Smart Contracts: happily ever after?

Nowadays, many services appear to offer a more or less viable environment for concluding smart contracts, but few of them offer solution in case a conflict arises. They try to sell us smart contracts as some kind of universal salvation from all the evil. It’s true that the nature of blockchain is able to some extent to eradicate fraud and forgery, which are a characteristic of contemporary transactions. But is it possible that smart contracts will become another legal unicorns? One thing to be kept in mind is that on the other side of both wallet numbers sits a human being, who is, as we all know, prone to mistakes. Thus, it boils down to the fact that any smart contract platform that is unable to prevent its users from having go to the court fails to justify its main purpose — to reduce the possibility of external interference which is associated with state authority. With that in mind, by virtue of the reasons explained in our previous article arbitration is the most preferable supplement to smart contracts.

“I’m good at everything, including drafting contracts”

First, one has openly to admit the fact that being a good producer of toothbrushes, he may have scarce or even no expertise in drafting international sales contracts so as to foresee all the possible outcomes and incidents. Having a knowledgeable decision-maker on your side, who understands both smart contract technology (at least in general) and has specialized knowledge of a specific industry will prevent numerous problems that may and will occur, regardless of all the advantages of blockchain. A smart contract may succeed in disbursing loan parts and managing payments. But should a borrower’s default take place, the seemingly impeccable technology will fail to address the situation properly. Another bonus is that arbitrators are bound by a confidentiality clause which guarantees maximum data integrity and limited discovery.

Waiting for an arbitrator to come…

Second, arbitration doesn’t happen on its own. That is to say, in case your smart contract contains no arbitration clause (and in the majority of services it doesn’t) it is unlikely that you will succeed in getting an arbitrator to deal with your problem. Instead you will have to bring a case to the court. Not to delve into too much legalese, an arbitration clause is the part of your contracts where the parties decide what will happen if the dispute arises at some time in the future. If poorly drafted, this brief, usually one-sentence long phrase may cost you a fortune (which makes it somewhat similar to programming). So make sure your smart contract provider offers you one. Another advice on that would be that it is better to avoid a jurisdiction whose local laws make smart contracts illegal.

Some happy-end smart contract arbitration cases

By the way, blockchain powered arbitration is not a sci-fi concept, or something to be practically attained in some distant future. In fact, in July this year, a Blockchain Smart Contract Arbitration was conducted. Interestingly, this was not the work of cryptocurrency enthusiasts. Instead CMS Hasche Sigle (one of the leading commercial law firms in Germany), have made a successful test-run. CMS developed the so-called Blockchain Arbitration Rules governing the procedural aspects of arbitration proceeding, which among other things allowed for documents and pleadings to be verified via the blockchain.

If the conservative part of our society, (to which lawyers indisputably belong) becomes the pioneer of smart contract technology with blockchain powered arbitration, this is the ultimate sign that we are talking about the technology bringing the fourth technological revolution on its tail. Moreover, there already exist ready-made platforms for creating smart contracts available to anyone, with in-built arbitration module. Confideal is among such platforms, as there is no need to even leave the platform to resolve a dispute.

Notwithstanding all the hype that smart contracts have created, disputes will not completely cease to exist, so it will be expedient to consider adjustments to the dispute resolution process in advance to not give up the brave idea of decentralization that smart contracts give us.

Maybe once we might say “they used a smart contract and lived happily ever after”, but this is still too far ahead.