Not for distribution without permission from Author

Preliminary Thoughts & Research

Smart Contracts: Error! Code

Not Found!

Jared I. Arcari
June 25, 2018 | Jarcari@law.fordham.edu

Author’s Note: This preliminary thoughts and research paper was written in
fulfillment of a law school course writing requirement. Upon completion of the course, I
remain interested in the topic and will continue to pursue my ideas and research
regarding smart contracts. I intend to continue developing this idea and thesis into a
publishing note or article in the near future. Any feedback, thoughts, or suggestions are
greatly appreciated. Please feel free to contact me at jarcari@law.fordham.edu.
(Draft Date: June 25, 2018)
 Not for distribution without permission from Author

Smart Contracts: Error! Code Not Found!

The fields of law and technology are increasingly colliding as businesses look to

increase efficiency and reduce costs while law firms face pressure to lower costs and

provide agile legal services. The Wall Street Journal and other publications have

increasingly written about “legal tech” becoming a focal point of the future of the legal

field.1 In particular, coverage of blockchain technology as it relates to the legal field has

proliferated over the past couple of years, with almost every major publication

discussing the seemingly endless uses of blockchain, technological developments and

how technologists and lawyers understand the use of such technology.2

While the general discussion around blockchain technology and its legal

implications has reached cacophonous levels, one sub-section of blockchain technology

has remained largely in the background of mainstream discussions until very recently:

smart contracts.3 Smart contracts aren’t a new topic or technology; they were first

discussed in the 1990s as a mechanism to embed “many kinds of contractual

clauses…such as liens, bonding, [and] delineation of property rights” that consummate

transactions between two parties on a blockchain.4 Smart contracts rely on the

automation and interconnectivity of a blockchain to connect the two contracting parties,

1 Sara Randazzo, LexisNexis Snaps Up Legal Tech Startup Ravel Law, THE WALL STREET J. (June 8,
2017), https://blogs.wsj.com/law/2017/06/08/lexisnexis-snaps-up-legal-tech-startup-ravel-law/ (of
particular interest was one of the opening lines of the article, "the company took its latest step. . . toward
turning lawyers into data analysts").
2 Nathaniel Popper, Tech Thinks It Has a Fix for the Problems It Created: Blockchain, N.Y. TIMES (Apr. 1,
2018), https://www.nytimes.com/2018/04/01/technology/blockchain-uses.html (discusses “a range of
corporations and governments are trying to apply the blockchain model – for projects from the prosaic to
the radical”).
3 In the final version of this paper, I will explain in greater detail what a blockchain is, how it operates and
some of the benefits that is making blockchain more mainstream.
4 Nick Szabo, Smart Contracts: Building Blocks for Digital Markets (1996),
http://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool20
06/szabo.best.vwh.net/smart_contracts_2.html.

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exchange the consideration between the parties and record the transaction on a public

ledger. Smart contracts are mostly used for simple transactions that require an “if-then”

function and are often used by clearinghouses and other transaction-oriented

businesses.5

Scholars, lawyers and regulatory agencies are beginning to grapple with how to

deal with smart contracts. Current issues range from securities compliance concerns to

enforcing the terms of smart contracts according to traditional understandings of

contracts law.6 Despite competitive concerns in the legal field, smart contracts cannot

yet handle more complex transactions or code ambiguous language that constitutes a

considerable portion of a lawyer’s billable hours.7 This paper will first discuss what a

smart contract is, how it operates, and how a smart contract may be viewed from a legal

perspective. Next, I will undertake an analysis of the strengths and weakness of smart

contracts is necessary to illustrate the deficiencies of current smart contract models.

Lastly, this paper will conclude by discussing how smart contracts still cannot compute

key legal provisions and concepts that are heavily utilized (and litigated) in traditional

contracts.

5 See Peter Davey, A Tower of Babel: Cyber Regulation for Financial Services, BANKING PERSPECTIVES
(2017), https://www.theclearinghouse.org/banking-perspectives/2017/2017-q4-banking-
perspectives/articles/blockchain-for-banking (“when there are a lot of parties involved in a deal and each
has to fulfill an obligation before the next party can perform its part, a blockchain can be leveraged to
complete one part of the transaction and automatically trigger events for the next party. To take
advantage of the automation, the terms of the deal and the various attributes would need to be agreed on
in advance and then built into the application, making this more applicable for recurring or highly
repeatable transactions”).
6 See generally Confideal Ltd., Are Smart Contracts Legal?, MEDIUM (Oct. 17, 2017),
https://medium.com/@confideal/are-smart-contracts-legal-1cc29c6f15c7 (discussing several factors
determining the legality of smart contracts including the type of contract, jurisdiction, arbitration, and
other factors).
7 See Dean Sonderegger, Blockchain: Can Smart Contracts Replace Lawyers?, ABOVE THE LAW (Feb. 27,
2018), https://abovethelaw.com/2018/02/blockchain-can-smart-contracts-replace-lawyers/.

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PART I: What is a Smart Contract?

A smart contract is a coded program on a blockchain that allows the “exchange

[of] money, property, shares or anything of value in a transparent, conflict-free way

while avoiding the services of a middleman.”8 In less technical and more legal wording,

a smart contract is “a consensual arrangement between at least two parties… an

automated, independent commercial result from the satisfaction or non-satisfaction,

determined objectively through code, of a specific factual condition.”9 In essence, a

smart contract is an instrument that controls the exchange of items between two or

more parties as controlled by a pre-determined and agreed upon code contained within

a blockchain.10 A common analogy used to describe the mechanics of how a smart

contract operates is the classic vending machine: a person exchanges something, such as

a coin, and the programming within the vending machines dispenses the chosen product

once it confirms that the payment has cleared.11 While this is an ultra-simplified

explanation of a smart contract, it helps to conceptualize how the smart contract

operates as the circuit board of the vending machine in handling an arms-length

transaction between two parties.

There are several key efficiencies that proponents of smart contracts argue makes

them ideal contract substitutes for some transactions. Automation ranks at the top of

smart contract’s efficiencies; the integral coding itself is designed to automatically

8 Smart Contracts: The Blockchain Technology That Will Replace Lawyers, BLOCKGEEKS (2016),
https://blockgeeks.com/guides/smart-contracts/ (last visited Apr 2, 2018).
9 David M. Adlerstein, Are Smart Contracts Smart? A Critical Look at Basic Blockchain Questions,
COINDESK (June 26, 2017), https://www.coindesk.com/when-is-a-smart-contract-actually-a-contract/.
10 See id.
11 See id.

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execute the transaction upon completion of the prerequisite action.12 In terms of the

vending machine analogy, the prerequisite actions for both parties requires that the

chosen item is in stock and can be dispensed and the purchaser has inserted the correct

amount of money. Additionally, many commentators note the decentralized nature of

smart contracts is a key point of efficiency because normal contracts “rely on established

institutions such as banks and government to authenticate transactions,” whereas smart

contracts utilize a blockchain’s ability to regulate transactions by simultaneously

confirming the transactions against countless versions of the public ledger.13 This

decentralized ledger system allows for multiple checks and balances to cover each

transaction between parties, whereas traditional contracts, such as a loan administered

by a private bank, are only subject to the oversight of that singular institution. One can

see the benefits of smart contracts in an example involving loans between individuals

where the parties would be best served with a safe, anonymous and secure transaction.

However some commentators have argued the term “smart contract” can be

misleading as it is “typically used to refer to any blockchain program, whether or not the

program creates an [actual] agreement,” for example “even purely operational functions

– such as assigning a value to a variable – have been viewed as ‘contracts.’”14 So are

smart contract even considered legally enforceable contracts at all?

12 See NORTON ROSE FULBRIGHT & R3, Can Smart Contracts be Legally Binding Contracts?, (2016),
http://www.nortonrosefulbright.com/files/r3-and-norton-rose-fulbright-white-paper-full-report-
144581.pdf (last visited Mar 29, 2018) (provides a detailed discussion regarding how smart contracts are
analogous to limit orders for trading stocks where a trader sets a program to automatically buy/sell shares
upon the share price reaching a certain limit, at which time the program automatically executes the order
without further input from the trader).
13 Tsui S. Ng, Blockchain and Beyond: Smart Contracts, BUS. L. TODAY (Sept. 2017),
https://www.americanbar.org/groups/business_law/publications/blt/2017/09/09_ng.html.
14 Jeremy M. Sklaroff, Smart Contracts and the Cost of Inflexibility, CLS BLUE SKY BLOG (Jan. 4, 2018),
http://clsbluesky.law.columbia.edu/2018/01/04/smart-contracts-and-the-cost-of-inflexibility/. For
reference, a blockchain is a public ledger as it is a continually growing ledger of records, transactions and

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There are a slew of articles and posts debating the legal enforceability of smart

contracts in court, which I will discuss in greater detail in a longer Note to come soon.15

Smart contracts, for the time being, are largely considered distinct from the traditional

language-based contracts that businesses, lawyers and law students are familiar with. A

traditional contract is often reduced to four major requirements to be enforceable: an

offer, acceptance by the parties, intent of the parties to enter into an agreement, and

consideration exchanged between the parties to consummate the agreement and its

provisions.16 But a contract normally relies on many more provisions relating to other

terms of the agreement than what is required to cover the traditional four points of an

enforceable contract. Contracts contain complex language and terms and conditions

ranging from termination rights to contingency claw-back provisions even after

performance of the contract has been consummated by either party.17

The legal field is awash with opinions regarding smart contracts, mostly

stemming from smart contracts as a major departure from written contracts. Although

smart contracts are touted as a more efficient way to “cut the middleman out,” the threat

to lawyers has been over-hyped and likely won’t be a major issue going forward.18 Some

other exchanges that is linked, forming a chain, and is available to all parties to compare transactions
against to confirm authenticity.
15 For the purposes of this research article, the breadth of the debate over whether smart contracts are
legally enforceable was too broad to cover. I will cover this issue first and then delve into my thesis
regarding how smart contracts can come to be seen as enforceable agreements by increasing their
complexity and accounting of other legal provisions typically seen in more complex traditional contracts.
16 See Norton Rose Fulbright LLP & R3, Can Smart Contracts be Legally Binding Contracts?, 27-29
(2017) http://www.nortonrosefulbright.com/files/r3-and-norton-rose-fulbright-white-paper-full-report-
144581.pdf.
17 It is important to note that different types of contracts require very different terms, thus the thought
that one type of contract is a one-size-fits-all does not sit well with attorneys. A lease agreement for an
apartment is drastically different compared to a loan agreement from a major lender, whereas the lease
agreement would have extensive liability provisions and the loan agreement would focus more directly on
repayment terms and default provisions.
18 Brett Cenkus, Will Smart Contracts Finally Rid the World of Lawyers?, HACKER NOON (Feb. 18, 2018),
https://hackernoon.com/even-the-best-smart-contracts-wont-put-lawyers-out-of-work-anytime-soon-

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commentators, including Brett Cenkus who has been both on the law and business

“sides” of the table, have noted that business lawyers are still needed to draft the first

contract that will be used as a template, advise clients on what is legally enforceable and

what is not, draft custom contracts, and help determine and define subjective provisions

of contracts between parties.19

Uses of smart contracts for everyday transactions are currently limited to simple

“triggered” transactions, such as exchanges of money for another product which is an

“all-or-nothing” type of contract that the coding can easily handle.20 Although some

businesses and thought leaders “imagine a future where commerce takes place

exclusively using smart contracts, avoiding the high costs of contract drafting, judicial

intervention…and the inherent ambiguities of written language,” that sort of wishful

thinking still appears far off from broad acceptance, especially by the legal community.21

However, the development of smart contracts has even garnered attention from the

American Bar Association, where some authors have admitted that “smart contracting is

a disruptive advancement that will have far-reaching impact for many industries,

including financial services, government, real estate, manufacturing, and healthcare.”22

Thus, while smart contracts seem like a niche business at the moment and a moonshot

to replace lawyers in the future, smart contracts continue to develop and be used by

a224736e0235 (discussing how the implementation of new technologies, such as the internet, has
historically displaced some attorneys but also given other attorneys greater opportunities to develop niche
talents in new, unfamiliar territories for their clients).
19 See id.
20 Refer back to the vending machine example on page 3. Such smart contracts are currently being used
by clearinghouses, brokers and other large-volume, simple transaction-type businesses that required
instantaneous transactions to be cleared, confirmed and recognized by both parties to effectively act as a
middleman between the parties of the agreement.
21 Jeremy Sklaroff, Note, Smart Contracts and the Cost of Inflexibility, 264, 264 UNIV. OF PENN. L. R.
(2017), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3008899.
22 Ng, supra note 13.

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more businesses, industries and are increasingly being accepted as a form of secure

transaction between parties.

PART II: The Benefits of Smart Contracts

There are several benefits to utilizing smart contracts that have garnered support

and have helped to legitimize the use of smart contracts for simple transactions. First,

because a blockchain “spreads monitoring and enforcement among many participants

or ‘nodes,’ in the system,” a smart contract is inherently secure and resistant to

modification or tampering by any party.23 As discussed in Part I, blockchain

technology allows additional checks against abuse or manipulation of the smart contract

due to its decentralized design.24 By spreading enforcement of the smart contract across

the blockchain network rather than a centralized repository, the contract itself is

protected from alterations and other changes, giving both parties peace-of-mind and the

ability to ensure each smart contract is being enforced properly.

The second benefit of smart contracts is the automated self-executing nature of

the “if-then” coding structure. Smart contracts “not only define the rules and penalties

around an agreement… but also automatically enforces those obligations,” once the

consideration between the parties is exchanged according to the details of the smart

contract, it is automatically executed without further intervention from either party or a

third party administrator.25 In particular, proponents generally hold that smart

23 Sklaroff,supra note 14.
24 See id.
25 Supra note 8. An interesting example of the conflict between smart contracts and traditional processes
can be seen in trusts and wills. Traditionally, the administration of a will is expensive and time
consuming, often requiring the exchange of documents and other legal formalities between the
beneficiaries and the administrator in order to release the assets of the estate. However, a smart contract
in this context would greatly reduce the time, administrator hassle and time required to administer an
estate by automatically recognizing the parties as the proper beneficiaries and distributing assets
instantaneously according to the will. As one could see, there are clearly remaining issues including

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contracts help to automate repetitious transactions and reduce human discretion in

executing a contract according to its terms.26 In other words, traditional contracts

require one party to complete an input and then the other contracting party returns the

agreed upon output. This “party-by-party” design requires good faith in both parties to

complete their respective transaction while the other party waits. Smart contracting

ensures that this back-and-forth transfer occurs instantaneously, without interruption,

and does not require continued human input.27

The third most cited reason for using smart contracts comes down to simple

economics: the more middlemen removed from a given transaction, the lower the

transaction costs. Some industry proponents believe that smart contracts can

significantly reduce legal costs and the need for lawyers, noting that some legal

transactions such as transferring inheritances once a person dies could be automated

and potentially threaten entire industries within the legal field that rely on these

mundane but important transactional tasks.28

Lastly, smart contracts reduce follow-up issues after the contract is executed

because the scope of the transaction is limited: the contract is triggered and then

executed fully and irreversibly. By design, a smart contract executes once the

fraud, challenges to a will and other scenarios that often play out during the administration of an estate,
but the ease and time-saving components of smart contracts are hard to ignore from an economic and
productive perspectives.
26 See Max Raskin, Note, The Law and Legality of Smart Contracts, 1 GEO. L. TECH. REV. 306, 306
(2017), https://www.georgetownlawtechreview.org/wp-content/uploads/2017/05/Raskin-1-GEO.-L.-
TECH.-REV.-305-.pdf (discussing how a smart contract “ensures performance, for better or worse, by
excising human discretion from contract execution”).
27 A good example of human interaction/discretion is a bank loan, which often requires a human
operator, typically called the loan officer, to collect documents from the person receiving the loan,
confirming the documents and information is correct, and then releasing the funds after the information
has cleared. This takes time, resources and human interaction between the steps of fully executing an
agreement that is rife for inefficiency.
28 See Lloyd Marino, Blockchain - The End of the Middleman, MEDIUM (June 13, 2016),
https://medium.com/@LloydMarino/blockchain-the-end-of-the-middleman-37d97a67d7f.

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consideration between the parties has been exchanged. This challenges typical contract

formats which often allow for termination rights before the contract executes and claw-

backs of consideration even after the contract has been executed, sometimes years

after.29 Currently, the code behind a smart contract is limited to the time before the

contract is executed; functions after the execution of the agreement cannot act as

clawbacks or other traditional post-transfer of consideration operations. But that has

not stopped some commentators, including major accounting firms such as Deloitte,

from noting that the smaller the scope of the agreement and the more concise the

language, the easier it is for the coders to control the transaction before the final

execution to prevent issues that would require a type of ex post provision to be

enforced.30 As such, many industries including insurance, shipping, and real estate are

testing and perfecting smart codes for simpler operations that reduce the typical cost of

such simple transactions and likely do not require ex post provisions to protect the

parties post-execution.31

Despite the security, autonomy, simplicity and reduced cost of transactions

attributed to blockchain technologies including smart contracts, there are still many

open issues regarding their use as legal instruments across a broad spectrum of

scenarios. It is yet to be seen in the technology sector if smart contracts can be built to

29 See Gretchen Harders & Susan G. Sholinsky, Bonus Compensation and Clawbacks: What Employers
Need to Know, EPSTEIN BECKER & GREEN LLP (June 12, 2009), https://www.ebglaw.com/news/bonus-
compensation-and-clawbacks-what-employers-need-to-know/. Additionally, the authors note that the
Sarbanes-Oxley Act of 2002 even goes so far as to require companies to clawback forfeited salaries and
bonuses from certain executives under federal statute. Thus, clawback provisions are even present in
federal statute, something smart contracts still cannot do.
30 See Jeroen Bulters & Jacob Boersma, Blockchain technology – the benefits of smart
contracts, DELOITTE US LLP (Nov. 15, 2016), https://www2.deloitte.com/nl/nl/pages/financial-
services/articles/3-blockchain-the-benefits-of-smart-contracts.html.
31 See id.

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reliably address the legal concerns that transactional attorneys and detractors argue still

limit their use to simple exchanges.32

PART III: Inefficiencies of Smart Contracts

As alluded to in the end of Part II, there remain several outstanding

inefficiencies that must be addressed before there can be any real discussion of smart

contracts being applied to more complex transactions in the legal context. These

inefficiencies largely revolve around three main issues: flexibility, uncertain legal

enforceability and lack of more complex legal concepts such as conditional terms and

ambiguity.

Smart contracts are currently used to handle repeated simple transactions that

largely only require an “if-then” input-output code. Smart contracts, while well-adapted

for these transactions that many don’t even see as full-blown legal contracts, lack

flexibility as they only perform a simple discrete function.33 Many corporate attorneys

argue that they largely are responsible for custom contract drafting that rarely fits

within a predetermined pattern.34 A smart contract is a one-size-fits-all approach and

lacks adaptability to “unplanned modifications” in responding to unforeseen, ex post

events. 35 As is often the case, those unforeseen events and the required provisions to

address such events in the contract are difficult to contemplate at the outset of the

32 See "Dev_zl", Ethereum Development Walkthrough (Part 1: Smart Contracts), HACKER NOON (Jan. 14,
2018), https://hackernoon.com/ethereum-development-walkthrough-part-1-smart-contracts-
b3979e6e573e.
33 Many transactional attorneys are quick to point out that smart contracts (1) aren’t all that smart and (2)
aren’t really contracts. However, most smart contracts do have all the elements of a legal contract and
thus should not be dismissed as quickly by the legal community.
34 See Brett Cenkus, Seriously? Smart Contracts Won't Get Rid of Corporate Lawyers Either?, CENKUS L.
(2018), https://www.businessattorneyinaustin.com/smart-contracts-wont-get-rid-of-corporate-lawyers/
(last visited Apr 8, 2018).
35 Sklaroff, supra note 14.

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coding. Thus, smart contracts can leave gaps in coverage for ex post events that

traditional contracts ordinarily cover.36

In addition to the aforementioned short-comings of smart contract coding, smart

contracts face uncertain legal hurdles, regulatory conflicts and other legal

misconceptions that has thus far prevented widespread adoption or acceptance. Since

smart contracts are built on a decentralized platform, there is no centralized authority

for deciding disputes or administering notices to parties, and how to enforce these types

of contracts.37 As such, smart contracts are difficult to analyze under existing

compliance and regulatory schemes which often require end-to-end tracking of the

transactions and verified identities of the parties to be compliant with most national and

international agencies.38 Further, there is a general misconception that smart contracts,

because of their automatic trigger to execute the agreed upon transaction, are immune

to contract law and “remove the potential for disputes” since they are an automated

program that cannot be faulted by human error or dispute.39 While the automation

certainly removes human input and consequently the opportunity for human error, the

coding of a smart contract itself is still subject to human error and intervention.

However, smart contracts face an uncertain legal future as governments, regulators,

36 In addition to clawbacks, there are other unforeseen events that can occur after the execution of an
agreement between the parties due to one of the parties not performing as promised. This can include one
of the parties discovering that a representation made by the other turned out to be false or is commonly
used in private equity funds to clawback fees from previous investments in the portfolio to offset costs
later on. See Bruce Kirsch, In Plain English: The Private Equity Fund General Partner Clawback
Provision, REAL ESTATE FINANCIAL MODELING (June 7, 2013), https://www.getrefm.com/model-for-
success/in-plain-english-the-private-equity-fund-general-partner-clawback-provision/.
37 See Norton Rose Fulbright LLP & R3, supra note 16, at 27-29.
38 See id.
39 James Rogers, Harriet Jones-Fenleigh & Adam Sanitt, Arbitrating Smart Contract disputes, NORTON
ROSE FULBRIGHT LLP (Oct. 2017),
http://www.nortonrosefulbright.com/knowledge/publications/157162/arbitrating-smart-contract-
disputes.

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banks and other institutions begin to pass regulations and rules regarding the use of

smart contracts in more transactions.40

As discussed briefly above, because smart contracts are located within a

blockchain network, they lack a significant connection to the outside world where the

performance of the parties actually takes place in most transactions.41 Smart contracts

are housed on a blockchain, and thus lack insight into the “outside world,” effectively

still requiring some intervention from outside resources to determine when and if a

party has not performed their obligation in the rea world.42 Currently, substantial

performance rendered to a smart contract would be interpreted by the code as no

performance: there is no degree of discretion available in smart contract coding.43

To discuss the above inefficiencies in further detail, smart contracts lack two

major legal concepts normally operative on contracts law: conditional terms and

termination rights. Colloquially, these would be the “buts” or “unless” in a traditional

contract that reside in provisions governing everything from termination for default to

clawback of employee compensation post-closing. “Conditional terms” in the context of

this paper represent a broad list of legal provisions used in contract law to protect

parties against a multitude of issues that can arise during a contract such as a

bankruptcy of one of the parties or their inability to complete the requirements on their

40 See Hossein Kakavand, Nicolette Kost De Sevres & Bart Chilton, The Blockchain Revolution: An
Analysis of Regulation and Technology Related to Distributed Ledger Technologies (Jan. 5, 2017),
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2849251 (last visited Apr 2, 2018) (noting that
“on the regulatory and legal side, many issues have been raised in terms of privacy, security and risk.”).
41 See Raskin, supra note 23, at 316.
42 See David Hahn, Christopher Kelley & Matthew O'Toole, Smart Contracts Need Smart Corporate
Lawyers (Feb. 17, 2018), http://www.potteranderson.com/newsroom-publications-OToole-Kelly-Hahn-
Discuss-Why-Smart-Contracts-Need-Smart-Corporate-Lawyers.html (noting Smart contracts may require
intermediation by or with external parties or services… for example, a particular smart contract might not
be fully automatable and self-executing; it might execute instead upon the happening of an external event
or might need to interact with an external party to effectuate performance”).
43 See id.

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side of the agreement in time for the proposed effective date. Termination rights, the

“unless” part of a potential smart contract code, also cover a gamut of potential issues

normally spelled out in a traditional contract.44

As many transactional attorneys will point out, the lack of an ability to state in a

smart contract’s code “but if X happens, then Y does not occur and the consequence is

Z” prevents smart contracts from being seriously considered for more complex

transactions. Complex operations such as the aforementioned are common in legal

contracts where it might be stated more eloquently “if Party A does not produce the full

product by X date, then Party B may deduct a portion of the purchase price for the

product as consideration for lost economic opportunity suffered by Party B.”

Contractual obligations and their respective penalties are meant to set expectations that

the parties have for one another and are not necessarily limited to the “if-then” scope of

operation covered by current smart contracts.45 Furthermore, contracting parties often

use ambiguous language to offer an opportunity after the contract’s execution to rebut

the performance of the other party. Some traditional commercial contracts contain

contingencies for the “.001%” chance that an external event occur and often include

subjective measurements such as “best efforts” or “commercially reasonable efforts” to

allow the parties to negotiate later or dispute the other party’s actions in court or

arbitration. Currently, there is no documented way to insert subjective reasonableness

measurements in smart contracts, severely limiting contracting parties who wish to

benefit from automation but still require legal protections.

44 Another interesting perspective comes from a whitepaper produced by Linklaters which posits that the
automation of smart contracts can have further unintended consequences for a party that has the legal
right to exercise a termination right but chooses not to do so for various reasons. See ISDA & Linklaters,
Smart Contracts and Distributed Ledgers – A Legal Perspective, 15 (2017).
45 Karen Levy, The Social Workings of Contract Hacking Distributed (Jan. 17, 2018),
http://hackingdistributed.com/2018/01/17/what-contracts-are-and-arenot/.

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Termination rights, or the “buts” of traditional legal contracts, normally include

basic provisions such as “but if X happens before the effective date of this agreement,

then this agreement is void and the parties may terminate with[out] penalty.”

Regrettably, termination rights are limited due to the self-executing nature of smart

contracts and the performance often cannot be voluntarily stopped by the parties once

the smart contract commences.46 Some commentators note that smart contracts should

contain a “fail safe” in the coding that allows the contract to be terminated in certain

scenarios by either party to the contract, or potentially by third party administrators

who oversee the smart contract.47 Whereas a legal contract often contains numerous

termination provisions providing respite from obligations due to force majeure or the

bankruptcy of a party, smart contracts are either fully executed upon the threshold

consideration being fulfilled or not executed at all.48 With no ability for the parties to

terminate the agreement for the litany of issues that arise in the real world, contracting

parties are left with little recourse if they utilize current smart contracts. As I will discuss

further in Part IV, there are potential solutions on the horizon, but the technology and

acceptance by the legal community must first develop to enable these solutions.

Overall, smart contracts lack several key aspects of traditional contracts. While

smart contracts are more efficient in many senses, more secure, and in some respects

cost much less than paper contracts prepared by attorneys, their inefficiencies still

burden their ability to replace traditional contracts. Until smart contracts are able to

46 See Raskin, supra note 26, at 311 (noting that there is limited ability for a smart contract to account to
scenarios requiring termination either during or after the execution of the agreement because; “unlike
non-smart contract whose performance can be stopped by the parties either voluntarily or by court order,
once a smart contact has been initiated, by definition, it must execute”).
47 See Cheng Lim, T.J. Saw & Calum Sargeant, Smart Contracts: Bridging the Gap Between Expectation
and Reality, OXFORD BUS. L. BLOG (Jul. 11, 2016), https://www.law.ox.ac.uk/business-law-
blog/blog/2016/07/smart-contracts-bridging-gap-between-expectation-and-reality.
48 See id.

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account for the “but” or “unless” provisions common to most traditional contracts,

lawyers can breathe a sigh of relief.49

PART IV: Error! That Function Cannot Be Completed.

While the legal profession is often depicted as slow to change and resistant to

innovation, legal-tech is a burgeoning field of technology and law that is developing to

assist clients and lawyers be more efficient and lower transaction costs.50 Smart

contracts are an efficient tool for many simple transactions between parties, yet their

adoption for more complex transactions has been stymied for the reasons discussed

above.51 Simply put, many of the provisions of a traditional contract, such as

conditional terms and termination rights, cannot be executed by a computer code

existing on a blockchain yet.52 There are several fundamental weaknesses of smart

contacts that must be addressed first before smart contracts can begin to execute more

complex transactions and become a tool in the transactional lawyer’s arsenal.

One of the key components missing in smart contracts is something I would refer

to as “external awareness.” To summarize, smart contracts are housed on a blockchain

and thus lack insight into the external world and events occurring outside the

blockchain. Such events such as a court order, force majeure, a work-stop order occur

49 To stress an earlier point made by several sources, transactional attorneys aren’t losing their jobs any
time soon. Much of the existing literature from the legal community so far is fractured; some lawyers
arguing that smart contracts are the bane to the lawyer’s future income and others arguing that lawyers
will still be needed to handle transactional work. See Cenkus, supra note 18.
50 See generally Jasmine Ye Han, How Blockchain Technology Is Transforming the Legal Industry, BNA
(Feb. 20, 2018), https://www.bna.com/blockchain-technology-transforming-n57982088958/ (noting
that “blockchain technology is now being used to build tools and infrastructure that help lawyers draft
contracts, record commercial transactions, and verify legal documents… two examples of such tools and
infrastructure are OpenLaw and Integra Ledger”).
51 See id.
52 See Zack Korman, Smart Contracts and Contracts as Code, L. TECH FACTORY (Dec. 9, 2017),
https://lawtechfactory.com/blog/smart-contracts-and-contracts-as-code/ (arguing that “the problem
isn’t that the assets aren’t digital or that automated processing has to occur on someone’s server. The
problem is that the terms we include in the contract cannot be verified by a computer”).

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in everyday contracts and require the parties to adapt according to the provisions in

their contract. Currently, smart contracts lack the ability to determine whether an

external event is occurring and, more importantly, whether that external event is

enough to trigger a responsive provision in the contract such as determining whether

efforts of the party is commercially reasonable or whether a breach is “material.”53 The

ambiguities in traditional contracts such as “reasonable” are often the most litigated

provisions of a contract and are designed to account for these external situations that

can greatly impact the parties. Ambiguity allows parties to agree upfront to the terms

with the ability to disagree later on, whereas smart contracts do not allow for

disagreement after execution.54

Litigation concerns are a serious consideration whenever two contracting parties

sign an agreement, where “as clear as the contract seems when it is signed, a crafty

litigator can come along years later after a dispute has arisen to make the contract a

miasma of confusion;” ambiguity is placed in many contracts to allow for future disputes

to be litigated.55 Parties may not intend to dispute the other party’s behavior in every

contract, but it is a form of ex post “insurance” for parties if an issue does arise during or

after the contract is executed. So, why can’t smart contracts capture such an

arrangement, and why does that hold back smart contracts from taking on more

complex transactions?

A common example of the benefits of ambiguous language in a contract is a share

purchase agreement where the parties represent and warrant that there are no lawsuits

53 See id.
54 See id. The article discusses in further detail how smart contracts, despite being deemed “smart,” are
actually closed-off from the outside world, often to the detriment of the parties who want to use smart
contracts but need to account for external events.
55 Gregg L. Weiner, but is it clear? Avoiding ambiguous contracts, ABA BUS. L. SECTION (Jul. 2001),

https://apps.americanbar.org/buslaw/blt/bltaug01_weiner.html.

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against the company that are likely to “materially affect” the value of the purchased

shares. In this example, there are actually several low-probability – but high value –

lawsuits are pending against the company and its current shareholders which, in their

representations, determined were not material enough to warrant disclosure.56 A smart

contract - utilizing current technology and coding - cannot determine whether low

probability pending lawsuits are enough to trigger a breach of this representation of the

seller. In comparison, a seasoned litigator might be of the opinion that even the slight

probability of a high-cost lawsuit is enough to seek damages for a breached

representation. Perhaps more concerning for a smart contract in this situation, once the

transfer of consideration has occurred, there is no ability for the smart contract to

reverse the transfer or recoup damages.

For these reasons, innovations in smart contracts should be seen as the beginning

of a growing field, but not an existential threat to traditional contracts yet. Smart

contracts, as they are coded today, simply cannot effectuate more complex transactions.

If proponents of smart contracts wish to utilize smart contracts for more complex

transactions, we first must understand how to code in ambiguous language into a

blockchain system that is inherently built to eliminate ambiguity. An “if-then” function

is purposely built to remove ambiguity, unnecessary delay and human errors from the

“equation” of a contract. However, the equation of a traditional contract is a system of

legal prose designed to give parties greater flexibility and future opportunities for

disputes. Therefore, before we discuss smart contracts replacing lawyers, we need to

understand whether a computer code can understand and interpret ambiguous

56 See Korman, 2017.

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circumstances, recognize external events and allow parties to dispute the transaction

and seek damages post-execution.

Potential solutions to these short-falls are difficult to find in current scholarship

on smart contracts.57 Perhaps most authors have taken the stance of attacking smart

contracts rather than understanding, from a legal perspective, how to solve their

inefficiencies to better serve as a tool for attorneys in an increasingly digitized world. It

is my opinion that two key areas that could be addressed immediately are how the

coding architecture is built and post-execution enforceability through intermediaries

and other “neutral” third parties.58

Further research should be conducted to determine if some legal concepts can be

coded into the set of rules that embodies the actual coding of a smart contract, such as

accounting for ambiguous terms or executing future termination rights. This would

require two efforts to be made. First, smart contract experts must determine how to

best create modules in the smart contract’s code to represent scenarios such as “a

material breach by a party of provision X shall mean either party has been served

lawsuits that, if awarded the full damages sought by the plaintiff, costs greater than 5%

of the current assets of the company.” This scenario could likely be litigated in a

traditional contract dispute between the parties, as the seller would argue that the

lawsuits are low probability and likely not to incur the full penalty while the buyer might

argue that the possibility of losing 5% of the company’s assets is a material breach.

Secondly and more importantly, there would have to be standards agreed upon by the

57 Although a whitepaper by Linklaters does make some general recommendations and forward-looking
statements regarding potential solutions. See ISDA & Linklaters, Smart Contracts and Distributed
Ledgers – A Legal Perspective, 17-18 (2017).
58 For instance, the whitepaper by Linklaters discusses lawyers acting as “oracles” for smart contracts by

being neutral third-party intermediaries to govern, advise and enforce smart contracts between parties.
See ISDA & Linklaters, Smart Contracts and Distributed Ledgers – A Legal Perspective, 18 (2017).

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law community that would act as objective determinations that could be inserted into

smart contract coding.59 Judges, lawyers and scholars would have to come together to

decide which situations constitute a material breach, what percentage of a party’s assets

is considered to warrant a breach, and countless other provisions that are constantly

litigated.

Furthermore, current smart contracts are executed and completed on the

effective date and thereafter are powerless against either party. If smart contracts are to

be used in more complex transactions, coders would have to develop “long-lasting” code

that survives the execution of the agreement and exchange of consideration and

continues to be enforceable post-execution. One potential solution is a designated “safe

place” within a blockchain that may act as an escrow account between the parties until a

later-designated time. Much like an escrow agent in a typical scenario acts as an

impartial holder of the consideration until both sides have properly completed all the

terms of the agreement, an “escrow region” should be created where smart contracts can

continue to be enforceable even after execution and where those smart contracts can

extract consideration from the violating party and return that consideration to the

damaged party.

PART V: Conclusion

Smart contracts are an exciting and growing field within the blockchain

“universe” and continue to develop more coding to fit more transactions. Their self-

executing and secure design make them valuable to many different parties wishing to

efficiently consummate transactions between parties. While smart contracts are efficient

59I intend to discuss this in much greater detail in a finalized Note. The notion of pre-determined
objective determinations for smart contracts might initially seem outlandish, but it is fully possible if a
governing body with enforcement abilities was assigned to the task.

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and represent a cost-saving technique that will likely continue to develop, they also lack

several key features of traditional contracts that makes them un-usable for many

contract situations. They cannot be recalled, altered, disputed or provide parties with

future opportunities to litigate the terms or actions of either party. While traditional

contracts are often rife with ambiguous language, that language provides security to

both parties to later dispute the outcome of a transaction. Smart contracts can certainly

handle the actual execution and exchange of consideration of a traditional contract, but

they have yet to develop enough to handle ambiguities that traditional contracts, and the

parties using those contracts, rely on.

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