[English Translation] Considerations on damages and liability if smart contracts do not function properly

After looking at the title, I thought, hmm, indeed? So I translated it into Japanese, and now let's read it together.

If Smart Contracts Don’t Function Properly — A Consideration of Damages and Liability

A “smart contract” is, at its core, an autonomous computer program that operates on the blockchain, with the contract itself encoded within it.

Smart contracts not only define the rules of a contract (like traditional contracts) but also automatically enforce those rules. Smart contracts operate with if-then conditions, where a single data point serves as the simplest trigger. Examples of fields where smart contracts are currently used (or designed for use) include the following.


These fields tend to involve the transfer of assets or value in some form. Ownership of assets or liens are among the simplest rights that can be tokenized and handled by smart contracts. For example

What Happens If a Smart Contract Doesn’t Function Properly?

When a written contract does not “function properly,” it is usually a matter of interpretation and clarity of drafting. This issue is typically resolved by examining the intentions of the parties at that time. Often, it is also addressed by preparing testimony or documentary evidence to support the situation.

Generally, a trusted third party (for example, an intermediary, mediator, or the judicial system) will assist the parties in reaching an agreement on the outcome or in issuing a binding ruling. Such trusted third parties also possess a legal framework to support them (in law and precedent). If a lawyer was negligent when drafting the contract’s terms, the party may be able to seek legal remedies.

However, with smart contracts, the situation changes. The code itself contains the contract. A frequently cited case of a smart contract not functioning correctly is The DAO.

The DAO was a “decentralized autonomous organization,” established as a venture capital fund and issued via smart contracts on Ethereum. There was no management; instead, participants directly agreed to fund projects according to the terms of the smart contract at the time of its creation.

In June 2016, one participant exploited the characteristics of the code to siphon funds. This “hack” gave rise to two conflicting views on the enforceability of smart contracts.

One view, held by blockchain fundamentalists, was that because the code within the contract recognizes the violation, the outcome is justified by its design. They argued that participants agreed to be bound by the smart contract and thus must comply with any result under that code.

The other view contends that participants, in a broader sense, agreed that the DAO would be used only for funding projects with consent.

Which perspective will prevail in the future remains unclear. The strict view that “the code is the contract” treats the contract’s code as the sole evidence of the parties’ intent, in which case the contract and its outcomes are essentially identical.

In such an environment, participants who want to engage with smart contracts should seek comprehensive advice about what will actually happen when the program is executed.

Due diligence in such cases requires broad expertise. Contracts involve complex programming that may be difficult to understand without specialists in the field.

Practically speaking, it is possible that none of the parties (i.e., the contracting parties, lawyers, or developers of the smart contract) fully understands their own contract, so close communication among the parties will be necessary.