The Social Workings of Contract

Recently, scholars have begun paying attention to the legal limitations of so-called smart contracts. There are several salient critiques: smart contracts may imperfectly capture obligations; they may not fully account for changed circumstances; they may still require external interpretation. Taken together, these issues may well impede the legal utility of smart contracts “in the wild.” But there’s another set of issues at play, too: in the real world, contracts have social utility, and people use them in complex, strategic ways that often don’t align with their legal rights and obligations. These social functions require flexibility—often, the very flexibility that is intentionally short-circuited by smart contracts.

In my recent paper, “Book-Smart, Not Street-Smart: Blockchain-Based Smart Contracts and The Social Workings of Law,” I describe three common contracting practices that illustrate how contracts actually “work” in the social world. People may include contract terms that they know to be legally unenforceable in order to set behavioral norms for their contracting partners; for instance, “pay-if-you-stray” infidelity clauses in prenuptial agreements are generally unenforceable in court, but still communicate expectations about how the parties will treat each other. Or, people might include contract terms that are purposefully vague; particularly in long-term relations where the parties contract with one another repeatedly, it can promote stability to leave some expectations underspecified. Finally, parties might strategically decide not to formally enforce an enforceable contract. The looming shadow of a lawsuit can be enough to encourage people to bargain between themselves, and the outcomes of these bargains are often mutually preferable to what might result from formal adjudication.

Altogether, these uses of contract suggest that contracts are social resources as much as they are legal mechanisms. But smart contracts focus on the technical form of contract to the exclusion of social context; that’s what they’re designed to do. We might think of smart contracts as book-smart, not street-smart. While they may facilitate technically perfect and seamless implementation of agreements, the social friction required to negotiate and enforce a “dumb” contract can, in some cases, be functional and desirable. This doesn’t imply that there is no role for smart contracts in some social settings, but it does suggest that attention to the setting matters a lot. In the paper, I suggest that as a matter of policy, we ought to carefully consider the social characteristics of contracting environments—the goals of the parties, the longevity of the relationship, the availability of reputational mechanisms, and the like—before deploying smart contracts into them.

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