Smart Contracts
Rafael Burgos and Paola Colorado from El Salvador, experts in Corporate Law, share this article on smart contracts and their transformative impact on the legal field.
The future of law is closely linked to technological evolution, especially with the arrival of new tools such as smart contracts. The implementation of smart contracts not only proposes the modernization of the contractual mechanisms we already know, but also the challenge of adapting traditional law to an environment where technology gives a modern sense to fundamental concepts that have been the foundation of contractual law for years.
Now, it is important to understand what smart contracts are. Smart contracts are programs stored on a blockchain or data network that execute automatically when predefined conditions are met. Their design ensures transparency, immutability, and security of the agreement, as rules and actions are coded and recorded in a decentralized system that guarantees contract execution, allowing all participants to be confident in the outcome, without the need for any intermediaries.
Beyond their obvious advantages on efficiency and self-execution, smart contracts could present limitations regarding their own strengths, such as autonomy and innovation. One example would be the fact that making changes or correcting errors in the code can be complex and costly (requiring advance developers), lack of parameters or precondition controls, programming errors, and distrust from users, among others. Despite this, they are promising tools in development that will become an effective method for establishing new dynamics of contractual regulation in the future, aimed at streamlining clients'’ business operations.
From a legal perspective, contracts have traditionally been understood as agreements between two parties that create, modify, or extinguish a legal relationship, as long as certain essential elements such as consent, object, cause, and form are met. If any of these requirements are missing, the contract will be null. Therefore, any smart contract, in its structure, must comply with these same requirements to be legally valid.
An example can be found in guarantee deposit contracts, where the depository acts as a third party responsible for settling a guarantee depending on whether or not the condition that triggers the execution of the guarantee in favor of the creditor is met. Through the smart contract, immediate settlement can be configured when the condition specified in its setup is met. The entire process is transparent, secure, and does not require anyone else to intervene, because the contract ensures that the rules are followed as agreed.
This has an impact on trade by facilitating relationships between debtors and creditors by automating processes related to the execution of guarantees, and on smaller-scale transactions, which creates opportunities to expand its application to transactions of greater significance in a broader context, with potential to be explored in various areas of law in its practical application.
To sum up, they have the potential to transform the way legal professionals perform our work, creating efficient mechanisms for conflict resolution, based on the autonomy of the parties’ will.
The information provided by ARIAS® is presented for informational purposes only. This information is not legal advice and is not intended to create, and does not constitute, an attorney-client relationship. Readers should not act upon this information without seeking advice from professional advisers.