How Smart Contracts Can Reduce Your Liability

If you own a business, you’ve probably heard the term “smart contract” at least once.

Smart contracts on the rise in the business world. In fact, some even called 2017 the year of smart contracts. A carefully crafted contract can relieve you of a great deal of liability if things go awry in your company. But you have to make sure you include certain elements within them.

So, what exactly is a smart contract and how do they reduce your liability?

A Smart Contract, What Is It Good for?

You already know retail fraud is a growing problem in commerce. Researchers have been trying to evaluate this issue to come up with solutions. Especially in the case of online stores, retail markets are often duped by fraudulent buyers. This is because online fraudsters can conceal their identity and make huge purchases.

This is why people choose to enter smart contracts. Raskin (2017) defines smart contracts as “agreements whose execution is automated.” Essentially, these executions are affected by a running code that translates legal prose into an algorithm. It determines that certain conditions of the contract are being met and automatically executes solutions if they aren’t. These contracts allow both parties to pre-commit to the terms without relying on a central authority.

It’s like this: say you agree to a smart contract with a local library, stating you’ll return a book by a certain date. The contract says that if you don’t return the book by a certain date, the cost of the book will automatically be sent from your Bitcoin wallet to the library. This is different from a traditional contract, where the library would send you a bill for the late book, giving you the choice to not pay and be in violation of your contract. Your pre-commitment to paying the book with the smart contract ensures less legal issues in the future.

In this format, contracts could be converted to computer code, stored and replicated in the system and supervised by the network of computers that run the blockchain. Smart contracts define the rules and penalties around an agreement in the same way that a traditional contract will. However, they do so while avoiding plenty of legal problems.

Here are the elements to include in your smart contract:

Prepare a Vulnerabilities Memorandum

Before writing up your smart contract, make sure you’re identifying vulnerabilities within smart contract use. This process should include legal, compliance, and business personnel working with the developers. It’s always imperative to know what exactly the “smart” part of your contract does and doesn’t do. Although it seems counter-intuitive, it might be useful to have documentation confirming you took reasonable steps in eyeing an aggrieved party when you’re in court. They like seeing that you can prevent foreseeable risks.

Develop a Backup Plan

Every now and again, a smart contract may fail victim to its own vulnerabilities. This is when having a backup plan comes into play. Even if you already have small business insurance that helps in cases of mishap, it’s important to be prepared when worse comes to worst. It may be as simple as having a team ready to fix bugs that come up in the software, or it could be as complicated as implementing protocols for responding to cybersecurity threats.

Communicate with Other Parties

Sharing information with other parties of the smart contract will help with options for dealing with vulnerabilities. In many cases, the other participants will be your best allies in identifying and neutralizing problems.

Provide Contingencies in Your Contract

Most likely, there will be parts of your backup plan that should be incorporated into your actual contract. Make sure there are alternative procedures that follow in the case of a malfunction as well as correcting transactions that are improperly made. All issues can have solutions in your contractual terms.

Limit Remedies

By all accounts, you should try to limit your contract remedies. Contractual remedies should be tailored to encourage the parties to resolve problems caused by vulnerabilities.

Prohibit Damages

Courts often include terms in your contract that will prohibit liability for lost profits, lost time, loss of use, and other consequential damages. Be sure that they encompass all aspects of the performance of the smart contract.

With these simple steps, your business is sure to be utilizing smart contracts in the best way to reduce liability. Remember to find the right insurance, create the perfect team ready to fight vulnerabilities, and prohibit remedies and damages to your contract. This way, your business will be running as smoothly as possible, without liability claims.

photo credit: art crimes P1080351 via photopin (license)

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