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What are the Legal Issues with Smart Contracts?

Experienced Smart Contract Team

Do you need legal assistance on your smart contract and how it impacts your business? If so, then do not wait any longer to secure the advice of an experienced attorney in smart contract formation, execution, and monitoring.

Although smart contracts facilitate increased transaction speed, accuracy, transparency, and even financial innovation, they carry with them unique legal consideration such as those involving interpretation.

In addition, federal agencies have taken a broad position on regulating smart contract applications. Do not let yourself and your business get dragged into a federal investigation.

At Oberheiden, P.C., we have a dedicated team of Blockchain Attorneys who are experienced in providing comprehensive advice on smart contract applications.

Before undertaking a project that uses smart contracts, make sure you are compliant. Put Oberheiden, P.C. on your side to resolve any uncertainty and boost your compliance.

Put our highly experienced team on your side

Dr. Nick Oberheiden
Dr. Nick Oberheiden

Founder

Attorney-at-Law

John W. Sellers
John W. Sellers

Former Senior Trial Attorney
U.S. Department of Justice

Local Counsel

Joanne Fine DeLena
Joanne Fine DeLena

Former Assistant U.S. Attorney

Local Counsel

Joe Brown
Joe Brown

Former U.S. Attorney & Former District Attorney

Local Trial & Defense Counsel

Amanda Marshall
Amanda Marshall

Former U.S. Attorney

Local Counsel

Aaron L. Wiley
Aaron L. Wiley

Former Federal Prosecutor

Local Counsel

Roger Bach
Roger Bach

Former Special Agent (OIG)

Michael Koslow
Michael Koslow

Former Supervisory Special Agent (FBI)

Chris Quick
Chris Quick

Former Special Agent (FBI & IRS-CI)

Kevin M. Sheridan
Kevin M. Sheridan

Former Special Agent (FBI)

Ray Yuen
Ray Yuen

Former Supervisory Special Agent (FBI)

Dennis A. Wichern
Dennis A. Wichern

Former Special Agent-in-Charge (DEA)

Overview of Smart Contracts

Smart contracts are pre-defined pieces of computer code transferred and stored on blockchain technology.

Smart contracts are formed in a manner that allows them to be automatically executed under certain qualifying conditions—”triggering events.”

In other words, when the triggering event occurs or fails to occur, the terms of the smart contract are automatically enforced. There is no need for approval from a third party. In fact, there is no need for escrow, banks, or any other intermediary.

Smart contracts are immutable. Once the code is agreed to by the parties and transferred to the blockchain, it is irreversible.

Therefore, smart contracts present unique challenges with respect to negotiation, interpretation, modification, and execution.

Negotiation, Interpretation, Modification, and Execution Issues

Smart contracts are an entirely different creature than traditional contracts. The main legal issues arise when discussing contract negotiation issues; contract interpretation issues; the ability to engage in contact modification; and how contract execution occurs.

1. Contract Negotiation Issues:

There are many contract negotiation differences between a traditional contract and a smart contract. Traditional contract making involves a lot of negotiation. Parties may not know all the answers at the negotiation stage and wish to finish the rest of the contract´s provisions later. Or, they may desire to figure out the solution to a problem when it occurs—and only if occurs. With traditional contract making, the parties are allowed to do this. Smart contracts, on the other hand, demand preciseness and objectivity. There is no room for vague or open terms. Computer code is ill-equipped to handle an individual’s or group of individuals´ negotiations. Simply put, many businesses that rely on negotiation and the ability to fill in terms at a later date do not benefit from smart contracts.

2. Contract Interpretation Issues:

With traditional contracts, the parties may have accidentally included a term to which one party interprets one way and the other party interprets another way. Often, the parties will need the assistance of an attorney or sometimes the court to resolve the vague or ambiguous term in the contract. The court will do an analysis and apply multiple tests to see whether the other party should have known about the term´s normal usage. The court will then determine which term should apply. With smart contracts, there cannot be any vague or ambiguous terms written in the code. In a way, because the smart contract is confirmed at the time the code is written and then transferred as a permanent record to the blockchain, there is no such thing as interpretation issues with smart contracts.

3. Ability to Engage in Contract Modification:

In a nutshell, contract modification is only allowed with traditional contract making. When making a traditional contract, the parties to the contract can always modify the terms if everyone agrees. Depending on whether the contract is for a sale of goods or is a contract at common law, the modification may have to be in writing. Either way, modification is very common. This is in stark contrast to smart contracts. With smart contracts, contract modification is not allowed. Once the code of the smart contract is sent to the blockchain, it is immutable. Therefore, modification is not possible. The only way to “modify” a smart contract is to cancel the old one and make an entirely new and different smart contract with the new terms.

4. Contract Execution:

Execution is also vastly different. Traditional contracting will typically require some action on the part of one or both parties in order for the contract to be considered “executed.” If one party refuses to perform their side of the bargain, there is a breach. Depending on the severity of the breach, the breach may be minor, or it may be a material breach. When there is a breach, the injured party generally has some rights available to them such as recission or specific performance, in some instances. With smart contracts, the contract “executes” upon the occurrences or non-occurrence of one of the predefined conditions—the “triggering events.” This is an automatic execution process. Therefore, because execution is automatic, contract breaches are not possible when dealing with smart contracts.

These issues require the services of an attorney experienced in smart contracts and the legal issues surrounding them.

If you are considering using smart contracts for one of your projects or within your business but are unsure of the legal consequences, call or contact us online today.

The E-SIGN Act and UETA

The E-SIGN Act and UETA contain important provisions regarding electronic signatures and electronic contracts and agreements.

The E-SIGN Act (“Electronic Signatures in Global and National Commerce Act”) is a federal law enacted in 2000. This Act provides that electronic signatures and electronic records in interstate and foreign commerce are valid and have legal effect.

In other words, under the E-SIGN Act, contracts entered into electronically are legal and cannot be denied legal effect merely because they are done electronically.

UETA (“Uniform Electronic Transactions Act”) gives electronic records and signatures legal effect similar to paper documents and manual signatures.

Both of these Acts lend support to the idea that smart contracts should also be treated as legally enforceable agreements. After all, electronic records and signatures cannot be denied legal status solely because they are in electronic form.

The key to fully answering the question of whether smart contracts are covered by these Acts is to ask whether the blockchain technology storing the smart contract details is an electronic record.

If so, then the digital signatures associated with the smart contract on the blockchain would then have to be considered an electronic signature.

An electronic record is defined as anything stored by electronic means. An electronic signature includes an electronic symbol or process associated with the record and adopted by the person who intends to sign it.

Thus, electronic records and electronic signature cannot be denied legal effect because an electronic agent was somehow used.

Because smart contracts use electronic code that is self-executing upon the occurrence or non-occurrence of a pre-defined “triggering event,” they very likely fall under the provisions of these Acts.

Need Advice with the Legal Issues of Smart Contracts?

While smart contracts are an innovation, there is still much legal uncertainty surrounding their operation.

From negotiation and interpretation to modification and finally to execution, smart contracts are entirely different than traditional contract making.

Because of this, the regulation of smart contracts is uncertain. If you are looking for advice on smart contracts and the legal issues that could affect your project, then you need the legal services of an experienced smart contract attorney.

At Oberheiden, P.C., our team of smart contracts attorneys can advise you on the most pressing legal issues with smart contracts as well as the current approaches taken by federal agencies when attempting to regulate smart contracts.

Do not wait to get the advice you need. Call or contact us today for a free consultation.

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