Smart Contracts Are No Replacement for a Smart Attorney

 

In New York, a contract is formed when there is an offer, acceptance of an offer, and consideration exchanged between the parties. Usually verbal agreements are translated to a written document that outlines the exact expectations of each person entering into the agreement.  The intention of a contract is that people can negotiate, discuss, and set forth exact rules to govern future disputes.

New York Law has consistently held that the precise words in a written contract must control all disputes.  As recently as this year, the Court of Appeals has affirmed this standard, but riding on the coattails of the standard are the inevitable difficulties apparent in its realization.

If you’ve ever been involved in a contract dispute, you know it is common for people that signed a contract to be funneled through a prohibitively expensive process to resolve it. Sometimes this process hinges on the definition of a single word that may determine the terms of their agreement. The word can be something as simple as the word “with”, “upon”, “cash”, or “bad faith.”

It is highly recommended that, when negotiating contracts, you have an attorney who is knowledgeable about contract law, specifically the pitfalls of misinterpretation.  Even the Courts can get it wrong.  It is important to have an attorney review your contracts for potential red flags and identify words that have been misconstrued in the past.  It can be more cost-effective to over-clarify on the front-end, as it may save you money if things go south.

 

 

Smart contracts are a potential aide in this situation.  While they are not a replacement for good counsel, nor can they avoid the more grey-area pitfalls, they can be a vehicle through which the Courts can preempt a multitude of issues.  In basic terms, smart contracts are self-executing digital instruments that allow for an automatic exchange of whatever services and payment are on the table.

The characteristics of a smart contract are:

  1. They are digital: It involves code, data, and running programs.
  2. They are embedded: contractual clauses (or equivalent functional outcomes) are embedded as computer code in software.
  3. The performance is mediated by technological means: the release of payments and other actions are enabled by technology and rules-based operations.
  4. They are irrevocable: once initiated, the outcomes for which a Smart Contract is encoded to perform cannot typically be stopped (unless an outcome depends on an unmet condition).

Smart contracts require more work and time on the front end to make sure that the parameters are clarified.  This is yet another reason to still have an attorney to review the document, as smart contracts tend to be harder to question once they are set in stone.

One of the most common situations in contract litigation is where a person completes work and the other person doesn’t pay.  The non-paying person usually makes an argument based on a differing understanding of how “work” is defined in the agreement, and it often requires expensive litigation to get your money.  To this end, a smart contract can set up specific parameters for what defines the completion of work and can set aside funds in escrow which will automatically transfer once those parameters are met.

Smart contracts will certainly come with unforeseeable issues and smart contracts may never be able to grasp the more gray areas of contract law, but where there are clear, black and white breaches of your agreement, smart contracts will enable clean, painless contract enforcement. Allowing you to preempt future issues and to have a self-contained, unbiased vehicle for enforcing the agreement.

Most of your lawyer’s attention will shift to helping you negotiate the contract terms properly so that the implemented code perfectly reflects your intentions.  Thus, you will be paying for an ounce of prevention (i.e. clarifying terms beforehand) and saving yourself a pound of cure (i.e. betting your life savings on a judge’s interpretation of your agreement).

It is our expectation that smart contracts will aid in the enforcement of agreements that are complete, clear and unambiguous, leaving less room for parties to force the other into litigation simply by pleading ignorance as to the definition of a word.  In short, smart contracts could enable New York contract law to be what it has always, imperfectly, strived to be.

Just make sure you hire an attorney who is knowledgeable about contract law to review your contract—whether “smart” or otherwise—to save yourself the hassle of having to pay them to clarify it later.

 

 

This article is intended for general informational purposes only and should not be considered legal advice or counsel, nor does it create an attorney-client relationship.

Vivek Thiagarajan is an attorney who focuses his practice on litigation, corporate and not-for-profit law. Vivek represents both plaintiffs and defendants in actions involving contractual breaches, including nonpayment and employment issues, landlord tenant disputes, premises liability, qui tam investigations, and personal injury matters. Vivek can be reached at vivek@morgdevo.com or (585) 672-5500.