SMART CONTRACTS, BLOCKCHAIN AND THE LAW OF CONTRACT
From time immemorial, the barrage of contract law disputes have stemmed from the lack of performance of the terms of the contract by parties and this has caused commercial transactions to continuously be rife with mistrust and riddled with safety measures.
Due to its nature however, smart contracts guarantee performance once the set parameters are met. This is done by setting the terms of the contract in code replicated across multiple nodes of a blockchain. It ensures that the code or in this case, the terms, benefits from the security, permanence, and immutability that a blockchain offers. This also means that once a block is added, the effect is replicated.
The foregoing notwithstanding, there are legal considerations associated with smart contracts and blockchain technology and one of these is whether or not a smart contract qualifies as a valid contract.
This question does not have a blanket answer as this area of law remains grey, especially in a country such as Nigeria where the law of contract largely caters to just the traditional mode of contract formation and execution. It can however be argued that a smart contract can indeed be regarded as a valid contract.
This is because in order for a contract to be considered legally binding and enforceable under common law, it must satisfy certain fundamental elements: an offer, a valid acceptance of that offer, consideration, and intention to create legal obligations. Provided that there are no vitiating factors, any contract that ticks these boxes is ordinarily binding.
This has sparked an ongoing dispute as to whether smart contracts possess equivalent legal validity when compared to conventional contracts despite meeting the basic validity requirement. While some assert that smart contracts do not rely on a legal system for their existence and can function independently without any overarching legal structure, others voiced concerns about the legal status of smart contracts since, unlike traditional contracts, the contract is not given force through natural language but rather through computer data and rules.
The major lacuna however is that no domestic law or regulation caters to smart contracts. This implies that smart contracts are still governed by the same laws that regulate traditional contracts. These laws in themselves do not seem to adequately contemplate the recent technological inputs of blockchain and smart contracts.
Another consideration is whether a smart contract meets the requirements of being in writing. While it is not set in stone that a contract must be in writing to be enforceable in Nigeria, certain contracts only enjoy enforceability when in writing. Contracts such as arbitration agreements; agreements between shipmasters and seamen; bills of exchange; bills of sale; contracts for hire purchase; declaration of trusts in respect of land and dispositions of interests in land; legal practitioners’ agreements with clients for remuneration; marine insurance policies; money lenders’ contracts; and pawn brokers’ agreements for a pledge can only be valid when in writing.
The major question that is still left unanswered is whether codes that make up the blockchain technology of smart contracts can be regarded to have met the criteria of “in writing” where smart contracts are entered into with regards to any of the above agreements. It can be reasoned that since codes can be regarded as written expressions of the intentions of the party and the terms that make up the contract are contained in the code albeit in computer code language, it can be argued that smart contracts are indeed in writing as the law never did clearly specify that it must be words in human language.
Smart contracts can be executed across borders, potentially simplifying international agreements. While smart contracts can be particularly valuable in cases where parties are located in different jurisdictions with varying legal systems, the absence of a globally coordinated effort to acknowledge the legality of smart contracts could pose difficulties. The outcome of a private international law dispute remains uncertain when one jurisdiction acknowledges the contract as a valid legal instrument, while another does not. Safe to say, the concept of smart contract is open to a lot of ifs and maybes as there is hardly any certainty backed up by legal considerations.
It should be noted that courts lack the capability to influence the execution of smart contracts and these contracts are impervious to modifications. This is challenging as parties often enter into contracts without fully spelling out all the terms. This allowance is however not granted in smart contracts where every detail needs to be computed to give the expected outcome.
In the realm of traditional contracts, if unforeseen circumstances render performance impossible, non-performance is pardoned. In the case of an unanticipated event that makes performance unfeasible, the contract is deemed frustrated, absolving both parties from liability for non-performance.
However, in contrast, smart contracts are incapable of comprehending any alterations to their terms. The unchangeable nature of smart contracts means that parties are unable to modify any contractual provisions, and the potential for interference with performance is entirely eliminated, even in unprecedented circumstances.