First, let’s do a smart contract that will kill all the lawyers

First, let’s do a smart contract that will kill all the lawyers

Adi Marcus, Adv.
June 11, 2022

Television has not yet replaced radio, Netflix has not yet killed cinemas, and while we can already hear the enthusiastic crypto mob arguing that smart contracts are the next generation of both commerce and law and will bring an end to the era of lawyers, it is worth to remember Sodom before pulling out the torches and pitchforks...

A smart contract is actually a contract written in a manner that combines code and blockchain data, contains all information required for a particular transaction, and is activated automatically using a series of "rules". A smart contract can be compared to a vending machine. The buyer puts in coins and selects the desired candy, the machine – under its programming - checks if a correct amount was inserted and if this condition is met - the machine releases the selected candy.

The benefits are significant. The smart contract mechanism is usually simple, fast and efficient. It saves the need for lengthy and tedious legal negotiations, can operate automatically and provide a neutral and safe environment for the transaction, gives the parties a tool to ensure the execution of the transaction and reduces the chance of fraud and human error. Thus, for example, in a sale of a particular goods or product the seller can ensure that upon receipt of funds using a blockchain currency an order will be sent to the warehouse which will deliver the product to the customer and the customer can ensure that if goods are not timely received an automatic refund will be triggered.

Smart contracts, however, still present a number of restrictions that leave, at least for now, attorneys protected from genocide. First, keep in mind that most transactions, including crypto transactions, involve elements outside the blockchain network, and as such cannot automatically "activate" all the rules encoded in the smart contract basis. Thus, for example, in the example above, while a smart contract can handle payment and shipping, continuing the relationship between seller and buyer, including product warranty issues, defective product repair and the like are more difficult to arrange using a simple line of code. The smart contract can discern whether a payment has been received and activate the rule, but in order to test whether a defective product meets the product warranty conditions a link is required between the blockchain system and the real world, and this opens the door to controversy. A smart insurance contract that would automatically activate a compensation mechanism for a farmer in the absence or excess of rain by connecting to a weather reporting system, raises questions about whether any crops were damaged at all (and whether there were crops).

A smart contract is written by a programmer who does not necessarily understand the legal complexities and the contract is prone to both exposure to legal faults and programming issues. In addition, a smart contract is a closed system of rules and actions - cause and effect. It is incapable of interpretation, it is incapable of flexibility and it is incapable of adapting to a changing reality. Legal contracts contain clauses of force majeure, clauses of exit in the event of a change of circumstances, clauses of cancellation in the event of failure of the foundations of the transaction and are subject to human interpretation for all its disadvantages but also for all its advantages. All of these are missing in a smart contract that by its very nature, is automatic and rigid and resembles a Ben of Sodom: if the legs are too long, shorten them.

Due to this, and in light of these and other limitations, it is now customary to classify contracts in the age of smart contracts into three categories: natural contracts, hybrid contracts and code only contracts. This classification, in fact, makes it clear that in most cases the smart contract is not the appearance of everything. It is often required to be accompanied by a traditional contract, drafted by lawyers who specialize in the field and which includes all agreements that cannot be translated into computer code and sometimes, even when it is a contract that can be written in code only, a lawyer involvement is required to ensure code compliance to the essence of the transaction. Thus, not only is it not advisable to rush and pull out the torches and pitchforks and pounce on the castle of jurists, it is worthwhile to ensure that upon entering into a smart contract for complex transactions, a “real” lawyer with expertise in the field examines the terms and all accompanying documents.