Smart contracts can easily comply with offer, acceptance, and consideration requirements of conventional contracts, writes Mykyta Sokolov for lawless.tech.

“Requirements of intent and mutual assent may represent a problem; however, not so complicated smart contracts that are performed as it was intended by the parties can comply with such requirements.” she explains.

In her article, she explains the difference between external and internal smart contracts, especially relating to consideration, mutual assent and intent to be bound, electronic agency as a specific intent issue, and offer and acceptance.

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An article by two Hogan Lovells lawyers and published by Lexology outlines some of the due diligence steps to take in the age of blockchain age of smart contracts.

Authors of the article are Theodore J. Mlynar and Ira J. Schaefer.

They discuss the need for a traditional analysis of the proposed transaction and negotiated terms, a source code analysis, and the advice that the proposed smart contract be run on a simulator to see how it operates in response to expected and unexpected messages from users and other contracts..

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In an article in the Pillsbury Policyholder Pulse blog, Kimberly Buffington and Cara Adams discuss the question: Will insurance policies become the laboratory to test the thesis behind smart contracts?

“Whether there is room for smart contracts in the insurance context remains to be seen. Generally, the ‘if this occurs, then that’ nature of insurance policies lends itself to the conditional nature of smart contracts,” they write.

There are drawbacks, they explain, writing that it would be unrealistic to expect smart contracts to eliminate ambiguities and resulting disputes any more than such disputes are currently eliminated by traditionally written contracts.

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While the use of smart contracts is tempting, this silver bullet of efficiency and lower costs doesn’t come without potential problems, warns Gregg M. Jacobson of Chamberlain Hrdlicka in an article in Bitcoin Magazine.

Among the concerns he points out are: “First, will a court even consider a computer program to be a binding contract? Second, if disputes arise, where can the parties sue? Last, do the parties have to go to court, or is the less-expensive option of arbitration available?”

In his article, he discusses each of those points.

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Gary J. Ross, writing for Above the Law, takes a look at the potential impact that the use of smart contracts will have on the legal profession.

He offers reassuring prospects: “The smart contract carries out what it is programmed to do, and that’s it. It doesn’t think independently, nor does it provide any reasoned analysis.”

“A smart contract is best for carrying out the simple “if thens” of the agreement. Basically, the first page of the term sheet,” he writes.

Ross is a partner at Ross & Shulga PLLC.

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Jared Butcher, writing in the Steptoe Blockchain Blog, suggest three tools to address smart contract risks: (1) cybersecurity insurance policies, (2) indemnification agreements with outside vendors, and (3) “make whole” agreements among the smart contract parties themselves.

He writes that insurers, vendors, and other contract parties can provide the best source of indemnification, assuming that the proper contractual arrangements are put in place.

Under the heading of cybersecurity insurance policies, he writes:

“One issue worthy of particular attention is the employee exclusion. These exclusions in the policy language should be scrutinized to determine the level of coverage for losses caused by employee errors, which are likely to be a significant source of risk in a smart contract system.”

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A Canadian digital currency exchange (QuadrigaCX) reported recently that a malfunction in a smart contract is responsible for a $14 million dollar loss of the cryptocurrency ether, reports Jared Butcher in the Steptoe Blockchain Blog.

He explains that a software upgrade performed by the company had an error in the code that prevented the smart contract from properly processing incoming amounts of the cryptocurrency Ether. During the time it took to discover the problem, Ether sent to the company’s exchange was “trapped” in the smart contract.

“The potential for new risks and severe consequences arising from smart contracts (compared to traditional contracts) suggests that a re-consideration of indemnification strategies is warranted,” Butcher writes. “Risks arising from coding errors or other human errors are not the product of intentional wrongdoing or a catastrophic event and may not involve any injury to a third party.”

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An alert from Pillsbury Winthrop Shaw Pittman takes a look at some new laws in the United States that provide a clear indication that smart contracts will be impactful.

Authors of the article are Craig A. de Ridder, Mercedes K. Tunstall and Nathalie Prescott.

The article covers the Current legal state of smart contracts and blockchain technology, provides a refresher on smart contracts, discusses upcoming smart contract and blockchain technology projects, and looks at the future of smart contracts.

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Perkins Coie has published a white paper that offers an initial analysis of the legal aspects of five prominent smart contract use cases: digital asset sales and capital markets, supply chain management, smart government records and smart cities, real estate land registries, and self-sovereign identity.

In the paper, available on JD Supra, the authors conclude that legal risk is inherent in each of these subject areas, but that with careful risk mitigation planning, companies can overcome those hurdles to offer effective products and services.

The paper consists of four parts: definition of terms, a review of current literature, five uses of smart contracts, and insight into practical steps a business may take when launching a product or service that uses smart contracts to mitigate legal risk.

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Jared Butcher, writing in the Steptoe Blockchain Blog, says it is no secret that smart contracts have vulnerabilities, but he suggests a mix of best practices to limit potential liabilities that may arise when vulnerabilities interfere with smart contract performance.

“There is potential for manipulation by insiders, which is of particular concern for smart contracts that operate based on ‘proof of stake’ protocols, given the ongoing concerns that those protocols will not be effective in ensuring that the parties play by the rules,” Butcher writes. “Even without intentional interference by hackers or insiders, smart contracts may have software bugs that disrupt performance, and there is the possibility of unintended outcomes if the smart contract’s code fails to anticipate an unusual situation.”

In the post, he offers six best practices to consider when implementing a smart contract.

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Smart contracts are digitally signed promises, which are executed automatically by software code built on blockchain technology. But what are the features of smart contracts that make them more suitable to some sectors than others?

In an article written by David E. Brennan, Jocelyn S. Paulley and Penny Ann Sanders, the English firm of Gowling WLG offers some some points to keep in mind when answering that question.

The authors write that it seems that contracts based on words cannot be totally dislodged and replaced by software code. “However, it is still important to understand blockchain technology, how smart contracts can take advantage of that technology and who can verify that the terms translated into software are the same as those written in roman characters.”

They cover the subject with headings such as smart opportunities, financial services, digital content, supply chain and trade finance, provenance, land transactions, government, machine-to-machine transactions, and challenges to going smart.

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Blockchain consortium R3 has contracted global law firm Norton Rose Fulbright to determine the contractual effect and enforceability of smart contracts, reports Finextra.

The issue is whether, or in what circumstances, smart contacts have legally binding contractual effect, are enforceable and whether disputes arising from smart contracts can be resolved by an automated resolution process built into a smart contract.

The Finextra report quotes Todd McDonald, co-founder and COO of R3: “The past few years have seen a great deal of talk about distributed ledger technologies given the profound impact they will have on the future of financial services. In order to fully realise the benefits of the technology, it is essential that we design smart contracts that are legally enforceable. Working with our partners at Norton Rose Fulbright, we’re exploring various ways to ensure smart contracts meet that threshold.”

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The executive director of the Federal Bank of Atlanta’s Center for Financial Innovation and Stability released a paper on smart contracts and their potential to change traditional legal proceedings, finding: “In many circumstances, smart contracts may eventually be a more efficient way of contracting than traditional paper contracts.”

The Cointelegraph reports that Larry Wall, in his paper titled “Smart Contracts in a Complex World,” explored the inefficiency of paper contracts in legal proceedings, which is primarily caused by ambiguity in the language of the law.

“The majority of contracts that are formed between two parties to ensure the fulfilment of the established agreements are often incomplete, because of the difficulty in stating every possible situation where the contract can be utilized,” according to the Cointelegraph article.

“Wall believes smart contracts demonstrate a series of major advantages of paper contracts,” it continues.

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The Economist asks a straight-forward question about a new relatively contract technology: If smart contracts can be made to work, how automated should business ultimately become?

The article discusses the history of smart contracts since the term was coined in 1994, through the recent debacle of Ethereum’s “Decentralised Autonomous Organisations” venture capital fund that was hacked to the tune of $50 million.

“So far, IT has mainly replaced paper processes,”the article says. “Smart contracts mean a different order of automation: economic transactions are put on auto-pilot. True believers want them to do away entirely with intermediaries, from banks to governments. But they should be careful what they wish for. If smart contracts spread widely, you would take away much of the flexibility that smooths the economy’s functioning. Real-world institutions can adjust when things go wrong. For many years to come, and perhaps for ever, human institutions, flawed though they are, will be a smarter bet than relentless, bug-ridden code.”

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Banks’ interest in smart contracts could lead them to beef up their legal departments in the near term, as the financial industry and regulators alike continue to wrestle with the implications of blockchain technology, writes Brian Patrick Eha of American Banker.

In his article Eha explains that “a smart contract is a piece of software that executes its terms automatically and encodes rules agreed upon by all parties. Smart contracts are decentralized — living on a blockchain — and transparent, viewable by all parties. They can be used to transfer value, and that transfer is triggered in response to certain events.”

“What if smart contracts were to catch on? Ideally, the code would be reusable in the form of templates, cutting down on legal busywork. Just not all legal work,” according to the article.

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So-called “smart contracts” are science fiction realized, write Professor Michael Mainelli, executive chairman of Z/Yen Group and principal advisor to Long Finance, and Bob McDowall, an Associate of Z/Yen. Executable pieces of code stored on a mutual distributed ledger for future execution bind people and payments to actions and outcomes, they explain in their article published by CoinDesk.

In their article, the authors discuss challenges facing blockchain-based smart contracts and make recommendations for how they can be best used in the short term as they mature.

“Most critically, the implementation of the contract requires no direct human involvement after the smart contract has been made a part of the distributed ledger, which makes these contracts “smart,” or autonomous. The code automates the “what if this happens” element of traditional contracts,” according to the article.

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Even though they are still largely theoretical, smart contracts are being hailed as a force that will disrupt a number of industries, write Mark Hines and Niklas Holmberg of Gowling WLG in a post on Lexology.com. However, only superficial attention has been paid to the impact smart contracts will have on contract law and the role of the law in determining where and how smart contracts will be used.

Their post provides an overview of smart contracts and how they work and identifies some of the areas of contract law that we expect will be the focus of jurisprudential change.

They explain smart contracts, blockchain technology, and the legal implications of smart contracts.

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Smart contracts today may be similar to e-commerce in the 1990s – poised for widespread adoption and explosive growth even though it may still be a few years off, writes Oliver Herzfeld, chief legal officer of  Beanstalk, in an article published on Forbes.com. So, to avoid surprises or missed opportunities, it may be worthwhile to start now to consider and explore the possible applications of smart contracts to your industry and business.

“Essentially, a smart contract is software that executes commercial transactions and/or enforces legal agreements in a manner that eliminates the need for intermediaries and their associated transaction costs,” he explains.

Herzfeld adds that this system could have “a huge disruptive effect on (i) car manufacturers, since use optimization would presumably reduce sales; (ii) insurance companies, that would sell fewer car policies; (iii) financial institutions, that would underwrite fewer car loans; and (iv) taxi and ride hail companies, parking facilities and other businesses, that would all be displaced by this process. The resulting commercial and social disruption could be huge.”

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All bitcoin transactions are smart contracts, points out Chris DeRose on AmericanBanker.com. “Many institutions, which are increasingly exploring the use of blockchains for value settlement, have been similarly dabbling in the application and uses of smart-contract technology,” writes the community director of the Counterparty Foundation.

“Smart contract” essentially means “programmable money” or self-automated computer programs that can carry out the terms of any contract.

“The finer points of what programmable money is are still being worked out by enthusiasts, but most agree that it is a financial security held in escrow by a network that is routed to recipients based on future events, and computer code,” writes DeRose.

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