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Sunday, September 4, 2016

Are Smart Contracts Unamerican?

One of the in-vogue new tech phrases of the last year or two has been "smart contract."

This generally refers to some computer code effecting a self-executing contract that is supposed to dispense with the need for lawyers or the risk of lawsuits.

In other words, this is a tech unicorn.

Outside the United States, and in the fantasy utopia land between the ears of too many Americans, lawsuits and lawyers are considered a uniquely American hindrance interfering with commerce.

Inside the United States, lawyers and lawsuits are considered a vital and necessary deterrent to bad behavior. Sure, bad actors exploit their use as well, but litigation and access to your day in court provides a useful protection to those who believe they've been robbed, swindled or bamboozled. Plus, it's peace of mind.

Outside the United States, it's really tough being the victim of a predatory business practice. That's why many foreign entrepreneurs come to the United States. And when they go to other countries, guess what? They pick countries which have American-style legal protections and recognize American-style property rights and due process.

The smart contract as envisioned commonly today does not recognize or properly account for these rights. Circumstances change and disputes can arise during the course of performance. A smart contract may not be the best tool in those situations.

In short, today's smart contracts are often fatally flawed. They exchange the prospective and feared contingency (for example, someone trying to welch on a deal) for an actual and quantifiable loss (such as an inflexibility in seeking redress for a dispute arising during performance).

In any other situation, exchanging a possible harm for a second harm much more likely to occur, is sheer madness. So it is here.

If you are comfortable restricting the rights of parties to seek a neutral hearing in court over what they think are legitimate disputes, then the current brand of autocratic, rights-restricting smart contracts are for you.

However, that goes against the grain of the entire trend of foreign capital and innovation moving into the United States. Intellectual capital is the most protected in the United States. So why would our smart contracts pattern themselves after the autocratic solutions of less-free, less-hospitable countries?

Smart contracts have great potential. However, your smart contract must meet several requirements to work for you. It has to be written in conjunction and consultation with seasoned American corporate lawyers. This means someone who understand how contracts are supposed to work, how contracts are enforced in the American legal system and how litigation works. It also means the ideal smart contract lawyer understands how business and commerce works. Business and economic realities are critical to making any deal work.

Unless you have this smart living lawyer involved fully in the process, your smart contract will be nothing more than a lot of brilliant and expensive code, which will be even more expensive to fix the problem it fails to prevent in the first place.

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