Could Coders Face Civil Legal Liability When Smart Contracts Fail to Meet Legal Standards?

“The creators of smart contracts have invited society to a party they are throwing,”  writes Max Raskin in a new legal paper called The Law and Legality of Smart Contracts. “They say that this party has better food, booze, and music than the party being thrown down the street. But the other party has all of the people, even if the amenities are not as good. Whether society shows up to this new party is an open question. This is because legacy systems exist for a reason. By definition, they work.”

Mr. Raskin, who places the innovation of smart contracts in their ability to execute contracts with computers, concludes: “Both switching costs and uncertainty stand as barriers to the adoption of any new technology. Yet if the value of the new technology is overwhelming, such a change is more likely to occur. One way of reducing uncertainty is by situating the new in the old. While there may be many barriers to the adoption of smart contracts, legal uncertainty need not be one of them. Courts need not upend extant jurisprudence to accommodate smart contract.”

Smart contracts have been a main selling point for the blockchain system called Ethereum, with which premiere financial institutions and multinational technology companies – think the IBM’s and JP Morgans of the world – have experimented. The system, developed by Vitalik Buterin, has ballooned to more than a seven billion dollar market capitalization. The blockchain system’s native crypto-token, ether, currently trades at above $80.

The paper, which appears in the Georgetown Law Technology Review, differentiates between “Strong smart contracts”, which have prohibitive costs of revocation and modification, and  “weak smart contracts”, which do not.

“This means that if a court is able to alter a contract after it has been executed with relative ease, then it will be defined as a weak smart contract,” Raskin writes. “If there is some large cost to altering the contract in a way that it would not make sense for a court to do so, then the contract will be defined as strong.”

Raskin wonders: “What happens when the outcomes of the smart contract diverge from the outcomes that the law demands?”

Courts will likely enforce smart contracts, Raskin states, because “the courts will have more certainty as to party intent because the parties explicitly laid out their terms.”

What’s more, the authors conclude that programmers could face civil legal liability if their code is negligent. “[T]orts could emerge for negligent coding or negligent update that would further ensure smart contracts are drafted in accord with existing legal standards,” write the authors.

Raskin, whose paper’s foundation was laidout by cryptocurrency philosopher Nick Szabo, states: “It is a good rule of thumb that the entity with more guns wins. Here, governments generally have more guns than private parties and so the state’s courts are in a position of enforcing their law over the private law.”

Raskin ultimately concludes that smart contracts represent a new form of preemptive self-help that legislatures or courts will likely recognize.

“While certain unconscionable examples of strong smart contracts may need to be policed,” Raskin writes, “judges and policymakers should foster a climate that treats smart contracts as another form of more traditional agreements.”