need for
shipping addresses, it is entirely possible that the [smart contract] can buy and sell on the consumer’s
behalf without providing any information about the consumer to the [vendor] at all’.
15
3. Smart Contracts and Compatibility with Contract Law
Having briefly discussed the concept of blockchain technology and smart contracts, and canvassed
some of the principal advantages stemming from their use, this article now turns to considering
perhaps the most vexing of issues with respect to smart contracts: how the existing law of contract
will adapt to regulate and enforce these creatures of blockchain technology. Whilst it would be easy to
assume that smart contracts would be treated like any other contract in this regard, a brief
consideration of their unique nature and of the various established principles of contract law
demonstrates that there are likely to be some theoretical and practical difficulties and inconsistencies.
A selection of contract doctrines and principles will be discussed to provide context. For comparative
purposes, the position under Australian contract law will be measured against those in England,
16
France,
17
and the United States.
18
3.1 Establishing Capacity
Contractual capacity refers to a party’s ability to enter into a contract. Generally speaking, under
Australian and English law, a minor being someone under the age of 18 cannot enter into a
contract as they lack capacity.
19
The position is the same in the United States
20
and France.
21
Under
14
A digital wallet is an electronic device which allows an individual to make electronic transactions. Digital
wallets come in various forms, a common example of which is contactless payment technology embedded into
smartphones whereby a person can pay for a good or service by bringing their device into close proximity of the
other party’s designated payment point. See further: Rajesh Krishna Balan and Narayan Ramasubbu, ‘The
Digital Wallet: Opportunities and Prototypes’ (2009) 42(4) IEEE Computer 100; Richard Kemp, ‘Mobile
Payments: Current and Emerging Regulatory and Contracting Issues (2013) 29(2) Computer Law & Security
Review 175.
15
Joshua A T Fairfield, ‘Smart Contracts, Bitcoin Bots, and Consumer Protection’ (2014) 71(2) Washington and
Lee Law Review Online 35, 46.
16
Founding nation of the common law system.
17
Civil law nation.
18
Hybrid common law and civil law nation.
19
All Australian jurisdictions define a minor as a person under the age of 18 years: Age of Majority Act 1974
(ACT); Minors (Property and Contracts) Act 1970 (NSW); Age of Majority Act (NT); Law Reform Act 1995
(Qld); Age of Majority (Reduction) Act 1971 (SA); Age of Majority Act 1973 (Tas); Age of Majority Act 1977
(Vic); Age of Majority Act 1972 (WA). The United Kingdom ratified the United Nations Convention on the
7
Australian and English law there are limited exceptions to the rule that a minor cannot contract; they
may, for example, enter into contracts for ‘necessaries’ (being goods or services needed to maintain
the minor in his or her status or condition).
22
In all other cases, the contract is generally voidable at the
minor’s election.
23
Given that the parties to a smart contract may, and indeed often will, be unknown to one another,
there is a very real risk that a party who has attained the age of majority may inadvertently contract
with a minor cloaked by the anonymity of the internet. This threatens the enforceability of the
agreement. Elaborate screening procedures to determine age prior to entry of a transaction onto a
blockchain may be required though these are likely to be difficult to police. Moreover, whether or not
such a contract would be binding would depend upon the jurisdiction(s) in which it was formed and,
in the case of common law countries, whether the contract was one falling into one of the excepted
‘classes’ of contract (such as one for necessaries). Whether a contract was one for necessaries or not
would rely upon analysis of the subject matter. It is dubious to suggest that a purchase of a
cryptocurrency, for example, is one of necessaries given that it is, on its face, not vital to the minor’s
sustainment.
3.2 Contracting Under Mistake
A related issue is where a party contracts with another party on the assumption that the other party is
who they say they are, when in actual fact they are someone else. In the online context, this would be
relevant where a hacker had assumed someone’s digital identity and misappropriated their
cybercurrency. Under Australian and English law, where parties do not contract face to face, and
where one of the parties to the agreement is mistaken as to the identity of the other party at the time of
entry into the agreement, the contract is void at common law.
24
Under French law, the position is
slightly different: the doctrine of mistake can nullify an agreement where the mistake affects the very
Rights of the Child in 1991. The Convention defines a child (minor) as being a person under 18 years of age,
unless an earlier age of majority is recognised by a country’s law. As such, a minor in English law is also
someone under 18 years. Historically, the position at common law has differed, with the age of majority
previously being as high as 21 years.
20
All but three US states stipulate 18 years as the age of majority, the exceptions being Alabama (19), Nebraska
(19) and Mississippi (21).
21
This is reflected in various provisions throughout the French Civil Code (Code Civil des Français 1804), as
amended.
22
Chapple v Cooper (1844) 13 M & W 252; 153 ER 105.
23
The position is the same in the United States: see Restatement (Second) of Contracts (1981) art 14; Casey v
Kastel 237 NY 305 (1924). It is also similar in France where such a contract may be rescinded pursuant to art
1305 of the Civil Code: see generally John Bell, Sophie Boyron and Simon Whittaker, Principles of French Law
(Oxford University Press, 1998) p 425.
24
Cundy v Lindsay (1878) 3 App Cas 459; Shogun Finance Ltd v Hudson [2003] UKHL 62. This is known as
‘unilateral mistake’.
8
substance of the agreement.
25
In the US, a contract may generally be voidable at the mistaken party’s
option where the other party was aware of the mistake (which would always be the case in situations
of identity fraud) and enforcement of the contract would be unconscionable.
26
Given the potential ease with which financial theft and identity fraud can be committed through
digital technologies, there is a real risk that many transactions facilitated through smart contracts may
be struck down for want of legal enforceability. The capacity for computers to amplify the scope of
such contracts and potentially engage millions of consumers at a time across many jurisdictions (in
contrast somewhat to traditional non-digital contracts) means that the process of compensating the
innocent parties and penalising the offenders will be incredibly arduous.
Even assuming that a smart contract had been formed between two or more legitimate parties, who
would be responsible if a smart contract endured a coding error resulting in losses to one or more of
the parties? Paper contracts or even those reduced to writing in digital form (i.e. in word documents
stored on computer) cannot simply amend themselves. Theoretically, however, a smart contract’s
code could spontaneously change and thereby affect its manner of operation. Liability cannot
logically be assigned to either party in this instance, or in the related situations that the error was
caused by a third party either the programmer incorrectly coding the terms agreed by the parties, or
an external information source from which the contract draws variable information.
27
One solution
might be to assume that the smart contract has been frustrated by virtue of the fact it has without fault
of either party become impossible to perform as originally envisaged.
28
In that event, the contract
would be rescinded in its entirety and the parties would be relieved of any future obligations. Again,
however, spontaneous corruption of content is a risk that is entirely absent in the case of traditional
non-digital contracts.
3.3 Formation via Technology When Do the Offer and Acceptance Occur?
Under Australian and English law, an offer is characterised by a party’s indication of willingness to be
bound by the terms of a promise he or she has made to another party, with the latter being provided
25
French Civil Code, art 1110.
26
Restatement (Second) of Contracts (1981) art 153; Gethsemane Lutheran Church v Zacho 258 Minn 438
(1960); Maryland Casualty Co v Krasnek 174 So 2d 541 (1965).
27
Some examples of such a contract are provided later in this article (at 3.7) when interpretation of contractual
content is considered.
28
This is the fundamental rationale behind the doctrine of frustration. See in England/Australia: David
Contractors Ltd v Fareham Urban District Council [1956] AC 696; Codelfa Construction Pty Ltd v State
Railway Authority of New South Wales (1982) 149 CLR 337. In the US: Restatement (Second) of Contracts
(1981) art 265; Uniform Commercial Code (UCC) arts 2-6132-615; In France: French Civil Code, art 1147.
9
with the opportunity to elect between acceptance and rejection of the proposal.
29
Unequivocal assent
to the offer then confirms that it has been formally accepted and that a ‘meeting of the minds’ has
occurred. The Uniform Commercial Code (US) similarly states that ‘an offer to make a contract shall
be construed as inviting acceptance in any manner and by any medium reasonable in the
circumstances’.
30
In French law, it is essential to establish consent to contract through a ‘meeting of
the minds’ the accord de volontés by identifying an offer by one party to do (or not to do)
something as well as a corresponding acceptance.
31
In traditional contracting, i.e. contracting which does not occur exclusively via technology, it is
relatively straightforward to identify when an offer has been made and accepted by examining the
words and conduct of the parties along with all relevant circumstances. The only anomalous exception
in this regard is where acceptance is sent via post, in which case the acceptance is deemed effective as
soon as it is posted as opposed to when it is received by the offeror (commonly known as the ‘postal
acceptance rule’ or ‘mailbox rule’).
32
The analysis is made more difficult, however, when an offer to
contract is made and ostensibly accepted via technology. In such situations, given the instantaneous
nature of technologies such as email and text messaging, uncertainty surrounds the point at which
acceptance is deemed to have occurred.
The position in England and Australia is that the postal acceptance rule does not apply to
instantaneous forms of communication such as telephone and facsimile
33
and, in Australia at least,
transactions occurring via the internet (such as email) have been judicially regarded as analogous to
telexes.
34
Consequently, acceptance is effective upon receipt, as opposed to at the time of dispatch, as
would be the case under the postal acceptance rule.
35
England appears to endorse a similar approach
through reg 11 of the Electronic Commerce (EC Directive) Regulations 2002, which provides that
communications ‘will be deemed to be received when the parties to whom they are addressed are able
to access them’. French law is silent on this issue and the French courts have typically decided such
questions on a case-by-case basis.
36
In the US, the prevailing view is that acceptance is generally
deemed to have occurred once dispatched,
37
even where this occurs via the internet.
38
29
Stover v Manchester City Council [1974] 1 WLR 1403; Brambles Holdings Ltd v Bathurst City Council
(2001) 53 NSWLR 153.
30
Uniform Commercial Code (UCC) art 2-206.
31
French Civil Code, arts 1101, 1106.
32
Adams v Lindsell (1818) 106 ER 250.
33
Entores v Miles Far Eastern Corp [1955] 2 QB 327; Brinkibon Ltd v Stahag Stahl und
Stahlwarenhandelsgesellschaft mbH [1983] 2 AC 34.
34
See Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA (No 4) (2009) 255 ALR 632.
35
This position appears to be reflected in the provisions of the Electronic Transactions Act 1999 (Cth). See for
example s 14A.
36
Commission on European Contract Law, Principles of European Contract Law (Kluwer Law International,
2000) p 173. Bell, Boyron and Whittaker note that there seems to be a preference amongst the French courts for
10
Assume, then, that a smart contract for the sale of goods was being negotiated between two parties.
Typically, smart contracts are initiated by messages sent using public-key infrastructure (PKI) through
an internet connection, in similar manner to emails.
39
It would become necessary, in this situation, to
determine whether an offer had been validly made and accepted. The obvious question is whether
acceptance occurs once the party seeking to purchase the goods transmits their offer, once it is
received and authenticated through consensus of network users, or once it is coded and added to the
blockchain. The answer may lie in a broad interpretation of the legal rules discussed above. However,
it is obvious that these rules do not cleanly embrace the concept of smart contracts.
3.4 Establishing Legal ‘Intent’ in ‘Follow-On’ Contracting
Some smart contracts have the capacity to enter parties into subsequent, separate ‘follow-on’
contracts. That is, where parties have voluntarily entered into a smart contract (the primary contract),
that contract can itself enter the parties into an additional contract (the secondary contract). The
parties may not even have knowledge of the follow-on contract and so two questions arise: (1) can an
intention to create legal relations be established in this circumstance, and (2) can a smart contract or
related electronic agents or ‘bots’ autonomously enter parties into legally enforceable follow-on
contracts?
As to the first question, it is important to note that legal intent is one of the core requirements of a
valid contract under English
40
and Australian
41
law. The assessment is objective: the court does not
seek to identify the subjective intentions of the parties but instead asks whether reasonable people
would have regarded the agreement in question as intended to be binding. Under US contract law,
legal intent is typically established as an aspect of offer and acceptance rather than as a discrete
element; the courts objectively ascertain whether a party’s offer was a genuine manifestation of their
willingness to enter into a formal bargain, and whether the other party’s acceptance demonstrated
placing acceptance ‘at the time and place of sending’: Bell, Boyron and Whittaker, above n 23, p 312. This
would imply that the postal acceptance rule also applies to electronic communications in that jurisdiction.
37
See Okosa v Hall 718 A.2d 1223 (App. Div. 1998); Uniform Commercial Code (UCC) arts 1-103(b), 1-202,
2-206, 2-606.
38
See Roger LeRoy Miller and Gaylord A Jentz, Business Law Today (Cengage Learning, 2010) p 217, where
the authors provide a useful discussion as to rule’s position under US common law and the Uniform Electronic
Transactions Act in that jurisdiction.
39
Norton Rose Fulbright, ‘Can Smart Contracts be Legally Binding Contracts?’, R3 and Norton Rose Fulbright
White Paper (November 2016), p 22.
40
Merritt v Merritt [1970] 1 WLR 1211.
41
Riches v Hogben [1986] 1 Qd R 315; Woodward v Johnston [1992] 2 Qd R 214; Kovan Engineering (Aust)
Pty Ltd v Gold Peg International Pty Ltd [2006] FCAFC 117 (14 July 2006); ATCO Controls Pty Ltd v
Newtronics Pty Ltd (2009) VR 411.
11
understanding and desire that, in giving assent, they concluded a formal bargain.
42
The test under
French law is subjective; a party will only be bound to a contract if they actually intended to be
bound
43
and, as with the US, this is traditionally established by examining the agreement or
‘offer/acceptance’ stage of the parties’ interactions.
44
This analysis, however, is often still reliant
upon tangible manifestations of such subjective intention (whether oral, in writing, or by conduct).
45
It is certainly questionable whether legal intent can be presumed to exist in a follow-on contract
merely because it ostensibly existed in the primary contract. The courts may take issue with this and
determine that legal intention cannot be assumed to ‘carry over’ into subsequent, autonomously-
generated contracts. The consequence of such a finding is that a potentially large number of follow-on
contracts may be struck down for want of enforceability. Under the ‘reasonable person’ test favoured
in England and Australia, and the equivalent objective analysis of the parties’ agreement in the United
States, it would seem presumptuous to blindly assume that the parties would have acquiesced to any
further agreements stemming from a smart contract without having first properly considered their
nature and effect. Similarly, significant issues of proof would arise under French law where the parties
sought to prove that they did or did not intend for follow-on contracts to have legal force and bind
them and, therefore, that those contracts lacked the requisite consentement (consent).
As to the second question whether a smart contract or related electronic agents or ‘bots’ could
autonomously enter parties into legally enforceable follow-on contracts the guiding legal principles
are even less harmonious. In England, for example, there is authority implying that automated
computer systems are incapable of binding parties through implied agency as they lack the
consciousness of a human mind.
46
The position is somewhat different in Australia, where s 15C of the
Electronic Transactions Act 1999 (Cth) provides that a contract formed by (a) the interaction of an
automated message system and a natural person or (b) the interaction of automated message systems
‘is not invalid, void or unenforceable on the sole ground that no natural person reviewed or intervened
in each of the individual actions carried out by the automated message systems or the resulting
42
See Restatement (Second) of Contracts (1981), arts 21, 24; Lonergan v Scolnick 129 Cal. App. 2d 179 (1954);
Empro Manufacturing Co. v Ball-Co Manufacturing., Inc 870 F. 2d 423 (7th Circ. 1989).
43
See French Civil Code, arts 1110, 1134; Commission on European Contract Law, above n 36, p 146.
44
The courts seek to identify a consensual accord de volontés (‘meeting of the minds’). ‘There is not, in French
law, as such a principle that there must be an “intention to create legal relations”’: Anne de Moor, ‘Contract and
Agreement in English and French Law’ (1986) 6 Oxford Journal of Legal Studies 275, 278. See also Julie M
Philippe, ‘French and American Approaches to Contract Formation and Enforceability: A Comparative
Perspective’ (2005) 12(2) Tulsa Journal of Comparative and International Law 357, 372-3.
45
Bell, Boyron and Whittaker, above n 23, p 311.
46
Software Solutions Partners Ltd, R (on the application of) v HM Customs & Excise [2007] EWHC 971. Some
international authorities suggest that the fact the parties themselves programmed the smart contract and,
therefore, anticipated its capacity to enter them into follow-on contracts, means they must be taken to accept that
they may be bound to those follow-on contracts. See for example Chwee Kin Keong v Digilandmall.com Pte Ltd
[2005] 2 LRC 28 (Singapore).
12
contract’. As such, a smart contract or other electronic agent could conceivably enter parties into an
enforceable follow-on contract (subject to other legal conditions being satisfied, and to the parties’
right to amend errors in electronic communications
47
).
The US authorities addressing this issue are notably discordant. Some courts have decided, for
example, that an automated response to a contractual offer did not amount to valid acceptance
48
whereas others have found that a search bot acting autonomously in accepting and violating the terms
of a contract was deemed to be acting with the authority of the dispatching party.
49
In State Farm
Mutual Automobile Insurance Company v Bockhorst, the United States Court of Appeals (10th Circuit)
held that an automated reinstatement of an insurance policy, though erroneous, was regarded as an
action of the insurer and therefore legally enforceable.
50
The legal status of follow-on contracts
stemming from a primary smart contract under US law is therefore patently unclear.
Finally, various provisions of the French Civil Code permit the use of electronic contracts.
51
The
provisions relating to agency, however, are silent on the issue of electronic agents.
52
As we have seen,
the French law with respect to establishing contractual intent prioritises the subjective mindsets of the
parties, although ‘applying the subjective theory to electronic agents faces the difficulties of
attributing a “free will” to electronic agents and how such an electronic agent can be said to have “an
inner will”’.
53
That being said, any person may enter into a contract unless they have been declared
incapable of doing so by law.
54
Until electronic agents are unequivocally deemed to lack legal
personality, a ‘tacit agency’ may be inferred under art 1985 of the French Civil Code as between an
electronic agent and a human party, conferring authority on the part of the former to enter into follow-
on contracts on behalf of the latter. The question remains untested under French law.
3.5 Certainty of Terms
Contracts must be legally certain in order to be enforceable. Under English law, it is often said that
the contract must be sufficiently certain in terms of both inherent clarity and completeness in order to
bind.
55
The Australian courts endorse a liberal approach and endeavour to attribute meaning to
obscure contract terms, deeming the contract unenforceable only where no such meaning can be
47
See s 15D of the Electronic Transactions Act 1999 (Cth).
48
Corinthian Pharmaceutical Systems, Inc. v Lederle Laboratories 724 F. Supp. 605 (S. D. Ind. 1989)..
49
Register.com, Inc. v Verio, Inc. 356 F.3d 393 (2nd Cir. 2004).
50
453 F. 2d 533 (1972).
51
See for example Title III, Chapter VII, Sections 1-4.
52
See French Civil Code, Title XIII.
53
Abdulhadi M Alghamdi, The Law of E-Commerce: E-Contracts, E-Business (AuthorHouse, 2011) p 132.
54
French Civil Code, art 1123.
55
See G Scammell & Nephew Ltd v H C & J G Ouston [1941] AC 251.
13
elucidated.
56
The general common law position in the US is that contracts which are indefinite or
vague as to their essential terms are unenforceable.
57
The Uniform Commercial Code (US), however,
provides that sales contracts are not unenforceable even where ‘one or more terms are left open’
provided the parties intended to make a contract and there exists a ‘reasonably certain basis for giving
an appropriate remedy’.
58
The American courts prefer to construe contracts so as to give them
meaning and establish validity, rather than strike them down for uncertainty.
59
Questions as to the
certainty of contract terms in France have tended to focus upon the price, goods/services or other
central subject matter to the agreement.
60
Under French law, a contract must have a ‘definite object’
(objet).
61
Provided the fundamental aspects of the contract are clear, it will typically be enforced.
Smart contracts are computer programs coded to perform certain predetermined functions. The
language used to code them is completely unintelligible to anyone untrained in programming, which
raises a number of interesting questions with respect to their enforceability.
62
The laws of all
jurisdictions considered by this article favour certainty as to all critical terms of a contract, with some
tolerance for minor imperfections (curable through liberal construction). But how would the content
of smart contracts be treated when the courts come to examine whether they are sufficiently certain?
During the planning phase, the terms drafted in natural language by the parties must then be coded
into programming language in order to generate the actual smart contract comprising the agreement of
the parties. Ostensibly, then, the document containing the intelligible natural language terms is merely
prefatory to the actual contract and therefore not relevant to the question of legal certainty. Judges
may struggle to regard programming code within a smart contract as legally ‘certain’. Moreover, as
explained further on, natural language versions of smart contracts would potentially be restricted
under the parol evidence rule concerning reference to materials extrinsic to the smart contract itself.
Other issues with certainty may also arise from the use of smart contracts. For example, the courts
frequently encounter considerable difficulty giving meaning to normative standards such as
‘reasonableness’, unconscionability’ and the like. It is very unclear how a smart contract could be
coded so as to give effect to such terms. To provide a realistic scenario, assume that a smart contract
incorporated a duty of ‘good faith and fair dealing’. How is a computer to judge whether this
provision has been violated? As one commentator notes, ‘[t]rying to explain this to a group of
56
Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1969) 118 CLR 429.
57
See for example: Laseter v Pet Dairy Products Co 246 F.2d 747 (4th Circ. 1957); Robinson v Wilson, Inc. v
Stone 35 Cal. App. 3d 396 (1973); Rosenthal v National Produce Co 573 A.2d 365 (DC App. 1990).
58
Article 2-204(3).
59
American Sugar Refining Co v Newman Grocery Co 284 F. 835 (5th Circ. 1922).
60
See French Civil Code, arts 1583 and 1589 in the context of sales contracts.
61
French Civil Code, arts 1108, 1129. There is, however, some allowance for terms which are identifiable in the
future (such as the quantity of goods yet to be purchased). See arts 1126-1133.
62
As to the potential issues arising from interpretation of the content of smart contracts generally, see below at
3.7.
14
transistors so that it can be computationally executed is currently science fiction (without the use of an
enormous amount of code or computing power)’.
63
Moreover, in many cases traditional contracts
contain provisions allowing for the enforcement of rights against a defaulting party. The choice to
utilise such provisions is one which is critically informed by human judgment; automatic enforcement
may not be the best course of action, but the smart contract would know no different.
3.6 Remedial Issues
By virtue of their nature, smart contracts are also susceptible to a number of problems, each of which
give rise to certain remedial issues. Smart contracts are essentially computer programs fashioned as
conduits for commercial transactions. They are coded to execute specific instructions using immutable
programming language. Once on the blockchain, smart contracts proceed in enforcing themselves.
Whilst certain parameters may be amendable, smart contracts operating within a blockchain network
fundamentally do not perhaps cannot change. Computer code is designed to be finite; once on the
blockchain, it can be extremely difficult and potentially impossible to access and amend a smart
contract’s coding.
On the one hand, this might be seen as a positive because human error in execution is eliminated
given that data in a blockchain ‘is guaranteed to be valid according to certain predefined rules of the
system (e.g., there are no double-spends or invalid signatures)’.
64
On the other hand, smart contracts
present the risk of errors which may not be reversible or which require extensive efforts to correct.
65
This may result in significant economic consequences for miners. In April 2016, for example, a
coding error in the Ethereum-based online Ponzi scheme known as ‘GovernMental’ resulted in the
sizeable ‘jackpot’ ether payout becoming stuck in perpetuity.
66
Around the same time, online
Ethereum-based gambling service Etherdice suffered a similar fate and inadvertently locked its
bankroll.
67
Moreover, given the capacity for computer programs (and their coding) to spontaneously
63
Scott Farrell, Claire Warren, Roslyn Hinchliffe and Johanan Ottensooser, ‘How to Use Humans to Make
“Smart Contracts” Truly Smart’ (King & Wood Mallesons, 7 July 2016) <
http://www.kwm.com/en/au/knowledge/insights/smart-contracts-open-source-model-dna-digital-analogue-
human-20160630>.
64
Delmolino, Arnett, Kosba, Miller and Shi, above n 3, p 3.
65
Luu, Chu, Olickel, Saxena and Hobor note: ‘There is no way to patch a buggy smart contract, regardless of its
popularity or how much money it has, without reversing the blockchain (a formidable task). Therefore,
reasoning about the correctness of smart contracts before deployment is critical, as is designing a safe smart
contract system’. Loi Luu, Duc-Hiep Chu, Hrishi Olickel, Prateek Saxena and Aquinas Hobor, ‘Making Smart
Contracts Smarter’, Proceedings of the 2016 ACM SIGSAC Conference on Computer and Communications
Security (24-28 October 2016), Vienna, p 254 at p 255.
66
See
https://www.reddit.com/r/ethereum/comments/4ghzhv/governmentals_1100_eth_jackpot_payout_is_stuck/. At
the time of writing, the GovernMental website was inactive and offering error prompts:
http://governmental.github.io/GovernMental/.
67
See https://etherdice.io/#game.
15
corrupt, in which case neither party is necessarily ‘responsible’, there is potential for disputes as to
liability to arise if the risk of technical error eventuates.
Smart contracts therefore give rise to a number of significant remedial issues. These contracts are
relatively impervious being designed to be ‘permanent’ in nature and to integrate smoothly into what
is likely to be a voluminous ledger of transactions on the blockchain. As mentioned earlier, errors
requiring correction may not be reversible, or at the least would likely require extensive efforts to
correct.
68
Whereas error correction with traditional non-digital contracts is relatively straightforward,
the same cannot be said of smart contracts. This may present something of a logistical nightmare for
courts trying to apply traditional contract law principle to rectify errors with a smart contract.
A related and highly significant remedial issue relates to injunctive relief. Assume, for example, that a
party sought to restrain the other party from enforcing (or violating) a term of a smart contract.
Depending on the urgency or significance of the situation, one response would be to apply for an
injunction from the courts preventing the other party from enforcing or violating the term in dispute.
The issue here is that the smart contract is autonomous and self-executing. Unlike a non-digital
contract, a smart contract is not capable of simply being ‘stopped’ instantaneously upon notification to
the affected party that it must cease whatever activity is being prohibited by the injunction. Again, it
can be seen that enforcing a judicial order which affects contractual relations may well be far more
complex in the case of smart contracts.
3.7 Interpreting Content
It is the natural role of the courts to resolve legal disputes between citizens and/or the state. Given that
contracts are in the domain of private law, when contractual disputes arise it is for the courts to
determine the rights and obligations of each party. This inherently involves reference to the terms of
the contract. In the case of a smart contract, however, the terms are as discussed earlier at 3.5
encapsulated in computer code that will almost certainly be completely unintelligible to the average
lawyer or judge. Reference to the terms in legible linguistic form (in extrinsic materials such as
original terms of reference or heads of agreement, negotiation notes, emails etc.) would also
seemingly be barred by the parol evidence rule, which prohibits reference to such materials where the
express terms have been reduced to a final written agreement.
69
An exception here might be that the
68
Reversing the blockchain is the first step in remedying any defects with a particular contract within it,
regardless of that contract’s value or popularity. This is, needless to say, an enormously difficult task: Luu, Chu,
Olickel, Saxena and Hobor, above n 65, 255.
69
See in England/Australia: Goss v Nugent (1833) 110 ER 713; Mercantile Bank of Sydney v Taylor (1891) 12
LR (NSW) 252. In the US: Restatement (Second) of Contracts (1981) art 213; Uniform Commercial Code
(UCC) art 2-202. A version of the parol evidence rule in the contractual context can be found in art 1341 of the
16
terms of the smart contract are entirely ambiguous and incomprehensible without reference to such
extrinsic materials, in which case the courts may permit resort to them.
70
Expert evidence may also be
required, such as qualified programmers equipped to decipher the smart contract code. In any event,
the process of construction is very likely to be slowed as a consequence of the need to consider both
the contract terms as coded into the smart contract (program) and the original, natural contract terms
as drafted by the parties and/or their lawyers.
Smart contracts present other difficulties relating to the expression of their content. As mentioned
earlier (at 3.5), it would be highly problematic, for example, for a smart contract to give effect to
normative concepts such as ‘reasonableness’, which are often found in discretionary clauses. How is a
smart contract to quantify such a thing as reasonableness by application of a linear algorithmic
approach? Another problem would arise where the contract contained a mechanism for variation,
which is a common feature in many commercial agreements. It may also be difficult, perhaps near
impossible, to reduce particular scenarios articulated in contract terms to computer code. These
clauses could not readily be enforced owing to the immutable nature of the blockchain, and the need
for professionals versed in programming (which would likely exclude the parties and their lawyer(s))
to do the work.
One final example of an issue which may affect the interpretation of the content of a smart contract is
where the contract is dependent upon external sources of information to inform its operation. Assume,
for example, that a smart contract of insurance is created to indemnify a homeowner against inclement
weather. The contract might be programmed to obtain information relating to rainfall, temperature or
other factors from a meteorological agency’s website in order to determine if the policy is activated.
Alternatively, a smart contract for the sale of shares might be programmed to sell once the shares
reach a certain predetermined price. The contract could link to an official stock exchange website in
order to determine if the price has been reached, triggering the sale clause. If, however, the external
sources in either scenario malfunction or become inactive at any stage, the substantive content of the
smart contract could be affected; the contract could potentially commit errors or even fail altogether.
Again, the law must respond but the question here is how it would do so. Whereas wrongful or non-
performance in a traditional contract can be remedied in a number of ways from self-help to legal
action, ensuring the fulfilment a smart contract is, as we have seen, not as simple. The doctrine of
frustration (discussed earlier at 3.2) might provide a solution once more although we arrive at the
French Civil Code, though other provisions do affect the manner by which proof may be levelled against parties
involved in trade.
70
This is an established exception under Australian and English law. See for example: Reardon Smith Line Ltd v
Yngvar Hansen-Tangen and Sanko SS & Co Ltd [1976] 1 WLR 989; Codelfa Construction Pty Ltd v State
Railway Authority of New South Wales (1982) 149 CLR 337.
17
same unsatisfactory conclusion of the contract being vitiated entirely. The doctrine may also be
inapplicable given that the risk of technical error might be assumed to have been foreseeable and
therefore impliedly assumed by the parties. Carter, outlining the position under English and Australian
law, explains:
71
[I]t is usually said that the event relied upon as frustrating the contract must not have been foreseen by
the parties. … If the event was foreseen, and the contract contains no provision covering the event, the
inference will usually be drawn that the parties agreed to bear the risk of the occurrence of the event.
As Carter notes, however, the authorities confirm that mere foresight of the possibility of the cause of
a frustrating event occurring is not sufficient the parties must instead be found to have foreseen the
occurrence of the event in question as a ‘serious possibility’.
72
This imposes a slightly higher
threshold though it is still arguable, given the infancy of blockchain technology and the various
vulnerabilities of smart contracts, that the content of such a contract being affected by programming
errors is well within contemplation in the majority of cases. The law thus fails to adapt comfortably to
smart contracts, particularly in comparison to traditional non-digital contracts.
4. Other Issues with Smart Contracts
4.1 Security Concerns
All digital technologies are vulnerable to attack from cybercriminals. Cybercrime costs economies
around the world billions of dollars each year.
73
As more and more commercial transactions occur via
or with the inclusion of digital technologies, and unfathomable amounts of personal and financial
information are digitised, the risk of security breaches will continue to increase exponentially.
Utilising smart contracts necessarily involves digitising the entirety of the transaction between the
parties, which arguably exposes them to greater risk of sensitive information being compromised. In
2016, bitcoin exchange platform Bitfinex and cryptocurrency crowdfunding vehicle The DAO were
both hacked and funds were manipulated and stolen.
74
71
J W Carter, Contract Law in Australia (LexisNexis, 6th ed, 2013) pp 774-5.
72
Ibid p 775. The author cites Simmons Ltd v Hay (1964) 81 WN (Pt 1) (NSW) 358 in support of this
proposition.
73
A recent Forbes article predicted global cybercrime to cost $2.1 trillion by 2019: Steve Morgan, ‘Cyber Crime
Costs Projected to Reach $2 Trillion by 2019’ (Forbes, 17 January 2016)
<http://www.forbes.com/sites/stevemorgan/2016/01/17/cyber-crime-costs-projected-to-reach-2-trillion-by-
2019/#4c1bba3bb0cc>.
74
Capgemini Consulting, ‘Smart Contracts in Financial Services: Getting from Hype to Reality’ (2016) p 14.
18
That being said, smart contracts operate on a blockchain, which is generally either a shared public
ledger or a private permissioned ledger. This in itself can offer some form of security, as ‘distributed
ledgers are not vulnerable to a single point of failure. To be successful, a cyber-attack would need to
not only infiltrate one user; it would have to attack multiple copies of the record held across the
network’.
75
Regardless, the skill and adaptability demonstrated by many contemporary ‘hackers’
make it likely that a young and relatively untested technology such as blockchain one which many
major global stakeholders are now looking to actively invest in will be targeted.
Interestingly, there have even been reports of smart contracts being used for criminal purposes, again
calling into question their dependability.
76
The rising value of cybercurrencies and the growing use of
smart contracts and blockchain technology have inspired cybercriminals to steal and launder money,
demand ransoms, and undertake illicit transactions (one of the more famous being the Silk Road
online marketplace saga where the site’s owner was charged and convicted of numerous crimes
including computer hacking and narcotics trafficking).
77
As experimentation with blockchain
continues, and commercial parties opt to engage in transactions through smart contracts, the risk of
attack from unscrupulous and innovative hackers increases.
4.2 Scalability
Earlier in the article (at 3.6) two case examples of malfunctioning and incorrectly coded smart
contracts GovernMental and Etherdice were discussed. These case examples not only highlight the
potential harm of erroneous coding, but also demonstrate potential issues with scalability. In each
case, the coding error centred on miscalculation of the ‘gas’
78
required to perform certain functions in
each program. The computational power and resources necessary to undertake the respective
transactions was grossly underestimated; an error which is perhaps less likely to occur in traditional
simple contracts where most risks are well-known and allocated effectively through the terms of the
agreement. There is a legitimate risk that current computer infrastructure may not be able to keep pace
with the growth of blockchain.
75
Allens, ‘Blockchain Reaction: Understanding the Opportunities and Navigating the Legal Frameworks of
Distributed Ledger Technology and Blockchain’ (2016) p 4.
76
See for example Ari Juels, Ahmed Kosba and Elaine Shi, ‘The Ring of Gyges: Using Smart Contracts for
Crime’, Proceedings of the 2016 ACM SIGSAC Conference on Computer and Communications Security (24-28
October 2016) Vienna, Austria, 283.
77
For a concise discussion of Silk Road and the issues associated with its use see James Martin, ‘Lost on the
Silk Road: Online Drug Distribution and the “Cryptomarket”’ (2014) 14(3) Criminology & Criminal Justice
351.
78
Simply put, the term ‘gas’ describes the internal pricing mechanism for processing a transaction in a smart
contract. The party initiating each transaction pays for this process in gas; the miner then collects this payment
and adds the transaction to the blockchain. It essentially describes a party’s capacity to process a transaction and
therefore operates as a fee payable. Thus, a party’s gas depletes over time and they must eventually purchase
more.
19
4.3 Workforce Impact
The very premise of smart contracting is disintermediated automation; the contract between the
parties executes itself and no trusted intermediary facilitates the exchange of consideration. The
intermediary in the vast majority of non-digital commercial transactions is a financial or legal person
or authority. The traditional functions of many financial professionals and commercial lawyers may
now conceivably be performed by smart contracts, endangering their typically lucrative roles. Indeed,
some believe that the financial and legal workforces may suffer losses as ‘trustless’ blockchain
technology cuts them out of the market.
79
It is submitted that smart contracts do not pose quite so
serious and immediate a threat as has been suggested. There will still be a place in the world for
lawyers and other professionals who are deeply rooted in our global economies and who think in ways
that computers simply cannot. As two commentators have noted, artificial intelligence cannot
substitute for the organic intuition and perceptive depth of the human mind:
80
While many contracts may be automated, in any slightly complex interaction there will be a need for
judgement which is still best done by humans. Smart contracts are good at dealing with clear and
defined outcomes, but in many ways they are dumb they can only do exactly what they are
programmed to, and they cannot deal with ambiguity …. Really smart contracts still require smart
lawyers.
Lawyers are still useful, if not required (particularly in the case of complex transactions), to draft the
content which is ultimately translated into computer code. Indeed, they and other intermediaries in the
legal, financial and other business sectors would be smart to familiarise themselves with blockchain
technology so as to expand their skillsets and capitalise on predicted market demand.
81
There is no
question that smart contracts will challenge traditional intermediaries and perhaps assume some of
their functions, but they will not spell their end. One way to maintain relevance and improve market
79
See for example: James Eyers, ‘Blockchain “Smart Contracts” To Disrupt Lawyers’ (Financial Review, 30
May 2016) <//www.afr.com/technology/blockchain-smart-contracts-to-disrupt-lawyers-20160529-gp6f5e>;
James Eyers and Misa Han, ‘Lawyers Prepare for “Driverless M&A” as Smart Contract Era Dawns’ (Financial
Review, 19 June 2016) <http://www.afr.com/technology/lawyers-prepare-for-driverless-ma-as-ssmart-contract-
era-dawns-20160616-gpknyz>.
80
Simun Soljo and David Rountree, ‘Unravelled: Blockchain and Why Smart Contracts Still Need Smart
Lawyers’ (Allens, 6 July 2016) < https://www.allens.com.au/pubs/fsr/160706-unravelled-03.htm>. These
sentiments are reflected in the full Allens report: ‘Blockchain Reaction: Understanding the Opportunities and
Navigating the Legal Frameworks of Distributed Ledger Technology and Blockchain’ (2016). The report is
available at https://www.allens.com.au/data/blockchain/index.htm.
81
See for example: Marianna Papadakis, ‘Blockchain’s Big Opportunity for Lawyers’ (Financial Review, 2
June 2016) <http://www.afr.com/business/legal/blockchains-big-opportunity-for-lawyers-20160531-gp82p2>.
20
appeal is to embrace the power of smart contracts and blockchain technology and train in the art of
coding. As Wang (speaking in the context of lawyers) notes:
82
As smart contracts are increasingly used, lawyers may need to gain a basic proficiency in coding to
allow them to check that clauses and contractual mechanisms have been appropriately translated to
the relevant programming language. This could be met by training as part of continuing professional
development obligations or the legal industry could partner with blockchain stakeholders to produce
guides and programmable standard smart contracts that could be tailored to a client’s needs.
This notion has some notable disadvantages. Having to train legal professionals in coding is a time-
consuming process which will itself attract costs and consume a firm’s resources. Moreover, little
attention has been paid to the fact that blockchain technology may not be readily accepted by all
factions of commerce and wider society. A smart contract can only be used if the parties and indeed
interested third parties to the transaction are both willing and able to execute their agreement on a
blockchain and do away with traditional trusted intermediaries. These intermediaries are deeply
embedded in the modern commercial marketplace so it will take an enormous cultural and
technological shift to accept smart contracts as orthodoxy. Smart contracts may thus disrupt
commercial activity and cause disharmony in the manners in which commercial parties conduct
business, whilst also chipping away at the roles of intermediaries.
5. Conclusion
There are legitimate reasons for people in the legal, commercial, technology and other sectors to be
both optimistic and pessimistic about the growing presence of smart contracts. The reasons for
optimism are abundant. As this article has discussed, smart contracts have the potential to increase
commercial efficiency, reduce transaction and legal costs, and facilitate transparent and anonymous
transacting. There are, however, questions surrounding the legal enforceability of smart contracts; it is
uncertain whether they will easily adapt to current legal frameworks regulating ‘conventional’
contracts across jurisdictions. This is something they ultimately must do, as Omohundro (envisaging a
number of futuristic applications) states: ‘self-driving cars [will] need to follow the rules of the road,
autonomous business creation [will need] to follow securities laws, and autonomous markets [will]
need to levy taxes appropriate for transactions’ jurisdictions’.
83
As time progresses, and smart
contracts become more widely used and applied in a greater variety of commercial contexts, it is
essential that the law keeps pace; uncertainty is the breeding ground for disputation. At present,
businesses would certainly be wise to ‘factor issues concerning the legal status of smart contracts into
82
Wang, above n 9, 250.
83
Omohundro, above n 2, 20.
21
the wider business case for their deployment’.
84
It is not yet entirely clear whether smart contracts are
a smart idea, but there is little doubt the question will soon be tested in the courts.
84
Norton Rose Fulbright, above n 39, 21.
22
Author Details
Dr Mark Giancaspro
Lecturer
Law School
The University of Adelaide
North Terrace
ADELAIDE SA 5005
Telephone: +61 8 8313 0879
Email: mark.giancaspro@adelaide.edu.au
Website: http://www.adelaide.edu.au/directory/mark.giancaspro
... of the nature of the contractual clause has not gone unnoticed, and has raised many doubts among lawyers (Giancaspro, 2017;Governatori et al., 2018). In particular, Giancaspro (2017) pointed out that smart contracts also gave rise to several legal problems (also see Cuccuru, 2017). ...
... of the nature of the contractual clause has not gone unnoticed, and has raised many doubts among lawyers (Giancaspro, 2017;Governatori et al., 2018). In particular, Giancaspro (2017) pointed out that smart contracts also gave rise to several legal problems (also see Cuccuru, 2017). Automating the fulfillment of contractual obligations in smart contracts can be understood as a limit to contractual freedom. ...
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... This something can be a need of various actions or even state confirmations covered by a scope and underlying initial goal of the Grantor. Legal difficulty for interpretation of giving meaning to normative standards for SC is already addressed and noted [23]. To solve this interpretation, issue the authorized Entity must interact with an external Entity to achieve the execution of a specific point from a POA record. ...
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Blockchain Technology (BT) with so-called web3 is at an inflection point between new sub-theme hypes and worldwide industrialization over last three years thanks to large companies like MicroStrategy [1], Facebook [2] and several Venture-Capital formations [3] who are already fighting over market share and community growth. Our work represents insights from Literature-based Software Requirement (SR) elicitation for a specific Blockchain-based Application, which is creation, managing and control of digital Power of Attorney (POA). The context of POA is not only a financial driven use-case it is by far a heavy weight universal legal transaction. We use a morphological box and reduced PRIMS-P to synthesis a generic specification for further Blockchain-based Application development. Formulated SRs in POA context are reflected on our core actors which are Grantor and authorized, trusted, external Entities. Proposed characteristics for relationship and effects are visualized in a reference model originally used in digital platform ecosystems [4]. This design and modelling approach facilitated closing discussion of BT and its future eCommerce perspective.
... This shared database of all transactions that occur on the blockchain is continuously synchronized between all participants (Ølnes et al., 2017), enabling immediate peer-to-peer transmissions (Iansiti & Lakhani, 2017). Thereby, a distributed ledger offers great transparency (Giancaspro, 2017) and irreversibility of records (Iansiti & Lakhani, 2017), which assures data as well as transaction integrity (Ølnes et al., 2017). ...
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Contemporary blockchain platforms differ in their technological features and are under active development as open-source projects. Nonetheless, they have the potential to fuel substantial socioeconomic changes. The scale of such changes, however, requires not only blockchain platforms but also organizations that develop and provide services on top of these platforms. Yet, little is known as to why service providers use specific blockchain platforms to offer their services or how they deal with the developmental state of blockchain platforms. This study, therefore, strives to identify the general affordances of blockchain platforms for service providers and aims to understand how service providers respond to different affordances on distinct platforms. Based on Affordance Theory and grounded in the analysis of 19 cases of blockchain service providers on the three most prominent blockchain platforms, we identify five types of salient affordances (i.e., validity affordances, analytical affordances, automation affordances, decentralization affordances, gener-ative affordances). We explain how they result from specific features of blockchain platforms and from properties of the provided service. We lastly show that service providers' use of a blockchain platform depends not only on the salient affordances of the platform but also on the values that are enacted by the open-source community behind it. Financial support for Marten Risius from the Algorand Foundation through the Algorand Centre of Excellence (ACE) on Sustainability Informatics for the Pacific is gratefully acknowledged. K. Spohrer ()
... Smart contracts offer various advantages, including anonymity, efficiency, transparency, and providing financial services to people without access to bank accounts [22]. However, legal enforceability is still unclear [29], implying that signatures are likely to remain important. Handwriting is unique because it is influenced by training, physiology, and further behavioral factors over a lifetime [26,83]. ...
... Thus, smart contracts could automate and enhance the fairness of critical processes, guarantee the quality of data sources, and protect valuable resources, which are topics of relevant interest [11]- [13]. In particular, the idea of automating legally recognized contracts is very appealing [14]. ...
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In the evolving context of distributed ledger technologies, the standardization of smart contracts is necessary. Smart contracts are tamper-proof computer programs. Due to their security and flexibility, it is possible to exploit smart contracts in a wide variety of use cases. In particular, it could be possible to automate legally recognized contracts by leveraging smart contracts. To this extent, some standards regarding the proper management of smart contracts are surging. However, there are still many technological misconceptions regarding smart contracts. This study describes smart contracts from multiple perspectives and identifies and clarifies some of the most common misconceptions regarding smart contracts. This study also provides some guidelines and insights on the proper management of smart contracts. This study can be a valuable resource for future standards on smart contracts.
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With the deep integration of blockchain and Artificial Intelligence (AI), more and more blockchain-based AI tasks are accomplished using Smart Contracts (SCs) and create win-win solutions. That is, blockchain provides a trustworthy and decentralized data infrastructure for AI, and AI helps blockchain perform tasks requiring intelligence. Since these special SCs designed for blockchain-based AI tasks have different characteristics from the widely studied SCs designed for business logic, we name them Intelligent Contracts (ICs) for a focused study. In this paper, we systematically analyze ICs and propose a constructive framework for their construction and application. Specifically, we first formulate two construction modes of current ICs, including encoding AI models and scheduling AI collaboration. Then, we compare the characteristics of these two modes theoretically and experimentally as a reference for future mode selection. Finally, to extend the application of ICs and encourage AI-driven blockchain intelligence, we propose a technical route that helps blockchain autonomously respond to AI tasks through the dynamic and optimal configuration of ICs. Using typical AI tasks of classifying IRIS, MNIST, and ImageNet data sets as examples, we implement and thoroughly evaluate two modes of ICs on Ethereum. Based on the constructed ICs, we illustrate their optimal configuration and automatic response process. Experimental results demonstrate the effectiveness and feasibility of the proposed framework.
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Due to the emergence of new digital technologies, the tourism industry is at the stage of new transformations. The new technologies that are being created allow the tourist to work directly with the manufacturer of the tourist service, which helps to provide the consumer with a higher quality and less expensive product, increasing the responsibility of the manufacturer. The subject of research is the use of blockchain technology in the tourism industry. The purpose of the article is to study the problems and prospects of using blockchain technology in the tourism industry of Ukraine. To achieve this goal, the following tasks were set and solved: foreign experience in the implementation of blockchain technologies in the tourism industry; an analysis of the current state of use of blockchain technologies in the tourism industry of Ukraine; problems and prospects of introduction of blockchain technologies in tourism are revealed. The research was conducted on the basis of system-functional, dynamic, complex scientific approaches, using scientific methods: analysis and synthesis, induction and deduction, modeling, historical-logical method, methods of statistical analysis. The following results were obtained: considering Ukraine in the context of the use of distributed registry technology, it becomes obvious that the legalization and granting of the necessary legal status to this technology should be completed first. It is necessary to assess the effectiveness and regulation of the blockchain institution in our country, as well as to identify and eliminate shortcomings in its use. Conclusions: tourism is an area that requires the introduction of blockchain technologies. With the advent of technology, tourists will get better conditions for planning and making trips. Optimization through the blockchain of various areas of activity involved in the tourism industry will increase the profits of travel companies and reduce the cost of the final product.
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This paper aims to evaluate the regulation model for filing an action pauliana lawsuit by creditors to revoke the debtor’s legal actions prior to the declaration of bankruptcy. The research method used is normative juridical. The results show that the model for regulating the authority of creditors who wish to file an actio pauliana lawsuit against debtors in bankruptcy law can be done by making changes to Law Number 37 of 2004 concerning Bankruptcy by adding an article which regulates the procedural law of how a creditor can file a lawsuit. action pauliana in the following way: Creditors who acknowledge the existence of a Debtor's legal action, which is not required to be carried out within one year before the bankruptcy decision is pronounced, may submit an application to the Supervisory Judge by attaching valid evidence so that the Supervisory Judge will issue a ruling concerning the Debtor's legal action is in one year before the bankruptcy decision is pronounced, is not mandatory and shall be revoked.
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Since inception, blockchain has earned significant attention due to its exclusive characteristics and advantages. It has changed the way the transactions are conducted by eradicating the role of third parties and promises to ensure trust among the participants. This technology is emerging as a potential solution to several issues but not without certain security vulnerabilities. In particular, protection of sensitive data is a more critical issue in the absence of a third party. This paper is aimed to report and share the state of the art of sensitive data protection in blockchain applications. The covered aspects include identification of sensitive data, existing techniques to protect sensitive data and to know how real time data compromised by security risks, attacks, threats and vulnerabilities concerning blockchain applications. This paper analysis the tools and techniques used in the past for protecting sensitive data and categorized them. On the basis of research and intuitive findings, methods and techniques are elaborated which can contribute in future in the designing a framework for protection of sensitive data in blockchain applications.
Chapter
Blockchain technology has been rapidly emerging in the past years. The notion of decentralization, enabling ecosystems that provide true ownership of resources without requiring a trusted third party, is gaining interest and is applied in use cases daily. Such use cases vary from simple currency-exchange applications to complex smart contract applications. Designing, building, and deploying blockchain-based applications mostly requires software developers. This introduces a technological burden for organizations who would like to benefit from such systems in their own use case(s) but lack time, financial means, or qualified people. To overcome this burden, we developed a software framework allowing an easy and quick setup of blockchain-based systems for use cases dealing with the exchange of resources. To set up such a system, an easy-to-use user interface is provided that allows business-level people to give the specifications of the system without the need for technical software-, blockchain- or smart contract knowledge. From these specifications an implementation is generated. In this paper, we present the architecture of the framework and discuss the principles used, and the user interface developed for specifying such use cases.
How to Use Humans to Make "Smart Contracts
  • Scott Farrell
  • Claire Warren
  • Roslyn Hinchliffe
  • Johanan Ottensooser
Scott Farrell, Claire Warren, Roslyn Hinchliffe and Johanan Ottensooser, 'How to Use Humans to Make "Smart Contracts" Truly Smart' (King & Wood Mallesons, 7 July 2016) < http://www.kwm.com/en/au/knowledge/insights/smart-contracts-open-source-model-dna-digital-analoguehuman-20160630>.
There is no way to patch a buggy smart contract, regardless of its popularity or how much money it has, without reversing the blockchain (a formidable task). Therefore, reasoning about the correctness of smart contracts before deployment is critical, as is designing a safe smart contract system
  • Chu Luu
  • Olickel
  • Hobor Saxena
  • Note
Luu, Chu, Olickel, Saxena and Hobor note: 'There is no way to patch a buggy smart contract, regardless of its popularity or how much money it has, without reversing the blockchain (a formidable task). Therefore, reasoning about the correctness of smart contracts before deployment is critical, as is designing a safe smart contract system'. Loi Luu, Duc-Hiep Chu, Hrishi Olickel, Prateek Saxena and Aquinas Hobor, 'Making Smart Contracts Smarter', Proceedings of the 2016 ACM SIGSAC Conference on Computer and Communications Security (24-28 October 2016), Vienna, p 254 at p 255. 66 See https://www.reddit.com/r/ethereum/comments/4ghzhv/governmentals_1100_eth_jackpot_payout_is_stuck/. At the time of writing, the GovernMental website was inactive and offering error prompts: http://governmental.github.io/GovernMental/.
Smart Contracts in Financial Services: Getting from Hype to Reality
  • Capgemini Consulting
Capgemini Consulting, 'Smart Contracts in Financial Services: Getting from Hype to Reality' (2016) p 14.
Lawyers Prepare for "Driverless M&A" as Smart Contract Era Dawns' (Financial Review
  • James Eyers
  • Misa Han
James Eyers and Misa Han, 'Lawyers Prepare for "Driverless M&A" as Smart Contract Era Dawns' (Financial Review, 19 June 2016) <http://www.afr.com/technology/lawyers-prepare-for-driverless-ma-as-ssmart-contractera-dawns-20160616-gpknyz>.
These sentiments are reflected in the full Allens report: 'Blockchain Reaction: Understanding the Opportunities and Navigating the Legal Frameworks of Distributed Ledger Technology and Blockchain
  • Simun Soljo
  • David Rountree
Simun Soljo and David Rountree, 'Unravelled: Blockchain and Why Smart Contracts Still Need Smart Lawyers' (Allens, 6 July 2016) < https://www.allens.com.au/pubs/fsr/160706-unravelled-03.htm>. These sentiments are reflected in the full Allens report: 'Blockchain Reaction: Understanding the Opportunities and Navigating the Legal Frameworks of Distributed Ledger Technology and Blockchain' (2016). The report is available at https://www.allens.com.au/data/blockchain/index.htm.
Smart Contracts" To Disrupt Lawyers' (Financial Review
  • Eyers
  • Blockchain
See for example: James Eyers, 'Blockchain "Smart Contracts" To Disrupt Lawyers' (Financial Review, 30 May 2016) <//www.afr.com/technology/blockchain-smart-contracts-to-disrupt-lawyers-20160529-gp6f5e>;