(Smart) Contracts Without Litigation

Smart contracts (potentially) eliminate law suits from a breach of contract. That is good news for anyone who enters into a contract. The potential risk of a lawsuit from a breach of contract inevitably increases the cost of doing business.

A smart contract reduces or eliminates the risk of lawsuit. This is good news to the business owner.

Lawsuits are Expensive!

As a litigation attorney, I have brought my share of breach of contract claims. Therefore, I know first hand that these contests can last for years.  And, that is if the other attorney is only sort-of good. Accordingly, lawsuits add great expense to the cost of doing business.

Lawsuits also carry emotional costs. Parties should never underestimate the negative effects of the the emotional costs. The degree of nastiness in a lawsuit depends upon many factors. The nastier the lawsuit the worse the emotional costs.

Smart Contracts Reduce Risk

In start contrast, smart contracts potentially eradicate the risk of breach of contract lawsuits. Accordingly, with the risk reduced lawsuit, the cost of business is greatly reduced! A smart contract works because it is self-executing.

Self-executing means that upon the occurrence of one triggering event, the reciprocal event occurs.

An Example

Thus, if the first event to the contract fails to happen, the smart contract will prevent the second event to happen. So, let’s consider an example.

I go to the local car lot to buy a car and find a car I like. The car lot agrees to sell me this car.  The car lot agrees that I can take the car after I leave a downpayment. To keep the car, I agree that I will pay the car lot a fixed amount each month until the car is paid off. No problem, right? This is a traditional contract.

Now, after a few months of making payments, I miss a payment. The car lot might let me keep the car. Then, I miss a second payment. Now the car lot is getting nervous that I will not pay anymore.

The car lot might sue me to get the car back (notwithstanding repossession). If this is a smart contract, the car will automatically revert back to the car lot. Thus the costs of doing business no longer include attorney’s fees. No lawyers. No legal fees.

Contract Drafting Takes on Greater Importance

In the event that a term of the smart contract is breached, the contract fails to execute. As a result, the parties to the contract return to their pre-contract condition. This happens by operation of the smart contract.

Thus, the need for courts, lawyers, and lengthy lawsuits is practically eliminated. The parties to the smart contract agree to be bound by the terms of the contract. In addition, the parties agree to be held to whatever outcome the smart contract determines.

However, when parties to a contract agree to be bound by the determinations of the contract, the parties are advised to carefully consider the terms of the contract. Thus, transactional attorneys become more significant to smart contracts.

Smart Contracts and the Blockchain

Smart contracts are part of the blockchain. They enable the blockchain to work efficiently and effectively.  The terms of the contract are written in computer code. Smart contracts reduce the need for trusted third parties to verify the transactions.

Thus, smart contracts reduce the costs of doing business by reducing fraud, arbitration, and enforcement costs.

Smart contracts are a dynamic and exciting part of blockchain. But, smart contracts raise as many questions as they solve. Check back here often as we continue to explore smart contracts.