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Some digital transactions these days use crypto contracts or smart contracts instead of traditional agreements. Now, you might be wondering, if something goes wrong or in the event of a dispute, how are these contracts treated in court? This is why a proper smart contract audit is vital to any agreements that run on the blockchain. While US courts are still playing catch-up, emerging legal frameworks look into how a smart contract is written and used as the basis for their treatment. Such concerns, however, can be avoided.
Are Smart Contracts Legally Binding?
Because smart contracts are written in code, they’re not automatically enforceable in court. Certain preset conditions must be met for it to be considered valid by law.
- Must contain basic legal standards similar to what paper contracts have: offer, acceptance, and consideration
- Parties involved must fully understand the terms, even when the contract is written in code
- Must come with clear documentation and be vetted by crypto service providers knowledgeable in technical and legal law
The Role of Jurisdiction
With blockchain transactions running globally, there’s always a question as to which law applies to a crypto contract.
- S. courts may only hear cases based in the US or that affect the local market
- Legal disputes are often heard in the court or country specified in the transactions
- Autonomous smart contracts may be outside a state’s authority
- To be safe, a smart contract must include a governing law and dispute resolution clause
Code vs. Intent
A code-based contract still needs to be fully understood by all parties involved. Otherwise, there’ll be questions about the true intention behind it.
- If a code runs correctly but a dispute arises, the court will check how the program aligns with intent
- If a code runs correctly but a dispute arises, the court would look into whether the code and the intent align
- If a code runs incorrectly, the law would look beyond the code and into agreements written in plain language, developer communications, whether online or offline, and when the contract was started
- A contract audit that comes with a legal review may serve as evidence
Evidence and Interpretation Challenges
Between a paper contract and a smart contract, it’s easier to interpret the former because there are established guidelines.
- An expert witness will have to explain the mechanisms of a crypto contract
- Poorly written or ambiguous codes can further complicate the process
- Most blockchain records, even when immutable, may be deemed inadmissible
- Not all blockchain logs are accepted as reliable
- Codes are best written in a language that anyone who lacks coding knowledge can understand
Hybrid Contracts Are Becoming the Norm
- Legal terms and presets are defined in the written contract
- The legal context is taken from a contract’s written portion
- Automations are outlined in the smart contract
- Hybrid contracts offer legal and operational provisions
Smart contracts may run on code, but they’re still subject to legal scrutiny if problems arise. By looking into jurisdiction, intent, and interpretation, there’s a possibility that a dispute can be resolved, especially if the basis is a hybrid contract. To avoid any problems, have all smart contracts audited by experts at Hashlock.