HOW COMMERCIAL DISPUTES ARISING OUT OF SMART

CONTRACTS CAN BE RESOLVED

George EC

Introduction
Contracts have been an expression of security and professionalism since the birth of the first
civilizations and this impression is not likely to change as long as such measures remain
valid. However, this does not mean that contracts have stayed the same throughout. Over the
years, their composition and characteristics have seen modifications created to suit the needs
of the time. The latest of these changes has seen the rise of “smart contracts” which are a
digitalised form of traditional contracts that are formulated either entirely by code or in a
hybrid format (both text and code). Smart contracts are created on software platforms that
function based on blockchain technology. Blockchain or distributed ledger technology (DLT)
has gained prominence since its introduction in 2008 by an individual or group of individuals
working under the pseudonym “Satoshi Nakamoto” and has multiple uses in a variety of
areas but is most commonly known for providing a ledger system for cryptocurrencies like
Bitcoin.

Over the course of this short article, the author will be explaining the concept behind smart
contracts, how they work and most importantly, how disputes arising out of smart contracts
can be resolved.

What are “smart contracts” and how do they work?

Smart contracts are digitalized contracts that are similar to traditional contracts in the sense
that they are composed of terms and conditions which are agreed upon between the parties of
the contract. However, the difference lies in the creation of the contract. While a traditional
contract can be made with pen and paper, smart contracts are formulated with the help of
code on a software platform that functions using blockchain technology. As mentioned
earlier, smart contracts are not always made up entirely of code but can also be a hybrid of
text and code. When the specific terms and conditions provided for in the code of a smart
contract have been fulfilled or met, the code will automatically produce the desired outcome,
usually in the form of compensation to the opposite party. In this manner, smart contracts do
not require human intervention during the execution process which further reduces the time
and money ordinarily spent trying to fulfil contractual obligations. Since smart contracts are
based on blockchain technology, an accurate record of information pertaining to each stage of
the contract will be available in the form of “blocks”. From the layman’s perspective, such a
thorough and innovative method should end the risk of disputes arising from such contracts
but unfortunately, this is not the case. In the next section will be discussing the scenarios
related to smart contracts that may lead to disputes.

Types of Disputes that may arise

Any transaction between human beings is potentially open to conflict as we are
argumentative by nature and the same holds true in the case of contractual obligations. Every
stage of the contract, from planning to execution, is potentially liable to conflict. Disputes
may arise over misunderstandings, misrepresentation, fraud, failure to execute the contract or
even an act of god. Smart contracts remove many such scenarios that have led to conflicts in
the past through automation and straightforward execution but have introduced their own
problems while doing so. Issues like faulty coding and inability to amend or terminate the
contract at the will of either party involved are unique to smart contracts.

A prominent feature of transactions made through blockchain technology is the option of

anonymity, wherein the identities of the involved parties are not disclosed. This is meant to
add a certain level of security to the transaction but in the case of smart contracts, this can
end up being rather bothersome. Traditionally, contracts invoke a fiduciary relationship
between the contracting parties and the element of anonymity reduces the level of
accountability and responsibility that a party may hold towards his/her contractual
obligations.

Furthermore, since smart contracts cannot be placed in the same category as traditional
contracts in the legal sense, enforceability and jurisdiction of smart contracts are two
immediate and interdependent issues that may arise in case of conflict. Enforceability of a
contract refers to the power of a court to enforce the contract in case of a dispute between the
involved parties. Laws are quite clear on the circumstances wherein a court may enforce the
terms of a traditional contract on the requisite party but this is not the case for smart
contracts. Jurisdiction refers to the authority of a court to pass orders upon a dispute brought
before it. Since parties to a smart contract may be present in different parts of the world, the
question of prevailing jurisdiction may arise as each party would prefer local jurisdiction in
case of a dispute.
Solutions and Concluding Remarks
The issues highlighted in the previous section are a few of the predictable disputes that may
arise over the course of a smart contract and there could be other issues that are yet to be
identified. With the introduction of new technology or modifications to existing procedures,
there are bound to be certain anomalies that require tweaking and it is almost a certainty that
such errors would be at the very least mollified over time. Till then, the use of smart contracts
should be ideally restrained to straightforward contracts with simple objectives so that the
space for error is miniscule.

Unlike traditional contracts, smart contracts made entirely of code cannot provide clauses that
predict undesirable circumstances and so it is advised to use hybrid models of smart contracts
so such scenarios can be dealt with adequately and in a manner that is agreeable to all parties
involved. In this way, clauses can be added specifying the requisite jurisdiction and manner
of dispute resolution in case of a conflict. Laws regarding procedure and submission of
evidence can also be formulated, specifically focusing on the submission of emails and oral
discussions as evidence of smart contracts. Court appointed experts can provide expert
evidence in case of malfunction due to faulty coding.

However, not all issues can be solved through new laws and precedents. Anonymity and
inability to amend or terminate smart contracts are issues that are better solved by a trained
professional adept in working on blockchain technology. Thus, smart contracts must be used
with caution until the technology has outgrown these small but impactful defects.