BY: SELASIE ATUWO AND LILY OBLIE
INTRODUCTION
Over the years, societies around the globe have conducted business, and trust (a core business element) has been built through institutions and individuals. Traditionally, these institutions and individuals, such as banks, governments, lawyers, and courts, have governed commerce. As digital transactions have grown in recent years, from mobile money usage in Ghana to fintech innovation and the adoption of virtual assets and cryptocurrencies such as Bitcoin in other jurisdictions, the concept of trust in commerce has evolved to embrace technological solutions.
Generally, a contract derives its effect from the parties’ intention, where that intention (expressed or inferred) forms the basis of the parties’ decision. In most modern legal systems, contracts have been documented on paper, signed in ink, and enforced by institutions. Every step of the commercial cycle depended on institutions, including banks serving as custodians and intermediaries for payments, legal professionals drafting and interpreting terms, and courts settling disputes arising from the agreements.
In the late 2000s, Blockchain technology emerged, among other things, to challenge the paper-based method and traditional architecture of trust by enabling applications such as smart contracts. Under this framework, a decentralised method for executing agreements is used, and agreements are enforced automatically by code rather than by intermediary players. Instead of relying on central institutions to authenticate transactions, blockchain distributes verification across a network of independent computers.
In an era when payment systems are rapidly evolving and Ghana advances regulatory frameworks for digital assets under the Virtual Asset Service Providers Act and the Ghana Digital Economy Policy and Strategy, it is pertinent to discuss how this breakthrough technology challenges traditional legal principles. Can code replace legal agreements? What happens when a smart contract fails? This article explores the concept of smart contracts, examining their benefits and risks, their interaction with traditional legal doctrines, assessing regulatory needs and evaluating the availability of legal and equitable remedies within the conventional judicial system.
UNDERSTANDING SMART CONTRACTS
Smart contracts refer to “computer protocols that digitally facilitate the verification, control, or execution of an agreement.” It is a term used to “describe computer code that automatically executes all or parts of an agreement and is stored on a blockchain-based platform.” However, not all blockchain transactions qualify as smart contracts. Take, for example, a Bitcoin transfer on the Blockchain. That becomes merely a movement of value. A smart contract, by contrast, contains operational rules that automate execution.
Smart contracts are (automatic and self-performing) computer code that execute automatically when the contract’s terms have been met. Using these smart contracts, monies may be received or sent without an intermediary, with the contract enforced once each party has fulfilled their obligations.
The concept of smart contracts was first proposed in 1994 by an American computer scientist, Nick Szabo. When Satoshi Nakamoto introduced Bitcoin in 2008, the foundation for practical smart contracts was created. Ethereum later became the first blockchain to implement smart contracts effectively and remains the most widely used platform, alongside others such as Solana and Polkadot.
Smart contracts are widely used in decentralised finance (DeFi), healthcare, supply chain management, voting systems and other use cases, and a key feature of smart contracts is immutability. This means the code cannot be changed by default, making it difficult to reverse or alter the contract once it is added to the blockchain.
A typical smart contract is based on conditional logic, such as “if x occurs, then execute y.” It begins with the parties’ intention. The parties initially determine how the smart contract should be operationalised and set out the criteria for the agreement. Unlike traditional contracts, the requirements are expressed with mathematical precision and translated into software code, and the contract’s provisions or terms are coded in a programming language. Once the contract is finalised, it is published or uploaded to the blockchain, and once the transactions have been verified, it becomes active. After the coding process, the blockchain tracks the predetermined conditions or prompts, such as dates and payments. Once these conditions have been met, the smart contract is activated. For example, two parties involved in the purchase and delivery of goods may use a smart contract application. The manufacturer may set up payments, and the supplier may set up shipments, each to be executed according to milestones or timelines.
THE DUAL NATURE OF SMART CONTRACTS
Smart contracts promise significant benefits, from transparency, accuracy, speed, security and reduced costs. They provide autonomy and savings advantages by eliminating the risk of third-party and broker manipulation and cost, ensuring speed through automation and security through cryptography.
Notwithstanding these benefits, smart contracts come with crucial risks. Code errors become permanent once they have been deployed. One of the most notorious cases is the 2016 DAO hack. The DAO was a decentralised autonomous organisation (DAO) that was launched in 2016 on the Ethereum blockchain to act as an investor-directed venture capital firm. After raising $150 million in ether (ETH) through a token sale, it was hacked due to vulnerabilities in the DAO’s code.
Errors in the code can also feed into the contract, triggering unintended outcomes. Additionally, the pseudonymous nature of the blockchain networks makes fraud easier and accountability harder. These risks do not eliminate the use cases of smart contracts but highlight the need for careful regulatory consideration.
LEGALITY AND ENFORCEABILITY: THE APPLICATION OF TRADITIONAL CONTRACT PRINCIPLES
Smart contracts test the boundaries of traditional legal concepts. A conventional contract must satisfy specific elements to be legally binding and enforceable. These criteria under traditional contract law include offer, acceptance, consideration, intention to create legal relations and capacity.
At first glance, smart contracts may appear to exist outside the familiar terrain of contract law principles. They are written in code rather than in natural language and executed automatically rather than with human oversight. Upon closer review, it may appear that the foundational elements of a valid contract (offer, acceptance, consideration, intention to create legal relations, and capacity) are not entirely absent from smart contracts but rather expressed in code.
Traditional Contract law elements vs Smart contracts
The initial stage of a contractual agreement does not differ significantly from that of a smart contract. Under traditional contract law, an offer is defined in Storer v Manchester City Council
[1974] 1 WLR 1403 as “an expression of willingness to contract on specified terms
with the intention that it is to be binding once accepted.”
In the context of smart contracts, deploying code onto a blockchain may be considered an offer. It may also be argued that deploying a contract is conceptually no different from an advertisement, thereby constituting an invitation to treat, where the other party’s digital signature signifies acceptance. For example, when a developer publishes a smart contract that promises payment upon fulfilment of certain conditions, that code constitutes an offer to anyone who interacts with it according to the stated parameters. These terms are fixed and may be non-negotiable.
Once the proposed smart contract is on the blockchain (the offer by an offeror), it can be accepted by an offeree. Traditionally, acceptance may be expressly made (oral or in writing) or implied (by conduct). It may be argued that smart contracts can be accepted by conduct, i.e., by performing the required conditions in the case of a unilateral contract. The acceptance in the smart contract would occur when the other party interacts with the contract in the manner prescribed by the code. This may include signing the transaction with a private key or sending digital assets to the contract. Ghana’s Electronic Transactions Act, 2018 (Act 772) recognises electronic records and digital signatures. It may support the argument that digital interactions (digital signatures) can constitute acceptance even in the absence of handwritten signatures.
Consideration may be straightforward, typically satisfied by the transfer of cryptocurrency or other digital tokens upon contract execution. Mateja Durovic and Andre Janssen, in “Formation of Smart Contracts under Contract Law” in “The Cambridge Handbook of Smart Contracts, Blockchain Technology and Digital Platforms”, argue that smart contracts do not involve an exchange of promises, as is usually the case in standard contracts, and that this may depart from the concept of traditional contracts. However, they conclude that smart contracts are still contracts. They refer to an example where a “contract to transfer one bitcoin upon the occurrence of an event is not a promise since it does not say “I will pay you one bitcoin if ‘a’ happens”, but rather “You will be paid one bitcoin if ‘a’ happens”, which highlights the creation of a smart contract but does not “commit any party to do” anything.
Proving an intention to create legal relations and capacity is what may be more complex. Does the counterparty’s interaction with the smart contract indicate intent? In traditional contract law, intention is inferred from the context of the transaction. Generally, commercial agreements are presumed to be legally binding, while domestic and social arrangements are typically not. In smart contracts, on the other hand, intention is inferred from conduct rather than by an expression, through the party’s interaction with the smart contract. This digital context is reinforced by Sections 20 and 23 of the Electronic Transactions Act, 2008 (Act 772), which recognise electronic expressions of intent and confirm that agreements concluded partly or wholly through electronic means are legally valid.
Blockchain systems may not verify whether a user is a minor or lacks mental capacity, either, which is a gap which the traditional legal system adequately covers. While the underlying legal rules on capacity may apply, enforcement becomes difficult, especially when the other party cannot be identified due to the blockchain’s pseudonymous nature.
On the issue of whether traditional contract principles are enough, the authors believe that even the most sophisticated code may be incapable of anticipating all contingencies. Although the smart contract may reflect most, if not all, contract law principles to make it enforceable, the code can automate performance but cannot replace the interpretive role of the courts, which is crucial for high-value and complex transactions.
SHOULD GHANA ADOPT BESPOKE LEGISLATION OR POLICY ON SMART CONTRACTS
The question whether Ghana should adopt bespoke legislation or policy frameworks must be examined against existing regulations: the Contracts Act, 1960 (Act 25), the Electronic Transactions Act, 2008 (Act 772) and the Ghana Digital Economy Policy and Strategy.
Ghana’s Contract Act appears to have broad, principle-based terms, without prescribing form, medium or technology for contract formation. This flexibility suggests that Ghanaian contract law may accommodate smart contracts. On this basis alone, it is arguable that smart contracts do not require bespoke legislation overriding traditional contract principles. However, Act 25 does not explicitly address pseudonymous parties or automated, irreversible execution. Nonetheless, Act 772 helps address some of the gaps, and the Ghana Digital Economy Policy and Strategy is highly instructive. Pillar 5 clearly identifies that data governance and emerging technologies are expected to drive Ghana’s next phase of digital growth. Smart contracts reflect this pillar, as they automate digital workflows, promote interoperability, and support innovation, particularly in fintech and the supply chain. This suggests that the strategy anticipates the use cases and role of smart contracts in Ghana’s commerce industry. A significant theme in the Strategy is that Ghana’s regulatory environment must shift from a siloed, sector-specific set of rules to collaborative, future-proof regulation capable of addressing blockchain-based issues.
Notwithstanding these, Ghana could take one of two regulatory paths. It could explicitly define smart contracts and grant them legal recognition, as some U.S. states have done, such as the New York State Technology Bill, which purports to recognise smart contracts in legal and commercial contexts. Alternatively, it could regulate the ecosystem by licensing platforms, imposing AML/CFT obligations, ensuring consumer protection, and taxing digital transactions. This latter approach may be more realistic, given the rapid pace of technology and the Bank of Ghana’s ongoing digital asset regulatory framework. A collaborative, risk-based and future-proof regulatory framework and policy guidance targeting transparency, consumer protection, AML/CFT and tax treatment may be the right approach rather than rigid statutory definitions.
REMEDIES AND DISPUTE RESOLUTION
One of the most challenging legal questions and commentary surrounding smart contracts may not be at the point of formation, but at the post-contract stage. If the smart contract malfunctions, whether through code errors or some malicious exploitation (although blockchain technology promises minimal risk), who becomes liable, and what are the available remedies? This is where technology collides sharply with legal doctrine, and traditional dispute-resolution mechanisms are tested. Some argue that traditional resolution methods by third parties, such as courts or arbitrators, involve high degrees of human intervention that could lead to uncertainty and high cost.
Jurisdiction and Judicial Intervention
A core issue to be determined is whether the courts have jurisdiction and which jurisdiction’s laws apply to disputes arising from smart contracts deployed on decentralised systems such as blockchain technology. In traditional dispute resolution, jurisdiction may be grounded in the parties’ location, the place of performance, or the governing law of the contract. Smart contracts complicate this because they may involve pseudonymous parties, globally distributed nodes and execution that may occur simultaneously across multiple jurisdictions.
The authors believe that the courts’ jurisdiction may be invoked where a party can be identified and a sufficient connection to a particular jurisdiction is made. However, a court cannot force the blockchain to reverse an executed transaction as it is immutable; it may at most order parties to make compensatory or restitutionary payments off-chain. Additionally, despite the pseudonymity, liability may lie with the developer who wrote the code, the user who triggers the contract, or a DAO controlling the system.
Even where jurisdiction has been established, the courts may face a constraint: the transaction cannot be reversed. Blockchains are generally designed to be immutable, meaning that once a transaction is validated and recorded, it cannot be undone. Thus, the court cannot issue a judicial order to compel a blockchain network to roll back transactions. This may, however, shift its judicial intervention from undoing transactions to addressing the dispute.
Possible remedies for breach of smart contracts
In traditional contract disputes, the courts commonly grant remedies such as rescission, specific performance, injunctions or damages. In the context of smart contracts, some of these remedies lose effectiveness.
Specific performance, for instance, may be inapplicable. Smart contracts are designed to execute themselves, and performance typically occurs once the predefined conditions are met. In this case, specific performance offers little value. Similarly, the remedy of rescission, although available, may be impractical as assets already transferred are irreversible on-chain.
Damages may be the most realistic judicial remedy, even if they are not always sufficient. Monetary compensation may be awarded against an identifiable party, developer or platform, depending on the legal basis of liability to cover losses from coding errors, misrepresentation or negligence.
Ultimately, traditional remedies remain available even if practically constrained in smart contract disputes. Remedies could be through precise contractual layering (combining smart contracts with traditional written agreements) and regulatory standards for consumer protection.
CONCLUSION
Smart contracts are more than just a technological innovation. They represent a fundamental shift in how trust and enforcement exist in modern commerce and business, offering efficiency and transparency. By enabling self-executing agreements that operate without constant human oversight, smart contracts reflect this evolutionary milestone.
The authors opine that smart contracts do not exist in a legal vacuum. Their core features reflect some of the long-standing principles of contract law, including offer, acceptance and consideration. Yet, code cannot capture human intent in its entirety and may not anticipate every contingency. Ghana, however, can harness the benefits of smart contracts while maintaining legal certainty and trust by adopting an ecosystem-based approach that balances innovation with accountability and consumer protection.