Beyond the Smart Contract Hype: Lawyers Dispute Promise of Self-Executing Contracts

Citing a number of legal and technical issues, a Legalweek panel pushed back the idea that contracts written entirely in code will ever be able to fully replace traditional, natural languages ones.

One of the most talked about benefits of smart contracts, which automatically execute the terms of an agreement, such as a transfer of funds, on the blockchain, is that they do away with the need of intermediaries. But lawyers at the “Getting Into the BlockTech Game” session at Legalweek 2020 in New York, pushed back against that idea, arguing that such a level of independence is not happening today, and likely won’t happen in the future.

Moshe Malina, associate general counsel at Citigroup, said the “grand theme of smart contracts” is that they are an entirely automatic, robotic process. But, “I haven’t seen that been implemented,” he said, adding, “In all the instance I’ve seen so far, there is a traditional natural language contract that sits on top” of a block chain-based process.

Such a hybrid approach is also something Judith Rinearson, partner K&L Gates believes is more a realistic expectation. “The contracts themselves aren’t going to change that much, but there are going to be triggers” that execute terms. She added, “I don’t think smart contracts will ever replace contracts.”

In fact, while some smart contract services have already hit the legal market, Joe Dewey, partner at Holland & Knight noted that these products have evolved noticeably since their debut. “You can begin to see changes in how some smart contracts platforms are marketed. A lot of them began as platforms geared towards blockchain, and if you look at them today a lot of the focus is on automation.”

Malina noted that there are several good reasons smart contracts likely won’t replace traditional ones. For one thing, like any tech, smart contracts may not always work as intended. “In some of the smart contracts on Ethereum there have been bugs in the code that created a transaction that wasn’t really intended.”

In addition, Malina said that traditional contracts offer much needed flexibility since they can cover a broader set of considerations and remedies. And even if there is a straightforward, simple agreement can be automated by a smart contract, one would still benefit from a traditional contract in the situation a party disputes the smart contract in court.

Arguing over a smart contract, after all, isn’t ideal for any court. “If you write a contract, a legal one in computer code, you’re going to have some practical difficulties in enforcing it … judges don’t read code [and] juries don’t read code,” Dewey said. He added that in that situation a court would have to bring in coding experts “and that complicates things.”