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Smart Contracts: A Way for the Future or not Contracts at All? |Claudio Mutua

In most common law countries, for contracts to be effective, they must fulfil several perquisites. Among others are offer and acceptance, legality and fulfilling any necessary formalities. I recently attended a workshop where it was proposed that the land management system, especially the vending of land, should be done on the blockchain. Like many others in the landed property legal regime in Kenya, the proposal is meant to forestall the prevalent fraud in the sector and reduce costs.

The proposed solution would involve the development of a blockchain-based smart contracting system. However, there are question marks about whether this would be applicable in Kenya and other countries with similar legal systems like Ghana.

Smart Contracts: A Conceptualization

Smart contracts are a vital ingredient of a decentralized blockchain. Smart contracts are programs that concerned parties store on blockchain, and which will run when there are predetermined conditions. Their role is the automation of the execution of an agreement so that every participant can be sure of the transaction's outcome.

One of the main reasons is to avoid intermediaries in the performance of the obligations, which can introduce extra costs and increase the possibility of fraud. From this perspective, their application in legal contracts appears to be a straightforward manner of ensuring the success of any contract.

Applicability and Practical Difficulties

Regardless of the apparent advantages that smart contracts would present, there are question marks about the viability of smart contracts. There are arguments that under the current legal regime, smart contracts are neither smart nor, strictly legally speaking, contracts. The advantages of having a "code-only" contract performed on the blockchain also become impediments when implementing the contracts in real life. For example, while blockchain-based code-only contracts allow irreversible transaction processing, which provides "trackability", the irreversibility ensures that human errors in the transaction are not correctable.

Per se, this may result in injustice and unnecessary frustration contracts. Furthermore, it also means that if the code effectuating the smart contract has any bug, it cannot be remedied. From a legal standpoint, this is problematic and raises questions about how "smart" the contract is.

Secondly, there are questions about whether the code is enforceable as a contract. It is necessary to note that smart contracts are not merely digitally signed agreements. They are a code written in a way that structures a set of interactions between parties.

For such codes, without an accompanying written agreement, there would be a difference between the parties' expectations and the contract's enforceability. For example, if one were to print and take that into a court, all one would have, is a massive code that neither most judges nor lawyers would understand. On the other hand, a written agreement to accompany the code stored on the blockchain is not only repetitive but may also reduce the efficacy of the smart contract while increasing costs.

Resolution to the Impracticalities

Smart contracts as enforcement mechanisms

So how do we deal with that? The first recommendation that appears to make the most sense in a country like Kenya and Ghana is using "smart contracts" as enforcement mechanisms for contracts that have already been captured in written format.

The legal-technical interface between a written contract and a smart contract based on the blockchain ensures that a port will connect the digital assets that are extant on the blockchain and products in the real world.

Thus, in this first instance, until the legal regime and technical expertise improve to ensure the legal enforceability of smart contracts, the contracts should become another facet to enforce written agreements. Their efficacy would be apparent in, for instance, releasing the payment after specific prerequisites are met.

Ricardian contracts

Secondly, a blockchain-based Ricardian contract would provide another solution to the question of enforceability. A Ricardian contract expresses and executes the defining components of a legal agreement in a software format. The objective is to make the format both machine-readable so that it can be quickly extracted for computational reasons and readable as a regular text document so that attorneys and contractual parties can conveniently comprehend the fundamentals of the contract.

Legally speaking, embedding markup language into a principally legally-phrased document reduces transaction costs, speeds up dispute settlement, improves enforceability, and increases transparency.

Moreover, using the Ricardian contracts also leaves many of the advantages of a smart contract while maintaining the enforceability of a traditional legal agreement. From a tech and blockchain enthusiast perspective, the Ricardian contract is a software design pattern that allows contractual documents to be digitized. Such documents are then valuable for financial transactions such as payments while retaining the depth of the legal contracting practice. The publication of the material and the unique cryptographic message digest's reference to that content eliminates contractual deceit resulting from numerous presentations.

Conclusion

Smart contracts present an exciting way of dealing with traditional legal contracts' potential pitfalls. However, they also present pitfalls in their code-only format. On the other hand, merely capturing written contracts in code would be double-work and replication, which may increase costs and defeat one of the core concepts underlying smart contracts.

In this case, using smart contracts to ensure the effectuation of written contracts presents an advantage. However, capturing the agreement in a Ricardian contract is more advantageous. Lawyers, policymakers and blockchain enthusiasts should explore this as a matter of policy.

 

 

 

 

Claudio Ndeleva Mutua is a legal advocate at Sian Mutua Advocates in Nairobi, Kenya and a Policy Fellow and Legal Advisor at the Institute for Liberty & Policy Innovation (ILAPI), of Ghana. He can be reached at cmutua@smlawafrica.com

 

 

Photo Credit: dotmagizine.online: Smart Contract Security Expert-expect and deal with attacks


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2022-09-22 01:22:22
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Source: ILAPI