Legal Pitfalls to Avoid in Blockchain Smart Contracts

Three Legal Pitfalls to Avoid in Blockchain Smart Contracts

Growing improvements to blockchain technologies — that allows for the transfer of possession without using a centralized third party (for example, a lender) — has caused the mass availability of blockchain “smart contracts.” An intelligent contract is a prewritten software application that automatically performs every party’s duty within an “if-then” structure while using blockchain’s decentralized affirmation system. Uber-secure cryptocurrencies, for example, bitcoin, utilize exactly the identical sort of confirmation systems.

A very simple case in point is that: When Party A pays a specific sum and the payment is confirmed, then the name to Party B’s property is automatically discharged to Party A and may be automatically updated with proper ownership details.

All these wise contracts are really tempting. They may easily boost the efficacy of your business enterprise, in addition, to save money that formerly went to third parties. Intelligent contracts are getting more popular in sections of property, health care, and securities, chiefly because of these prospective gains in cost and efficiency.

But this silver bullet of efficacy and reduced price does not come without potential issues. First, will a court even think about a computer program for a binding contract? Last, do the parties need to go into court or would be the less-expensive choice of mediation accessible?

Offer/Acceptance: Is It Even a Binding Contract?

Usually, contracts are binding and enforceable under the law in the event the essential legal process is followed. 1 side makes an offer, the other side takes that offer, and there’s some type of consideration underlying the trade. With a smart contract, but the parties are not necessarily making and accepting offers — they’re agreeing to some mutually agreeable computer program that outlines the if-then conditions concerning the trade between the parties. In the view of a courtroom, this by itself might not produce a binding agreement. If the agreement isn’t binding, it could be challenging to recover damages down the road.

To rectify this issue, the smart contract must include a clause detailing the arrangement between the parties; as an example, that this contract is regarding the sale of real estate, which Party A agrees to exchange the deed for the land (or the use of an apartment for a night, or the title to a vehicle, or whatever the contract is for) for the particular amount that will be provided by Party B.

With no this particular clause, the app is only a set of requirements. With this clause, the rest of the program becomes the terms for this already-specified arrangement and is much more likely to be enforced. Simple, but extremely helpful.

Jurisdiction: Is the Area of Jurisdiction Clearly Defined?

There’s a difficult jurisdictional problem on the horizon for blockchain technology. Together with the blockchain’s decentralized trade system, at which the contract really became binding and final is a question that the courts have yet to reply.

Theoretically, a court might find that a party may sue where validation of this trade happened. With potentially thousands or perhaps millions of peers supporting transactions throughout the nation, parties can be sued in arbitrary areas anywhere in the total United States.

A forum selection clause claims that the parties agree to resolve any disputes within one specific jurisdiction. Even though it’s sometimes a place of controversy between the parties when every party desires their particular city as the authority selected, this clause reduces the possibility of being sued anytime any place in the nation.

Dispute Resolution: Does It Have a Clear Dispute Resolution Mechanism in Place?

This may be a costly and protracted procedure. In the event the parties concur and include a dispute settlement clause, the parties may solve their disputes facing the arbitrator instead.

Though mediation was vilified lately as the instrument of big business, the arrangement could say that both parties have to agree on the arbitrator ahead or that a neutral third party — like the American Arbitration Association — might make the selection. This would remove any possible prejudice on the part of the arbitrator, as it will be the impartial third party, not either of the spent parties, deciding upon the arbitrator.

What’s more, the parties can make certain that the arbitrator had any wisdom and expertise with blockchain technology. Most judges now might not have even heard of the technology, not as much conversant from the ins-and-outs of app complexities. Adding a dispute resolution clause requiring that the arbitrator possess some blockchain experience could possibly be a benefit to either side.


Bright contracts might be the potential of trades. On the other hand, the technology is in its infancy and has not been thoroughly analyzed by federal or state courts. There are quite a few possible problems, for example, offer/acceptance, jurisdiction and dispute resolution. Therefore, while this technology might be exceedingly helpful for particular transactions today, it should nevertheless be considered best practice to employ an attorney for important or intricate contracts, like the purchase of IP or intricate services.

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