With the rapid evolution of technology in today’s time and the UAE’s aim for Blockchain technology to evolve, smart contracts have started to slowly become part of mainstream legal practice within the United Arab Emirates, which raises concern about the applicability of such contracts in contrast to traditional ones. This essay will explore the definition of smart contracts, their application in DIFC and UAE law, and their respective advantages and disadvantages.
Smart contracts, while there is no single consistent definition to them, are contracts that are automated and enforceable agreements and stored in blockchain, which is a database that stores data in blocks.[1] Smart contracts are automatic agreements and perform automatically, efficiently executing the contract’s terms written in code. Despite being seen as a new invention, vending machines can be argued to be a classic example of a smart contract, which means they have existed for a long time and are just getting more advanced over time.[2] The government of the UAE launched the Emirates Blockchain Strategy 2021 in April 2018, intending to take advantage of Blockchain technology and transform 50% of government transactions into blockchain platforms, including interest in smart contracts.[3] The DIFC has reinforced this idea with the introduction of the world’s first Blockchain court in order to investigate disputes arising from blockchain and make the system even more efficient.[4] This helped support and encourage the use of smart contracts and blockchain technology within the UAE.
There has been a constant debate on the legality and enforceability of smart contracts, with academics overestimating their authority in contract law and practitioners voicing concerns about the legal status of such contracts because, unlike traditional contracts that take force using natural language, smart contracts use computer data and rules which results in questions about their validity.[5] Nevertheless, smart contracts in the UAE are subject to the same rules and regulations as traditional contracts and hold the same level of enforceability. Article 12 of Federal Law No.1 of 2006,[6] On Electronic Commerce and Transactions, confirms this. Stating that a contract can be enforced by computers without the need for direct involvement of individuals. The DIFC also recognizes smart contracts and their legal status and has been active in ensuring more research and investigation on such kinds of contracts.[7]
There are numerous advantages smart contracts add to the system. Smart contracts save up on time and resources. Because of their automated nature, there is less need for human intervention and no need to scan and correct for errors introduced by them.[8] They also offer a high level of transparency. Smart contracts are typically used in financial services, and the level of transparency makes it so anyone can access and track the progress of a smart contract. They also add a sense of security and trust in businesses as individuals do not have to trust each other’s reliability. Parties can rest assured knowing the agreement will be fulfilled. These contracts also cannot be tampered with or changed, so the information displayed is of high accuracy.[9] Traditional contracts, in contrast, are usually slower and more susceptible to human error. They require hours of editing and numerous documents to ensure all terms and conditions will be executed as agreed. Parties also struggle to trust each other during transactions, in which smart contracts eliminate the need for trust as it automatically executes itself without intervention or biases.
However, smart contracts are not free from flaws. Blockchain itself consumes high levels of energy. It requires a lot of electricity, and this energy could be not environmentally friendly.[10] Smart contracts run on code, which means they run the natural risk of flaws and bugs. While this risk is minimal, it is still a concern. The terms of a smart contract also cannot be modified once it has been created, which means parties cannot change their mind after such a contract is made, and transactions are irrevocable, which poses ethical concerns. They can also be considered rigid due to operating purely on logic.[11] Traditional contracts offer more flexibility when it comes to parties changing their minds. Smart contracts are more suited for business transactions, royalty distributions, and financial services, while traditional contracts are more suited for minor and less technical situations. The existence of smart contracts does not mean traditional ones need to go away; instead, it addresses situations where traditional contracts fall short and offer a better alternative.
In conclusion, with the UAE’s intention to implement more blockchain technology in transactions and DIFC’s introduction of Blockchain courts, smart contracts offer a new platform in which contracts can exist. With their advantages and disadvantages, smart contracts have specified uses in which they excel and things they lack. As contract law evolves and smart contracts continue to be researched and developed, they will continue to be used and regulated along with traditional contracts as per the demands of society and the legal system.
Bibliography
Primary sources
UAE Legislature
Federal Law No. (1) Of 2006 Concerning Electronic Transactions & Commerce, article 12
Secondary sources
Journal Articles
Golosova J and Romanovs A, ‘The Advantages and Disadvantages of the Blockchain Technology,’ 2018 IEEE 6th Workshop on Advances in Information, Electronic and Electrical Engineering (AIEEE) (IEEE 2018)
Matei G, ‘Smart Contracts – Support for Successful Businesses’ (2022) 26 Informatica Economica 28
Papantoniou AA, ‘Smart Contracts in the New Era of Contract Law’ (2020) 1 Digital Law Journal 8
Qiu M, Lu Z and Zhang C, ‘Research on Blockchain-Based Smart Contract Technology’, Smart Computing and Communication, vol 13828 (Springer 2023).
Savelyev A, ‘Contract Law 2.0: “Smart” Contracts as the Beginning of the End of Classic Contract Law’ (2017) 26 Information & Communications Technology Law 116
Websites
(Dubai blockchain Policy V.2 – Digital Dubai) <https://www.digitaldubai.ae/docs/default-source/publications/dubai-blockchain-policy.pdf?sfvrsn=4a4bb396_4> accessed 28 November 2023
‘Emirates Blockchain Strategy 2021: The Official Portal of the UAE Government’ (Emirates Blockchain Strategy 2021 | The Official Portal of the UAE Government) <https://u.ae/en/about-the-uae/strategies-initiatives-and-awards/strategies-plans-and-visions/strategies-plans-and-visions-untill-2021/emirates-blockchain-strategy-2021> accessed 28 September 2023
TenTwenty | Webdesign W& E| D, ‘DIFC Courts and Smart Dubai Launch Joint Taskforce for World’s First Court of the Blockchain’ (DIFC Courts) <https://demo.difccourts.ae/media-centre/newsroom/difc-courts-and-smart-dubai-launch-joint-taskforce-worlds-first-court-blockchain> accessed 28 November 2023.
[1] Qiu M, Lu Z and Zhang C, ‘Research on Blockchain-Based Smart Contract Technology’, Smart Computing and Communication, vol 13828 (Springer 2023).
[2] Alexander Savelyev, (2017) ‘Contract law 2.0: “smart” contracts as the beginning of the end of classic contract law’, Information & Communications Technology Law, 26(2), pp. 116–134.
[3] ‘Emirates Blockchain Strategy 2021: The Official Portal of the UAE Government’ (Emirates Blockchain Strategy 2021 | The Official Portal of the UAE Government) <https://u.ae/en/about-the-uae/strategies-initiatives-and-awards/strategies-plans-and-visions/strategies-plans-and-visions-untill-2021/emirates-blockchain-strategy-2021> accessed 27 November 2023.
[4] TenTwenty | Webdesign W& E| D, ‘DIFC Courts and Smart Dubai Launch Joint Taskforce for World’s First Court of the Blockchain’ (DIFC Courts) <https://demo.difccourts.ae/media-centre/newsroom/difc-courts-and-smart-dubai-launch-joint-taskforce-worlds-first-court-blockchain> accessed 28 November 2023.
[5] Alexandros A. Papantoniou, ‘Smart Contracts in the New Era of Contract Law’ (2020) 1 Digital Law Journal 8.
[6] Federal Law No. (1) Of 2006 Concerning Electronic Transactions & Commerce, article 12.
[7] DIFC Courts (n 4).
[8] Gheorghe Matei, ‘Smart Contracts – Support for Successful Businesses’ (2022) 26 Informatica Economica 28.
[9] ibid.
[10] Julija Golosova and Andrejs Romanovs, ‘The Advantages and Disadvantages of the Blockchain Technology,’ 2018 IEEE 6th Workshop on Advances in Information, Electronic and Electrical Engineering (AIEEE) (IEEE 2018).
[11] Gheorghe Matei, (n 8).
Author:
Shadin Nagmeldin- First-year student LLB Honours Law
Middlesex university Dubai
Disclaimer:
The article presented here is for informational purposes only and is not a substitute for legal advice. If any of this information is to be acted upon, it is recommended to seek expert advice.