Conventional Simple Valid Contract
Smart contract is a disruptive technology. What is the impact of smart contracts on the conventional simple valid contracts? You must discuss the six elements of a simple valid contract.
Smart contract is computer enabled software that digitally facilitates, verifies or enforces the negotiations or performance of a contract (Mike, 2017). Smart contract is a technological advancement of the contract process. They allow performance of credible transactions without third parties. The convenience of the smart contracts is further guaranteed in that transactions are irreversible and traceable. Conventional simple valid contracts are basically agreement which is enforceable by law. This type of contracts usually involves written or expressed contracts and requires a third party to witness for them to hold. The two types of contracts facilitate exchange of goods and service in a peaceful way that is conflict free. This implies that contracts are an essential element especially in business world (Mike, 2017).
This type of contract depends on the following elements for it to hold. If one of these elements does not exist, the contract seizes to be valid (Steele, 2009).
Intention to create legal relations must be present among the contracting parties. For a contract to hold, the parties must be willing to fulfill the promises as stated in the contract. Failure to play as per stated promises might see one party sued. During negotiation each party presents its demands which are discussed among the parties. The parties later reach to an agreement which is the signed and documented as a legal contract. Clear intentions to enter into an agreement between parties determine the success of the contract. If both parties do not breach the contract, then its purpose is fully realized
An offer must exist between the contracting parties. A proposal is a proposition extended to the other party. For an offer to remain valid there must be a deadline subject to which the contracting party must adhere to. An example of an offer is a proposition by the company to sell you its products at a discounted rate. The offer is only valid over the stipulated period whereby the offering party expects the other party to accept or turn it down. Where time is not specified in the offer, the offer is only valid for a reasonable duration. However, their things to consider avoiding disputes in case of offer extension. The offering party should not take silence for acceptance of the offer. An offer is different from an invitation to treat in that invitation to treat invites other people to make offers. Invitation to treat example includes displaying goods on a shelf. This is not an offer to the customers; it is just an invitation to make offers to buy the goods at different prices.
Intention to Create Legal Relations
Acceptance is the crucial element in the formation and success of any contract. The contract is only valid if the offeree accepts the offering party’s offer. It is only after accepting the offer the contract should be bound as legal. Acceptance is usually made orally, in written form or sometime the contract may allow conduct as a form of acceptance of an offer. An example of a situation where conduct is accepted as a form of acceptance is in a transaction where the supplier receives the cheque and proceeds to make deliveries. Some rules govern the acceptance if the offeror does not specify the method of acceptance. The postal rule, this rule applies if it is reasonable to use the post for the offer and acceptance, the contract is formed during the time of posting the acceptance letter. Receipt rule, this rule stipulates that the contract is bound on the receipt of a fax message or even email by the offeror. Even if the offeror does not read the message immediately the contract is still bound so long as the acceptance is received.
For the contract to hold there exist consideration. Consideration can be described to as the benefit that the offered party gains out of the offer extended. For instance, a contract between a salesman and the company where a company offers to supply products at a lower price than the market price, the difference in price is the consideration. Any shortfall that may be incurred as a result of the offer is not sued in the court. This element ensures that both parties benefit from the offer and the rules laid down. However, consideration rule can be exempted in a specific contract form called a deed. In this form of a contract, the recipient may not be required to consider the other party. A promise of a gift is not enforceable since it lacks mutual exchange of consideration. This is because the recipient does not pay anything in return.
Capacity to enter a contract is the least but very essential element in contract formation. Both parties should have the authority to make contracts. Since a contract is a legal agreement, underage people are not in a position to enter into a contract. The same case applies to mentally unstable people. Such people with the inability to enter into a contract are usually represented by lawyers or parents in the case of minors. This rule, however, has some exemptions. In case of a contract for necessities, the rule of ability to enter into a contract is exempted. A contract that involves necessities such as food, clothing and sometimes shelter may involve minors may be held responsible. In case the minors breach such a contract, they might be sued in the court of law (Frantz & Nowostawski, 2016).
Offer
The success of the contract is dependent on the free consent of the parties involved. The contract is only valid only if the parties are not subject to any form of pressure to force them subject to agreements of the contract. A valid contract should be free from fraud, misrepresentation of facts or any other form of influence. For instance, where offeror threatens the offeree if they do not accept the offer extended, the contract is regarded as invalid even if the offer is accepted. The offeree may opt out of the contract if they have so long they can prove fraud.
Smart contracts were discovered in 1994 by Nick Szabo. The primary objective of developing these contracts was to cut down the overhead cost incurred in the traditional contracts as well as provide security which is more superior to traditional contracts. These contracting systems heavily borrow the blockchain technology. The terms of the agreement are written into lines of code which are contained in blockchain networks. These contracts are self-executing since they not only define the penalties and rules but also enforce the rules of the contract themselves. With smart contracts, one can transfer money, shares and other valuable things in the most transparent way without service of third parties (Ojo, Adeyemi & Fagbenle, 2006).
Smart contracts allow more trust compared to the traditional trust. The traditional contracts were undermined by trust issues. Traditional contracts usually involved documents which contained the rules and the agreements provided by the contract. Both parties lived with the fear that one party might steal the documents and go ahead to benefit at the expense of the other party (Henderson, 1969) . However, the smart contracts do not involve documents. Due to this reason, there are no fears of document theft. It easy to trust if one enters into a smart contract. Both parties will not need to trust each other to make successful transactions. Everything about the transaction is handled by a fair system that replaces trust.
Smart contracts save both parties on the cost of contracting. The traditional contract involved numerous third parties. For instance, both parties need to involve their lawyers and negotiators. All these parties need to be paid. The agreement is reached after several negotiations and meetings. To conduct every negotiation, the extra cost is incurred by the parties. The fees involved in traditional contracts makes contracting very expensive. On the other hand, smart contracts avoid all the third party and negotiation involved costs making it far much cheaper than traditional contracts. Parties also get to save a lot of time since there are no negotiations which require party presence. This time can be used as an extension of productive time. The time saved provides the party with enough resources to concentrate on fulfilling the demands of the contract (Panayi, 2016).
Acceptance
Safety of the contract is also ensured in smart contracts. Hacking the smart contracts is tough. The data in this protocol is heavily guarded with complex cryptography that ensures maximum safety. Traditional contracts, however, do not guarantee the safety of documents. The document is kept by a third party with each party retaining a copy of the original copies. The data is prone to termination since the third party may be bribed to change the documents. The third party may also be biased or may extend unnecessary favors to one of the parties. The documents may be misplaced altogether leading to a loss of data on the contract (Wong & Brown, 2009).
The smart contract is valid. The effectiveness of a contract may be defined by the ability of any contract to seal all the possible loopholes and to perform the required job within the right time duration. Smart contracts are computer generated which reduces the chances of making errs. This implies they perform the required job excellently (Peters & Panayi, 2016). The efficiency of the smart contracts is ensured by the ability of the contracts to perform within the right time periods. However, this is not the case with traditional contracts (Steele, 2009). The numerous negotiations which are time-consuming undermine the efficiency of the contract. Since traditional contracts are entirely dependent on people’s experience and skill, they are susceptible to errs. Their responsiveness in case of breach of a contract is always slow which implies they are ineffective towards maintaining a successful contract (Kosba, Miller, Shi,Wen & Papamanthou, 2016,).
Smart contracts are a useful foundation for start-ups business. The safety and efficiency of the smart contract make them ideal for new businesses. Smart contracts can be integrated with the internet-of-things and artificial intelligence technologies to create a single platform and deliver better services to customers as well as a more efficient workflow within the organization. The new business that incorporates the smart contracts in their operating system is guaranteed of safety and success. The less errs and high trust level is an opportunity to take up every investment chance presented to the business with less fear of loss due to breaches of the contract. The only smart contract can benefit a business in this way. Traditional contracts pose a lot of uncertainties which limits the ability of a business to flourish (Christidis & Devetsikiotis, 2016).
Smart contracts ensure clear communications which ensure accuracy and efficiency. The smart contract creates no room for miscommunication or misinterpretation during negations. The contract is drawn as a result of the interaction of contracting parties with a computerized system. The system prompts for clear details which ensure fewer communication gaps (Brandstätt, Brunekreeft & Friedrichsen, 2011). The data fed is accurately interpreted since the system is created to perform that duty correctly. This is an exceptional benefit of a smart contract which can also be achieved by traditional contracts.
Consideration
The smart contract ensures enough storage and backs up of the data. The successful contract should record essential details of each transaction. Some very minute details might cause a lot of conflicts between contracting parties. As a result, the contract details need to be well stored. Smart contract records every detail of a particular transaction which is of great essence. The data is then backed up safely which makes the data readily available in case it is needed. In the event the data is lost, the data is easily retrievable, unlike the traditional contracts (Nell, 2009).
Conclusion
The world of business is quickly transforming into more automation. The use of documents and manual systems are slowing down the effectiveness at which business is conducted. The same case applies to contracting. Most companies want to move into fully automated operational systems. The smart contracts are far much beneficial compared to traditional contracts. The smart contract is future of contracting as deduced from the benefits explained above.
References
Bonell, M. J. (2009). An international restatement of contract law: the UNIDROIT principles of international commercial contracts. Martinus Nijhoff Publishers. https://books.google.co.ke/books?hl=en&lr=&id=aQsfAgAAQBAJ&oi=fnd&pg=PR9&dq=traditional+contract+principles&ots=rgLJg2qo1d&sig=pNX9fhC19Lz-UoLsIkPIgysm5NE&redir_esc=y#v=onepage&q=traditional%20contract%20principles&f=false
Brandstätt, C., Brunekreeft, G., & Friedrichsen, N. (2011). Locational signals to reduce network investments in smart distribution grids: What works and what not?. Utilities Policy, 19(4), 244-254.
Christidis, K., & Devetsikiotis, M. (2016). Blockchains and smart contracts for the internet of things. IEEE Access, 4, 2292-2303. https://ieeexplore.ieee.org/abstract/document/7467408/
Frantz, C. K., & Nowostawski, M. (2016, September). From institutions to code: Towards automated generation of smart contracts. In Foundations and Applications of Self* Systems, IEEE International Workshops on (pp. 210-215). IEEE.
Henderson, S. D. (1969). Promissory Estoppel and Traditional Contract Doctrine. The Yale Law Journal, 78(3), 343-387. https://www.jstor.org/stable/794874?seq=1#page_scan_tab_contents
Kosba, A., Miller, A., Shi, E., Wen, Z., & Papamanthou, C. (2016, May). Hawk: The blockchain model of cryptography and privacy-preserving smart contracts. In Security and Privacy (SP), 2016 IEEE Symposium on (pp. 839-858). IEEE. https://ieeexplore.ieee.org/abstract/document/7546538/
Ojo, S. O., Adeyemi, A. Y., & Fagbenle, O. I. (2006). The Performance of Traditional contract procurement on Housing projects in Nigeria. Civil Engineering Dimension,, 6(2), 81-86. https://eprints.covenantuniversity.edu.ng/1652/
Peters, G. W., & Panayi, E. (2016). Understanding modern banking ledgers through blockchain technologies: Future of transaction processing and smart contracts on the internet of money. In Banking Beyond Banks and Money (pp. 239-278). Springer, Cham. https://link.springer.com/chapter/10.1007/978-3-319-42448-4_13
Steele, M. T. (2009). Freedom of Contract and Default Contractual Duties in Delaware Limited Partnerships and Limited Liability Companies. American Business Law Journal, 46(2), 221-242. https://onlinelibrary.wiley.com/doi/full/10.1111/j.1744-1714.2009.01078.x
Wong, T. H. F., & Brown, R. R. (2009). The water sensitive city: principles for practice. Water Science and Technology, 60(3), 673-682. https://wst.iwaponline.com/content/60/3/67
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