Smart Contracts: The New Code on the Block

If you’re familiar with the concept of blockchain technology, you probably associate it with the high-tech world of computer science and cryptocurrencies, not the practice of law. Blockchain emerged in 2008 as the cutting edge platform supporting the digital currency Bitcoin. But recent trends in blockchain development are demonstrating an increasing need for legal professionals who understand the technology well enough to handle the disputes that result from it. With the rise of “smart contracts,” blockchain is transforming the way that people enter into agreements and complete basic transactions, extending its influence to nearly every industry imaginable.

For complex construction litigation, this means recognizing blockchain’s anticipated role in project management, risk transfer, and contract coordination among the many parties involved in any given project. The ABA identifies the design and construction industries as particularly “ripe” for blockchain application due to the complexity of their “multiple stakeholders and phases.”[1] Theoretically, blockchain technology will not only facilitate, but compel cooperation regarding construction schedule, flow of funds, and eventual maintenance or indemnity obligations. This is due to the “self-executing” and “self-enforcing” nature of smart contracts, posing interesting legal questions about the interaction between these contracts and more traditional methods of contract interpretation and enforcement.


Smart Contracts and Blockchain: How Do They Work?

Smart contracts are digital, self-executing agreements that are automated through a series of coded “if/then” statements. Once set into motion, they use their own built-in enforcement mechanisms to carry out the terms of the contract based on the way events are progressing in the real world. Vitalik Buterin, the founder of one of the largest blockchain platforms in existence (Ethereum), defines smart contracts as:

mechanism[s] involving digital assets and two or more parties, where some or all of the parties put assets in, and assets are automatically redistributed among those parties according to a formula based on certain data that is not known at the time the contract is initiated.[2]

This type of automated redistribution is already carried out in our financial markets through conditional orders, like stop loss orders and limit orders, which trigger the sale of shares at a specified price.  In other words, hard-coded rules perform fixed actions once certain conditions are met.

The idea of smart contracts is nothing new, but a smart contract that is decentralized through blockchain technology becomes an unstoppable “force of nature,”[3] immutable and unmodifiable. Such contracts are spread across geographically diverse devices (called “nodes”), which are all storing and computing the same data at roughly the same time.[4] This enables the blockchain to be preserved even if some nodes or the entire network fails.

Blockchain offers a compelling alternative to placing trust in a single, centralized organization. “Trust imposes risk”[5], and proponents of blockchain hail the technology as removing trust from transactions entirely. In reality, it is more likely to work alongside the established trust-laden framework in a supplemental role, at least for the foreseeable future. Blockchain is poised to enhance a number of major industries by creating similar possibilities such as fully electronic medical records, electronic public property records, and automated loyalty and rewards systems.


Smart Contracts in Action: What Do They Look Like?

The written code comprising a smart contract is tied to the real world through a trigger or sensor called an “oracle.” The oracle acts as a monitor, allowing the contract to determine when to execute various functions without requiring external enforcement.  A simple example of this can be shown through the sale and shipment of goods. A seller may attach an oracle such as an RFID tag or GPS tracker to a package that is about to be shipped. The buyer pays the sale price to the blockchain, which stores the money until the package arrives at the agreed-upon destination. The package’s arrival, as determined by the oracle, automatically triggers the release of funds to the seller. These agreements can be as simple or complex as desired.

In the construction context, this technology shows potential as an all-in-one project management platform in which various project milestones are connected to automated payments. A condominium project could make use of oracles to expedite activities occurring in series. The next subcontractor in line would be able to monitor the progress of the preceding task in real time, reducing delays and improving preparation. The blockchain would also contain a transparent record of contract addenda and change orders. Eventually oracles could be used to “support self-maintenance services, collect rents through connected digital wallets, serve as the platform for tenant voting on building issues, and more.” Whether this technology substitutes or supplements contractual agreements written in natural language, its self-executing nature is sure to give rise to legal complaints.


Developing a Framework

Smart contracts have been described as “collapsing the distinction between agreement formation and execution,”[6] an idea that is pragmatically descriptive but legally misleading. The mere existence and operation of a smart contract does not satisfy the legal requirements of contract formation: offer, acceptance, and consideration. And the fact that a contract’s enforcement is automated will prevent parties from breaching the contract as written, but not from later contending that it was written incorrectly or in a fraudulent or misleading manner. It is inevitable that smart contracts will become the subject of litigation, and when they do, they are likely to disrupt many such well-established principles of contract law.

Many states have already expressly authorized smart contracts as legally enforceable, and others are working on developing regulations to govern their use. California recently passed Assembly Bill 2658, which established a working group designed to evaluate the risks, benefits, and legal implications associated with blockchain technology and smart contracts.


Legal Hurdles

One of the only ways to reap the benefits of blockchain while mitigating its legal uncertainties will be to enter into both smart contracts and conventional agreements, clarifying that the natural language contract is intended to prevail over the smart contract’s execution.[7] The natural language agreements can serve as legally binding “external models,” while the code can simply facilitate the decentralized, automated transactions that make blockchain so appealing. Without an external model, parties to a smart contract will be at the mercy of the tech-savvy professionals who draft their agreements. When possible, courts determine the intention of the parties from the language of the writing alone.[8] When such language is clear and explicit (that is, not ambiguous), it governs.[9] This presents an interesting conundrum for smart contracts. The very nature of an executable program precludes even the possibility of ambiguities, meaning that in these situations, the code of the smart contract would always prevail. Without a controlling external model, the true intention of the parties, whether expressed orally, through email, or otherwise, will likely be reduced to inadmissible extrinsic evidence.

The legal framework governing blockchain technology is still in its infancy, but it won’t be afforded that luxury for long. Blockchains are evolving without anyone’s permission, and their influence is expanding to many industries involving frequent litigation. Attorneys who acquaint themselves with the technology now will have a decisive advantage in face of these potentially revolutionary changes.

[1] Castillo, Yvonne R., et al. (2018) “Blockchain: Five Things to Know” ABA Cover Article, available at

[2] Buterin, Vitalik (2014) “DAOs, DACs, DAs and More: An Incomplete Terminology Guide,” available at

[3] Diedrich, Henning, Ethereum (2016) 7, note 20.

[4] Id. at 94.

[5] K. Werbach (2018) “Trust, But Verify: Why the Blockchain Needs the Law,” 33 Berkeley Technol. Law. Journal 489, 58.

[6] Sklaroff, Jeremy M. (2018) “Smart Contracts and the Cost of Inflexibility,” Prize Winning Papers, 9, available at

[7] ISDA Linklaters “Smart Contracts and Distributed Ledger – A Legal Perspective,” 14  (2017), available at

[8] Cal. Civ. Code § 1639; Cty. of San Diego v. Ace Prop. & Cas. Ins. Co. (2005) 37 Cal. 4th 406, 415.

[9] Ibid.