From code to contract: Revolutionising commercial law with smart contracts

As South African businesses and legal practitioners explore the potential of smart contracts, a central question arises: how can these modern instruments be reconciled with the existing framework of South African commercial law?

A smart contract is, at its core, a programme embedded in a blockchain that automatically executes transactions when specific conditions are fulfilled. Unlike traditional contracts, which are written in natural language and interpreted by people, smart contracts operate through code, offering precision through automation. The terms are stored on decentralised platforms, making them transparent to all parties involved. While this brings advantages such as eliminating intermediaries, reducing human error, and enabling faster performance, it also presents legal challenges, especially in jurisdictions where traditional legal principles still apply.

South African contract law, which is based on Roman-Dutch principles, requires four essential elements for a valid contract: consensus, legality, the possibility of performance, and certainty. The Electronic Communications and Transactions Act, 2002 (ECTA), recognises electronic communications and signatures, and potentially provides a foundation for the enforcement of smart contracts. However, ECTA was enacted before the emergence of blockchain technology and was not designed with decentralised systems in mind. As a result, uncertainties remain, particularly regarding the interpretation of code-based terms, establishing consensus where parties may not understand programming languages, and identifying appropriate remedies in the case of breach.

A key challenge in applying smart contracts to legal practice lies in the difference between objective and subjective terms. Objective terms, such as deadlines, payment amounts, delivery requirements, and asset transfers, are well-suited to automation. These can be clearly defined and coded to execute without ambiguity. In contrast, subjective clauses, such as “reasonable care”, “best efforts”, or “good faith”, depend on human interpretation and cannot be enforced reliably through code alone. Courts may struggle to determine whether a genuine consensus existed where the terms are expressed in a programming language rather than natural language.

To address these limitations, many have proposed a hybrid approach to contract formation. Hybrid contracts combine traditional written agreements, which define the overall legal relationship, with smart contracts that execute specific objective terms. This approach allows for the benefits of automation while preserving the ability to apply human interpretation where necessary. Additionally, including arbitration clauses that are tailored to blockchain disputes can provide access to more technologically capable dispute resolution mechanisms, reducing the need to rely on conventional methods that may not have the expertise to interpret code.

Legal systems around the world are beginning to adapt to technological advances. The UK Law Commission’s work on smart legal contracts illustrates how regulatory reform can accommodate technological developments. In South Africa, while some of the current legislation provides a starting point, further judicial guidance and legislative updates will likely be required to offer clearer direction on enforceability and available remedies.

In conclusion, smart contracts present a compelling opportunity to modernise commercial transactions through automation, transparency, and reduced administrative effort. However, their practical implementation depends on a careful balance between legal tradition and technological innovation. By recognising the limitations of code in capturing human nuance and adopting hybrid approaches that combine automation with interpretive flexibility, South African commercial law can evolve to embrace this new chapter in legal contracting. The future of agreements may not lie in replacing lawyers with lines of code, but in equipping them to understand and harness the power of both.