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The traditional contract model allows parties to facilitate business. Indeed, contracts are popular because they are legally binding for both parties, and each party can seek a remedy in court if they breach the contract. However, technology has meant a new system of contract law has developed – smart contracts. This article will outline what smart contracts are and whether they are enforceable in New Zealand.

What Are Smart Contracts?

Smart contracts are an innovative new way of creating agreements between parties using technology. Indeed, smart contracts utilise blockchain to create contracts. The blockchain is a decentralised peer to peer ledger that was primarily used by many as an exchange for cryptocurrencies until the advent of smart contracts. They are fully electronic, and as a smart contract is decentralised, there is no singular person in charge of the transaction. 

What Is the Benefit of Smart Contracts?

Smart contracts are beneficial because they are fully formed on a decentralised ledger. This means that both parties can set the ‘rules’ of the contract using code. The code then determines if a party has completed a particular task in accordance with the terms of the contract. If it has, it can then deliver money or any other consideration that the contract might contain. It is beneficial because the blockchain acts as a neutral third party to the contract and helps facilitate the adequate performance of the contract. 

Smart contracts can also be much cheaper to put together than a regular contract. This is because you save money on intermediate costs. For example, having to go back to your lawyer after drafting the initial contract can be expensive. 

Smart contracts also encourage transparency between parties. Indeed, each party can see when payment is made and when the performance of the contract is complete. Furthermore, smart contracts are generally more secure than regular contracts. It is much harder to get the upper hand over computer software than an actual person. Therefore, this can encourage more trust between parties.

What Are the Shortcomings of Smart Contracts?

The main disadvantage of smart contracts is the risk that comes with computer code. Even though blockchain is fully decentralised, there is still a risk that hackers could exploit any open-source code.

You may also need to hire a coder to create the contract for you if either party is not well equipped in computer science. This extra cost could be expensive. 

Smart contracts could also encourage unfair terms to be enforced, as consumers may not be fully aware of their legal rights.

Smart contracts could also cause issues if the parties want to vary the terms quickly. If the performance of the contract were to take place, then payment might be distributed before they can modify the contract. Therefore, smart contracts will not be suitable for arrangements where there is a high chance the contract may need to be varied quickly. 

Are They Legally Enforceable?

As long as the contract has the necessary elements, the contract will be legally enforceable. This means that the contract has to have:

  • an offer
  • an acceptance;
  • consideration;
  • intention; and
  • certainty.

If the smart contract does not have any of these elements, then the contract will not be enforceable. The contentious issue that most courts will have with smart contracts is the intention element. This is because people may not be aware that they intend to enter into a legally binding contract. After all, it is not a traditional contract. However, as smart contracts become more popular, this issue will become less of a problem.

Key Takeaways

Contracts help to facilitate business, and the court can enforce them. Smart contracts are a new type of contract that use blockchain to help broker deals. A neutral third party (the computer code) distributes consideration at the right time, reducing the risk that one party of the contract may not live up to their end of the bargain. However, there is a risk that it may not be performed how you want it to. Contracts could also be hacked if they are not secure. Ultimately, smart contracts are enforceable as long as they contain the necessary elements of a binding contract. However, courts may be reluctant to find that parties intend to be binding as they may not have the knowledge to prove intention. 

If you need any legal assistance with smart contracts, LegalVision’s experienced contract lawyers can help. Call us today on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Can anybody enter into a smart contract?

Yes. As long as an individual has the correct infrastructure and the contract contains all the elements of an enforceable contract.

Can I create a smart contract myself?

If you have the coding expertise you can create a smart contract yourself. However, it is always better to hire a coder and work with a lawyer so that you don’t miss anything.

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