What Happens When a Smart Contract is Breached?

Smart Contract

Smart contracts are self-executing programs that are stored on the blockchain and have the terms of the agreement between a seller and a buyer in their lines of code. They aim to make the execution of the agreement between the parties automated, allowing everyone to know what the outcome will be.

Smart contracts provide speed, security, trust, and transparency, which is why so many people love them. But what happens when a breach of smart contract occurs? There are a few things you should know about this if you are constantly working with smart contracts. So, let’s look at what happens when a smart contract is breached.

What Happens When a Smart Contract Is Breached?

Typically, when one party breaches a smart contract, they will be penalized. This could include a supplier that does not deliver their goods by the deadline, in which case a refund is issued to the suffering party.

Contracts are made to establish the legal obligations of all parties involved and to tell them the terms of the relationship. So, if someone signs a contract, they agree to the legal obligations – meaning they also agree that they will be penalized in case they break those rules.

Generally, it is hard to tamper with a smart contract, which is why they are considered so secure. Every party will receive a copy of the contract – so, there will be no new version that is visible to only one party.

Thus, when one of the participants in a smart contract breaks its terms, they may end up being taken to court by the affected party. The other party might even hire a breach of contract attorney to get the best judgment in the case.

There are many breaches of contract cases that occur daily, and smart contracts are not safe from breaches either. It’s important to seek legal help in this kind of dispute or do your best to avoid issues, to begin with. 

How Do You Avoid Problems?

If you want to avoid issues with smart contract breaches, there are a few things that you should pay attention to.

Whether the Platform Meets the Needs of the Parties Involved

One very important thing to take into account is whether the platform through which the smart contract is recorded and executed meets the needs of all parties. Is there any central administrator for the platform, or is it a decentralized platform?

When it comes to blockchains, they are decentralized most of the time. So, when any information gets recorded on them, nobody will be there to get rid of that information or update it. Meanwhile, having a central administrator would allow the information on the contract to be changed by this administrator.

However, before relying on a central administrator, it is crucial to ask where the administrator is, who they are and what abilities they have. For instance, you may want to know whether they are able to fix errors in the ledger. If they can, then you should ask how it happens and in what circumstances.

Also, don’t hesitate to ask whether this is something the parties want.

Multiple Types of Smart Contracts

Smart contracts come in two categories. One of them includes contracts that are agreed upon in natural language and the obligations get translated into code and performed by it. There are also contracts where the obligations are purely defined by the code.

If you want to avoid issues with smart contracts, you should pay attention to the kind you’re going for. Which type would serve your needs and the other party’s needs the best? Keep in mind that contracts, where the code defines the obligations, are more legally challenging.

The Cross-Border Likelihood

Unlike traditional contracts, there are higher chances that smart contracts can be cross-border. They can pretty much assist cross-border financial activity, peer-to-peer transactions, and supply chain management.

Therefore, it is important for all parties involved to make sure the agreement is also recorded in natural language as part of the code or in a separate agreement.

The Code Might Malfunction

You should think about all possibilities when you’re involved in a smart contract. Sometimes, the code might malfunction or might simply not work in the way the parties expected.

There are a few ways to avoid the risk, such as adding a “kill switch” in the code, which can help terminate the process before the completion of the code execution.

Furthermore, parties might want to think and discuss whether there should be any exclusions of liability in case there are issues with the code.

Final Thoughts

When someone breaches a smart contract, they will be penalized for this and perhaps even taken to court. So, it’s crucial to know what could happen if you ever breach a smart contract. On the other hand, you must know what you could do if someone else does this to you. Hopefully, our article was helpful in this regard.

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