A new technology called “smart legal contracts” has emerged. What makes these legal agreements innovative is that their execution is made automatic through the use of computers. Any time a smart contract is drawn up, it’s stored as a block of data on the blockchain. Once the conditions of the contract are met, it then executes the terms. Smart legal contracts, tend to follow a conditional logic with specific and objective inputs: if “X” occurs, then execute step “Y”. For example, in the case of a purchase agreement, once the agreed-upon product is delivered, the payment is released automatically.

Definition

A smart contract is a computer programme that, upon the occurrence of pre-defined conditions, runs automatically and executes pre-defined actions according to the terms of a contract or an agreement. By one account, the global smart contracts market size is projected to reach EUR 1,5 billion by 2028, from EUR 308 million in 2021.

Smart legal contracts may be defined as “legally binding contracts in which some or all of the contractual obligations are defined in and/ or performed automatically by a computer program.” Smart legal contracts represented one of the first major developments whereby traditional contracts could be digitally automated in some way, and they empowered users to guarantee an immediate outcome with minimal human input.

A smart legal contract is different to an electronic contract (sometimes referred to as a machine readable contract), which is a contract formed electronically e.g. online, due to its automation of performance and self-execution. Unlike an electronic contract, once executed and provided the predefined conditions have been satisfied, a smart legal contract will automatically perform the terms that have been represented in smart contract code. Indeed, it is this characteristic that renders a smart legal contract ‘smart’ 

Several benefits and cost savings associated with the use of smart legal contracts may be identifies as increased efficiency and lower transaction costs, lower enforcement costs, and reduced risk of fraud.

How?

In a smart contract, the terms of a legal document are written directly into lines of code and stored within a distributed and decentralized blockchain network. However, the code can also be stored as part of a different distributed ledger technology, too.

This blockchain is essentially a public database, with no single owner. Instead, the transactions are automatically processed by the blockchain without the need for third-party involvement. As the transactions are stored and linked in this way, the exchange cannot be edited by either party, making them extremely secure.

It may sound confusing, but you can think of smart contracts as a piece of computer code that automatically monitors, executes, and enforces an agreement once certain events have happened. At a basic level, this could be:

• If a specific event happens (e.g when X happens, do Y)
• At a specific date (e.g on X date, do Y)

Within smart legal contracts, these conditions or events can be simple, like a payment being received or authorized, and in theory, they can be used for anything from services being delivered to exchanging money.

Vending machines work in a similar way since a vending machine automatically releases a chocolate bar once a buyer has put money into it. This is called conditional performance, because one action triggers another to execute a full transaction, but only on those conditions.

Specific Use Cases

The use of smart legal contracts is anticipated to expand as various sectors seek to take advantage of the automation process.

In real estate deals, for example, one party can feel hesitant to transfer the ownership of a property before a fee has been paid by the other, and vice versa. To resolve this, you might rely on third party involvement to ensure both parties keep to their promises. However, this can delay the process and increase costs over time. To work around this, smart contracts can execute the terms once each condition has been met by both parties automatically instead – hence their popularity.

Healthcare systems benefit from the use of smart contracts for securing and sharing patient health records in a reliable way that is free from tampering and human error. One example of smart contracts in practice is to accurately transfer patient data between doctors and hospitals without the need to manually share and complete health record forms.

Smart legal contracts may have been recommended for use in voting systems by governments and by different groups, for example. This is because they are tamper-proof, and eliminate any risks of forgery – which ensures that voting systems are less susceptible to manipulation and mistakes. Smart contracts present a more efficient approach to voting entries and tallying since they are digital and automated, which reduces the need for masses of paperwork and manual document completion.

Legal Implications

Smart contracts have been developed and are used in a variety of fields such as finance, banking, supply chain, healthcare, education, transportation, etc. The questions now are: what is the legality of smart contracts, can Turkey’s contract law be applied to smart contracts, and in the future do we need to revise the current legal system to regulate smart contracts?

Smart legal contracts automate business transactions and spend little time discussing the roles, duties and responsibilities of each party, and what liability they incur if they fail to meet these. A smart legal contract executes the business rules automatically, unlike in conventional contracts which include intricate and detailed clauses that offer protection in the event that complex legal issues occur. Smart contracts are focused solely on achieving simple outcomes, whilst other contracts are designed to offer guidance in the event that those outcomes don’t come to fruition.

Questions surrounding the legal impact of smart contracts;

• In which circumstances is a smart contract going to be legally binding?
• How should smart contracts be interpreted by the courts?
• How can factors like mistake or misrepresentation apply to smart contracts?
• What legal remedies are available for smart contracts that have not performed the terms agreed in the ways intended?

Legal Issues

Even separately to these core legal questions, there are more specific legal issues to consider, like:

• How will the legal status of smart contracts vary between different states?
• Can you amend smart contracts in the way you can amend other contracts?
• What happens if a smart contract is subject to an attack?
• How can you avoid void transactions from a smart contract’s blockchain?

There are a wealth of legal issues surrounding smart contracts that we are yet to see the full effect of, so there is no guarantee of how transactions using smart contract technology will play out in the future when these pressing legal questions do arise. This lack of certainty can be unsettling for businesses and legal teams, which is why so many have been reluctant to adopt the intelligent, new technology.

Enforceability

Given the unique nature of smart contracts and the ways they differ from traditional paper agreements, there are concerns surrounding their enforceability. In general, smart contracts are enforceable as long as they follow the basic rules of contractual agreements. These include the following.

1- Offer, Acceptance, Consideration

As with any agreement, there must be an offer, an acceptance of that offer and consideration. Put simply, these are defined thusly.

• Offer: One or both parties offer the terms of the agreement.
• Acceptance: Both parties accept the terms as offered (often after some negotiation).
• Consideration: There is something of value being offered to each party.

If any of these components are lacking, it is not a legally enforceable contract.

2- Legally Permissible Terms

In general, you cannot use a contract to bind parties to terms that are illegal to enforce. For instance, asking parties to waive certain rights that cannot be legally waived will likely nullify that section of the agreement. This may present a special challenge for smart contracts since making sure such terms are severable from the rest of the agreement—which cannot be edited once executed—may be more difficult than it would be with a paper contract.

3- Legal to Sign Electronically

Finally, smart contracts need to be legally eligible for electronic signatures. Some types of agreements cannot be signed electronically. Most transactions involving smart contracts won’t involve any signature restriction, but it’s still worth consulting with an expert attorney about what can and can’t be signed electronically.

The current legal framework is clearly able to facilitate and support the use of smart legal contracts. Current legal principles can apply to smart legal contracts in much the same way as they do to traditional contracts.

Legal Assistance

Smart contracts are involved in any blockchain projects. In certain circumstances, such smart contracts need to be legally compliant or need to represent actual binding legal obligations. We will provide you with legal assistance so that your “smart contracts” can become “smart legal contracts”. Our services include;

• drafting of legal obligations in computational logic,
• identification of the contractual logic,
• liaising with coders to develop smart contracts which include binding legal obligations.

At Bicak Law, we continuously invest in the development of our team, to be able to provide assistance on legal matters relating to blockchain, smart contracts, cryptocoins and digital assets. We stay up to date with the current realities of the market and provide to our clients complete and practical solutions.

In case you need legal assistance on your smart contract and how it impacts your business,  do not wait any longer to secure the advice of an experienced attorney in smart contract formation, execution, and monitoring. Call or contact us today for a free consultation!