As an immutable, transparent, and reliable electronic database Blockchain allows transactions in many different sectors to be carried out quickly, efficiently, and automatically. Undoubtedly, smart contracts running on the blockchain have a significant role in this. With smart contracts, transactions such as cross-border fundraising, digital rights management, syndicated loans, NFT trading, or trade finance can be completed more quickly, at less cost, without human intervention.
When smart contracts first became popular with the Ethereum blockchain, we often encountered the following sentences: Smart contracts work on the principle of code is the law. Whatever things are coded matters, the smart contract code executes them exactly and spontaneously, regardless of the rules of law. Thanks to these features, in smart contracts, which guarantee a contract to be fulfilled, there won't be a breach of contract.
However, over time, the events in the blockchain ecosystem showed that the transactions carried out with smart contracts might also result in undesired and unpredictable results. For example, there may be bugs in the smart contract code. The oracles that provide data to the smart contract may enter incorrect data, or some other technological errors may be encountered. There might be a dispute between the parties regarding what exactly is decided, in other words, is coded in the smart contract.
Transactions performed with smart contracts are not immune from legal rules. When a dispute arises regarding smart contracts, the parties of the transaction will seek their rights based on the rules of law when they want to recover their losses or return to the situation before the transaction.
National state courts or arbitration boards may have jurisdiction over legal disputes arising from smart contracts. The parties can determine how they want the disputes arising from the smart contract to be resolved and place them in the smart contract code or draw -an off-chain- roadmap by traditional means. If the parties do not specify how the disputes arising from the smart contract will be resolved, these disputes will get before the national courts.
It is very difficult for courts to determine whether they are competent to resolve disputes arising from crypto assets and smart contracts or which country rules will be applied to this dispute. Because, besides the element of foreignness, due to the pseudonym structure of the blockchain, it may not be possible to determine who the parties of the transaction are. However, the rules regarding the determination of the applicable law and the jurisdiction of the courts generally require certainty about the parties and nature of the transaction.
Should the courts resolve the dispute according to the law of a place where the parties of a transaction are located? Or according to the law of a place where the software is located? Or should the law of a place where the subject of the transaction exists will be applied? In this last possibility, it is really difficult to qualify the assets subject to the transaction made with the smart contract. Also, today, almost all judges do not have the skills to understand and interpret the smart contract code.
Legislators and policymakers should consider solutions that take into account the unique nature of smart contracts. Traditional judicial methods will be insufficient in terms of evaluating smart contracts and determining legal remedies that take into account the characteristics of smart contracts. Therefore, it seems possible that we may encounter specialized courts on crypto-asset and smart contract disputes in the near future.
One thing is set: Smart contracts need their own dispute-resolution methods. Dispute resolution clauses placed within smart contracts can ensure efficient and fair resolution of smart contract disputes. In this time that Web 3.0 technologies are on the rise, decentralized and flexible online dispute resolution methods are expected to become widespread.
In this regard, various steps have already been taken: Kleros, for example, offers an online arbitration mechanism that runs on the Ethereum blockchain and where smart contract disputes can be resolved. “Digital Dispute Resolution Rules” to be applied in on-chain relations in the UK has been published. These rules are expected to provide fast and low-cost resolution opportunities for disputes in the digital world. The US-based organization JAMS which provides alternative dispute resolution services has published the “JAMS Rules Governing Disputes Arising out of Smart Contracts” rules specific to smart contracts.