By Dr. Mohammad Al-Thunibat
To
identify the legal issues of smart contracts we need first to know how smart
contracts work
1.
(A) wants
to buy something from (B), a product or service or anything else
2.
The deal
/ transaction is represented online as a "Block", coding the
transaction in a certain format (if/then)
3.
The block
is broadcast to every party in the network
4.
Users in
the network approve that the transaction is valid
5.
The block
then can be added to the chain, which provides an indelible & transparent record
of transactions / contracts
6.
The
transaction is executed
The legal
issues & challenges facing the legal status of smart contracts
1.
Formation of contracts
Rules
& conditions
It is
known that a contract is the "Law of will", and in order to consider
a contract as a legal one it must meet number of legal requirements, which are:
Under the common law
system
Consent (legal capacity &
free will),
Purpose,
Consideration.
Under the civil law
system
Consent (legal capacity &
free will),
Subject-matter (legitimate, exist
or able to be existed & lawful),
Cause
(legitimate & lawful cause).
So
Do smart
contracts meet these legal requirements?!
I argue that the answer is, yet: NO
According
to the nature and mechanism of how smart contracts work, one can't be sure that
all requirements are met as conditioned by Law, especially in regard with
contracts formation, not only execution!!
Therefore,
the formation of smart contracts are not yet clear to assume that they are 100%
legal !, which is seen as a significant issue that affect the legitimacy,
validity & enforceability of smart contracts for many reasons ...
What if
one of the parties lost his/her legal capacity for any reason after the block
is set?! Or there was a defect facing parties' will!!
What if
one of the parties want to modify or change the term agreed on?! Or the price
was not reasonable for any reason?!
What if the subject-matter was
not lawful or not existed?!
What if the cause of contract was
not clear?!
What if there was an obstacle to
execute the contract for any reason?!
Many other questions
might take place in this regard and which can question the validity of smart contracts!!!
2.
The natural language of contracts
(Readability
and understandability)
Legal
contracts must be understood to be executed & be enforceable, where parties
should know exactly what they are in & agreed on.
Also it
is mandatory that contracts must be readable or easy to be understood - as to
their language - in order to be valid and enforceable thereafter.
So
Does the
If/Then format (coding language) meet the conditions of readability and understandability?!
I argue
that the answer is: NO or let's say it’s not yet clear enough to say yes.
According
to the if/then format (coding) that smart contracts are set by, no one can
claim that all users of the internet or a system can read or understand that
language easily and clearly.
In
addition, after the transaction is represented as a Block, no one can edit or
modify or correct its content, (this is against the authority of free will and
the concepts of contracting), and which is seen as to affect the validity and
enforceability of smart contracts and for many reasons ...
What if
the system misunderstand parties' real intentions or misinterpret that for any
technical reason or other reasons?!
What if
there was an error during the coding process?!
What if
one of the parties or both want to change or modify a term or anything in the transaction?!
Is it
clear enough to assume that all users can understand and read codes or write a
full contract in that format?!
And many other questions to be asked that can justify my argument!!
The other
legal issues & challenges will be addressed in Part 4
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