Smart Contracts vs Traditional Contracts: Modern Challenges to Traditional Contract Law Principles

Traditionally, entering into a contract is a process laden with extensive negotiation, strategy, and complex language. Recently, however, with the rise of technology, there have been arguments for simplification that have taken shape in smart contracts.

Smart contracts are self-executing agreements with the terms written into code running on a blockchain without the need for third-party intermediaries. In essence, this means that once certain pre-requisites are executed, so is the contract.

This article is an overview of the advantages and disadvantages of smart contracts, case studies, and further examples of unconventional contracts.

Advantages and Disadvantages

There are numerous benefits to smart contracts, chief among them speed and efficiency. Because they rely on digital automation, smart contracts avoid delays associated with paperwork, manual drafting, and human error, resulting in significant time and cost savings. They also benefit from the reliability and transparency of blockchain technology, which can reduce disputes between parties.

However, these advantages come with important trade-offs. Smart contracts carry increased risks of hacking, operate within largely unregulated environments, and are often written by coders rather than lawyers. This creates security and interpretative challenges, and the immutability of blockchain means that errors in the code are difficult, and sometimes impossible, to amend once the contract has been deployed.

Real-world Applications

Smart contracts are predominantly used for automated insurance payouts, transparent supply chains, decentralised finance platforms (such as Uniswap), and real estate transactions, including rental agreements and ownership transfers.

More specific examples include the IBM Food Trust, which is a blockchain-based service software that connects supply chain partners to provide data and insight into a product’s journey, from farm to shelf. This is relied upon by major brands such as Walmart and Nestle.

Other types of contracts have served the different commercial needs. For instance, as a part of their strategy of creativity, clarity and simplicity, Tony’s Chocolonely employs ‘visual contracts’, agreements that use graphics, diagrams, and text to enhance the legibility of contractual terms. With that in mind, visual contracts operate on trust between the parties, which makes them riskier and, in some respects, ambiguous.

Student Re-focus

Many commercial clients are increasingly adopting smart contracts for their speed and convenience. For law students, understanding how they work, and the legal implications that follow, is becoming essential preparation for early practice