Short answer: no, at least not completely and at least not in the short term. For the foreseeable future, smart contracts will supplement, rather than replace traditional legal contracts. ## Smart Contracts Are Suited to Handling Some But Not All Aspects of a Traditional Contract Its still very early days in adoption of smart contracts and at this stage the chief benefits are those that arise from automation [[Benefits of Smart Contracts]], i.e. 1. cutting costs 2. increasing speed of transactions 3. reducing errors Automation of contract management is not necessarily new: banks have been using software to write checks and track payments for many decades. What is new with smart contracts though is that the management is by a ***neutral algorithm*** [[Smart Contracts -- Fundamentals#Management by Neutral Algorithm]] i.e. an algorithm that is not controlled by either party. But management by an algorithm only works for provisions that are expressible in conditional logic. [[Benefits of Smart Contracts#Smart Contracts Need Conditional Logic]] i.e. "if then" statements. 1. for a residential lease: if it is the first of the month, then the rent is due 2. for a music licensing agreement: if someone downloads a song, then the composer gets paid 3. for an insurance policy: if an insurance claim has been submitted, the carrier has to respond within 30 days 4. for a derivative: if the price of jet fuel exceeds a certain amount, then the holder of a derivative gets paid based on a formula (see [[Derivatives]]) This works for many contract provisions, but at the same time the world is messy. And many centuries of experience with contracts have taught us that certain aspects need flexibility 1. for a residential lease: the tenant is responsible for any damage to the property ***reasonable wear and tear*** excepted 2. for a music licensing agreement: the composer will be responsible for ***reasonable legal fees*** if the licensee has to defend against copyright claim 3. for an insurance policy: the policy holder must take ***reasonable steps to limit losses*** (see https://www.lawinsider.com/clause/mitigation-of-loss) 4. for a derivative: a defaulting party must give "***reasonable notice***" once it reasonably believes that if it is not going to be able to pay as agreed. Theoretically, perhaps, we could imagine providing an algorithm some criteria for determining "reasonableness" but for the time being, commercial entities are unlikely to trust an algorithm as a substitute for human judgment. (see [[Lessons from the Derivatives Industry]]) ## Understanding the Pieces of a Contract To a first approximation, you can divide the provisions of a contract into two piles 1. Operational or operative provisions, aka "deal points" aka "business issues" aka "the essence of the deal" 2. Non-operation provisions, aka "legal stuff" aka "what happens if things go south" To cut to the chase, 1. generally speaking those operational provisions will include at least some provisions that can be handled by smart contract while 2. the non-operational provisions, aka "legal stuff" will include a lot of mushy language about "reasonble notice" that, at least today, cannot be handled (or cannot be handled well) by "conditional logic" As Charles Fox explains in "Working with Contracts" >For example, the operative provisions of a contract to sell the assets of a business would include >1. a description of the assets >2. the calculation and method of payment of the purchase price >3. the mechanics of transferring the assets > >An asset sale contract containing only these operative provisions would be a very short document, legally enforceable but not addressing many of the other important issues that buyers and sellers care about. What if there were a material problem with the assets that th ebuyer did not discover until the closing? . . . What if the seller caused damage to the assets or the business prior to the closing? >These are the kind of issues addressed in the [non-operational] provisions: representations and warranties, covenants, conditions precedent, remedial provisions and definitions.[^1] To get more specific, under a typical contract to lease equipment would include, the lessor would be required to 1. keep the equipment insured 2. maintain the equipment in accordance with the manufacturer's specifications 3. operate the equipment in accordance with applicable laws 4. not use the equipment as collateral for a loan 5. not sell or transfer the equipment to anyone else 6. permit the lessor to periodically inspect the equipment 7. use the equipment only for specified purposes [^1] ## For the Foreseeable Future, Smart Contracts Will Supplement Rather than Replace Traditional Legal Contracts Right now, sophisticated commercial entities want to combine 1. the benefits of automation with 2. reassurance that if things go south, they have the protection of the courts (see [[Lessons from the Derivatives Industry]]) ### "Happy Provisions" of a Contract can (sometimes at least) be Automated Generally speaking, again, to a first approximation, the provisions that can be automated are going to be from the "operating provisions" e.g. "A agrees to pay B, X dollars on Date Y based on formula Z" (see [[Smart legal contracts Advice to Government#Obligations Suitable for automation]]) Let's call these the "happy provisions" because these are the parts of the contract that matter when everybody is happy and things are going right ### "Unhappy Provisions" of a Contract Are Messier and Best Handled by a Traditional Contract Generally speaking the other "non-operative" provisions of a contract are harder to express in logical if-then statements. They are there to deal with a messy world, where unexpected things happen and unforeseen disputes arise. (see [[Smart legal contracts Advice to Government#Obligations not suitable for automation]]) With apologies to Tolstoy, "Happy [contracts] are all alike; every unhappy [contract] is unhappy in its own way" (see https://en.wikipedia.org/wiki/Anna_Karenina_principle) In other words, it is relatively easy to predict how a contract will go right. It's much harder to predict how a contract can go wrong, and parties want to be able to rely on courts, applying traditional contract law principles to traditional contracts, when something goes wrong. ## The Challenge Now Is to Build "Centaur Contracts" That Combine the Benefits of Smart Contracts and Traditional Contracts Chess Grandmaster Gary Kasparov coined the term "Centaur Chess" https://jods.mitpress.mit.edu/pub/issue3-case/release/6 to refer to chess played by a team made up of humans and machines. The next phase of contracts will be "Centaur Contracts" that use automation, where possible to improve performance on the operating provisions of a contract while maintaining human judgment, with all the messiness that entails, to deal with our messy world. # Sources [^1] Working with Contracts, by Charles M. Fox (2008)