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Code as Contract: A Jurisprudential Challenge

The term "smart contract" is something of a misnomer. These constructs are neither inherently smart nor necessarily contracts in the legal sense. What they are - lines of code that execute automatically when predefined conditions are met - represents a fundamental challenge to contract law as it has been understood for centuries.¹

TLDR:

• Smart contracts can in many cases be legally enforceable in Australia under existing contract law principles - the Electronic Transactions Act 1999 (Cth) supports electronic contract formation
• The critical risk is the "code-contract gap" - divergence between what code does and what parties expect - which requires hybrid legal structures combining on-chain automation with off-chain documentation
• DAOs face significant legal uncertainty in Australia; unlike Wyoming's DAO LLC legislation,² Australia has no DAO-specific framework, leaving participants potentially exposed to partnership liability. Daimon Legal strongly recommends use of traditional legal entities such as trusts and limited liability companies to mitigate risk in this area.
• Pre-deployment legal review is strongly recommended - once smart contracts deploy to immutable blockchains, options for remediation narrow dramatically
• Disputes require both technical expertise (blockchain forensics, code audits) and legal strategy; traditional remedies face limitations given transaction irreversibility

Traditional contracts depend on interpretation, enforcement, and remediation - processes mediated by courts, lawyers, and ultimately human judgment. Smart contracts bypass this machinery entirely. When code executes, it simply executes. There is no arbiter to consult, no room for contextual interpretation, and rarely any mechanism for equitable adjustment when strict application produces unjust results without the involvement of those controlling the smart contract's underlying protocol (for example a DAO community using their governance tokens to remediate an adverse outcome or, in more extreme cases, reversing or forking the entire blockchain).

This creates a tension that lies at the heart of smart contract law. Code may be deterministic, but commercial relationships are not. Parties enter agreements with expectations that may diverge from what code actually does. When that divergence materialises, legal questions multiply: What did the parties actually agree to? Does the code constitute the agreement, or merely its implementation? Who bears responsibility when automated execution produces unexpected outcomes?

Daimon Legal advises on the legal dimensions of smart contract deployment - from pre-deployment structuring to dispute resolution when things go wrong.

Are Smart Contracts Legally Enforceable?

The question of enforceability is frequently asked but often misframed. Smart contracts do not replace contract law - they exist within it. The elements of contract formation under Australian law - offer, acceptance, consideration, intention to create legal relations - must still be satisfied for a binding agreement to exist.³ Code alone may not establish these elements; surrounding circumstances, communications, and documentation all inform the analysis.

The UK Jurisdiction Taskforce's 2019 Legal Statement on Cryptoassets and Smart Contracts concluded that smart contracts can satisfy requirements for contract formation, and that code can define contractual obligations.⁴ While not binding in Australia, this analysis from senior English judges and practitioners provides persuasive authority given the shared common law heritage. The Statement confirms that "a smart contract is capable of giving rise to binding legal obligations" and that "a natural or legal person can be a party to a smart contract even where other parties do not know that person's identity."

What You Need to Know: The Electronic Transactions Act 1999 (Cth) provides the statutory foundation for smart contract enforceability in Australia.⁵ Section 8 establishes that transactions are not invalid merely because they took place by electronic communication, while section 14 confirms that contracts can be formed by automated message systems. This means a smart contract that satisfies common law requirements for offer, acceptance, consideration, and intention is legally binding - the automated, coded nature of the agreement does not prevent enforceability.

Australian courts have not yet provided comprehensive treatment equivalent to the UK Legal Statement, though general principles support similar conclusions. In Stellard Pty Ltd v North Queensland Fuel Pty Ltd [2015] QSC 119, the Queensland Supreme Court confirmed that electronic communications can form binding contracts where the essential elements are present.⁶ The principles apply equally to smart contract formation.

The practical question is not whether smart contracts can be enforceable, but how to structure arrangements so that legal enforceability is clear. This typically requires documentation that sits alongside code - defining the legal relationship, allocating risks, and establishing dispute resolution mechanisms.

Daimon Legal drafts legal frameworks that complement smart contract implementations, creating enforceable agreements that account for the distinctive characteristics of automated execution.

The Code-Contract Gap

Perhaps the most significant legal risk in smart contract deployment is divergence between what code does and what parties expect it to do. This gap can arise from bugs, ambiguous specifications, or simply the difficulty of translating complex commercial arrangements into deterministic logic.

Consider a smart contract governing profit distributions from a joint venture. The code may execute distributions based on predefined formulae, but what happens when the underlying data feeding those formulae is incorrect? What if market conditions render the agreed distribution mechanism commercially absurd? What if one party's wallet address is compromised?

What You Need to Know: Australian contract law provides several doctrines that may address code-contract gaps. The doctrine of rectification allows courts to correct written contracts that fail to reflect the parties' actual agreement - a principle potentially applicable where code deviates from documented intentions.⁷ Mistake, misrepresentation, and unconscionable conduct remain available defences. However, these remedies operate after the fact; they cannot unwind executed on-chain transactions. Prevention through proper structuring is substantially more effective than cure through litigation.

These scenarios illustrate why sophisticated smart contract arrangements typically employ hybrid structures - combining on-chain automation with off-chain legal agreements that address contingencies code cannot anticipate. The legal wrapper defines what happens when code behaviour and commercial expectations diverge.

The 2016 DAO hack illustrates the stakes.⁸ Exploiters drained approximately USD 60 million by exploiting a recursive call vulnerability - the code executed exactly as written, but produced outcomes fundamentally inconsistent with participants' expectations. The resulting hard fork of the Ethereum blockchain - a network now underpinning billions in digital asset value - represented an extraordinary community response to a legal and technical crisis that proper structuring might have mitigated.

Our lawyers design hybrid arrangements that capture the efficiency benefits of smart contract automation while preserving the flexibility and legal certainty that commercial relationships require.

Smart Contract Disputes

When smart contracts fail - or succeed in doing precisely what they were programmed to do, with unintended consequences - disputes follow. These disputes present distinctive challenges for traditional dispute resolution mechanisms.

First, establishing what happened may require technical expertise. Did the contract execute as written? Was there a bug, an exploit, or simply unexpected behaviour at edge cases? Blockchain forensics and code audits become essential elements of case preparation.

Second, identifying responsible parties may be difficult. Smart contracts often operate within ecosystems involving multiple developers, deployers, auditors, and governance participants. Determining who bears liability for contract failures requires careful analysis of relationships, representations, and conduct - considerations that often intersect with technology licensing arrangements governing code ownership and usage rights.

What You Need to Know: Smart contract disputes often involve pseudonymous parties, cross-border elements, and technical complexity that traditional litigation handles poorly. Arbitration clauses - particularly those specifying arbitral institutions with technology expertise - provide substantial advantages. Including appropriately drafted arbitration clauses in smart contract documentation is now considered best practice.

Third, remedies may be limited. Once a smart contract executes, the transaction is typically irreversible. Judicial orders cannot undo on-chain events; they can only compel parties to take subsequent actions or pay compensation. Freezing orders and injunctions face practical limitations when assets exist on decentralised networks beyond any single party's control.

Daimon Legal handles smart contract disputes, working with technical experts to understand what occurred and pursuing remedies through negotiation, arbitration, or litigation as appropriate.

DAOs and Smart Contract Governance

Decentralised Autonomous Organisations represent perhaps the most ambitious application of smart contracts - using code to govern organisational decision-making, resource allocation, and collective action. DAO governance tokens confer voting rights; proposals are submitted, debated, and implemented through on-chain mechanisms that increasingly intersect with DeFi protocols and broader decentralised finance ecosystems.

Yet DAOs exist in legal uncertainty. Are they partnerships, with associated joint and several liability? Unincorporated associations? Something novel that existing categories cannot capture? Different jurisdictions have reached different conclusions.

Wyoming's groundbreaking DAO LLC legislation - the Wyoming Decentralized Autonomous Organization Supplement enacted in 2021 - allows DAOs to register as limited liability companies while maintaining decentralised governance structures. The Marshall Islands has followed with similar provisions.⁹ These frameworks provide legal personality, limited liability protection, and regulatory clarity that DAOs operating in legal limbo cannot access.

Doubts remain as to whether these attempts at legal recognition of DAOs is adequate. There remain important questions of recognition outside those jurisdictions - will Australia, for example, recognise a DAO incorporated under the Wyoming law? It seems unlikely that Australian courts would do so for conduct of the DAO in Australia or in relation to Australian participants of the DAO seeking redress and there are no precedents for how the courts might respond.

What You Need to Know: Australia has no DAO-specific legislation, leaving DAOs with Australian participants in an ambiguous position. The default characterisation is likely a partnership or unincorporated association - neither of which provides limited liability protection.¹⁰ DAO participants may face personal liability for the organisation's debts and obligations. Legal structuring through traditional entities (whether locally or offshore) combined with appropriate Australian documentation can manage this risk, but requires careful planning.

Daimon Legal advises DAOs on legal structuring - establishing legal structures that provide limited liability protection, defining governance frameworks that work alongside smart contract voting, and managing the intersection of on-chain and off-chain obligations.

Daimon Legal is one of the few law firms in the world to have developed qualified code deference mechanisms that align conduct of a traditional entity (such as a Caymans Foundation or other limited liability entity) with DAO governance.

Pre-Deployment Legal Review

Legal review before smart contract deployment is substantially more valuable than legal advice after problems emerge. Once contracts are deployed - particularly on immutable blockchains - options narrow considerably.

Our pre-deployment review examines smart contracts from a legal perspective: Does the code implement the intended commercial arrangement? Are there gaps between code behaviour and legal requirements? What documentation is needed to create enforceable rights? What happens when things go wrong?

We also have access to a deep network of smart contract auditors who can help address security vulnerabilities, to provide comprehensive pre-deployment reviews.

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Smart Contract Legal Checklist

The following checklist provides a practical framework for organisations deploying smart contracts or engaging with blockchain-based agreements. It is not exhaustive, but addresses the foundational legal considerations most implementations require.

Contract Formation and Enforceability

• Confirm all parties have legal capacity to enter the agreement
• Document offer, acceptance, and consideration clearly in off-chain agreements
• Establish intention to create legal relations through explicit contractual language
• Specify which jurisdiction's law governs the agreement
• Ensure compliance with the Electronic Transactions Act 1999 (Cth) or similar legislation in your jurisdiction for electronic contracts
• Identify whether any regulatory approvals or licences are required for the underlying transaction

Code-Contract Alignment

• Prepare plain-language documentation describing what the smart contract code does - these disclosure documents are becoming increasingly important as regulatory landscape becomes more certain
• Verify that code behaviour matches the documented commercial intent
• Identify edge cases and document how the code handles them
• Establish which document prevails in case of conflict between code and written terms
• Document any reliance on external data sources (oracles) and allocate risk for oracle failures
• Address upgrade mechanisms - can the code be modified, by whom, and under what conditions?

Risk Allocation and Contingencies

• Allocate risk for smart contract bugs, exploits, and unexpected behaviour
• Define procedures for handling code-contract divergence
• Establish mechanisms for dispute resolution (arbitration clauses, expert determination)
• Address consequences of blockchain forks, network failures, or protocol changes
• Include force majeure provisions appropriate to the technology context
• Document insurance arrangements where available

Party Identification and Compliance

• Implement appropriate KYC/AML procedures for counterparties
• Verify legal identity behind wallet addresses for significant transactions
• Consider sanctions screening requirements for cross-border transactions
• Document beneficial ownership where corporate entities are involved
• Assess consumer protection obligations if retail participants are involved

DAO-Specific Considerations

• Establish appropriate legal wrapper (company, foundation, LLC) for the DAO
• Document the relationship between on-chain governance and legal entity decisions
• Clarify liability allocation among DAO participants, token holders, and operators
• Address token holder rights and expectations in constitutional documents
• Implement mechanisms for legal entity compliance with applicable laws
• Consider jurisdictional structuring to access DAO-specific legislation (Wyoming, Marshall Islands)

Technical and Security Review

• Engage qualified technical auditors to review smart contract code
• Document audit findings and remediation actions
• Establish procedures for security incident response
• Implement access controls for administrative functions
• Consider formal verification for high-value or high-risk contracts

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How Daimon Legal Can Help

Smart contract legal work requires lawyers who understand both the technology and its legal implications - a rare combination that generic technology law or traditional contract advice cannot replicate. Daimon Legal provides practical, technically-informed legal services across the full lifecycle of smart contract deployment.

Smart Contract Legal Structuring We design legal models, corporate structuring and governance frameworks that complement smart contract implementations. This includes drafting off-chain agreements that establish enforceability, allocate risks, define governance, and address the contingencies that code cannot anticipate. Our hybrid structures capture automation benefits while preserving legal certainty.

Pre-Deployment Legal Review We review smart contracts before deployment, working alongside technical auditors to identify legal risks. Our analysis examines whether code implements intended commercial arrangements, identifies regulatory compliance requirements, and ensures documentation creates enforceable rights. Pre-deployment review is substantially more valuable than post-incident advice.

DAO Legal Structuring We advise DAOs on legal entity selection and establishment - including offshore structures accessing foundation frameworks in jurisidictions including the Cayman Islands and the British Virgin Islands (BVI). Our work encompasses constitutional documentation, governance framework design, liability management, and ongoing compliance support.

Smart Contract Dispute Resolution When disputes arise, we combine legal expertise with technical understanding. We work with blockchain forensic specialists and code auditors to establish facts, then pursue remedies through negotiation, arbitration, or litigation as circumstances warrant. Our experience spans contractual claims and recovery proceedings.

Regulatory Compliance Smart contract applications may trigger obligations under financial services law, consumer protection legislation, privacy requirements, and anti-money laundering rules. We assess regulatory exposure and implement compliance frameworks appropriate to each deployment.

Token and Digital Asset Documentation Where smart contracts involve token issuance, we prepare SAFTs, token holder terms, participation agreements, and disclosure documentation. Our work addresses both Australian and international best practices for token offerings.

Code Audit Coordination We coordinate the legal and technical audit processes, ensuring alignment between security review findings and legal documentation. This integrated approach identifies and addresses risks that siloed review processes might miss.

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For a confidential discussion about your smart contract legal requirements, contact Daimon Legal.

The information on this page is general in nature and does not constitute legal advice. Please review our Legal Disclaimer for important information about the limitations of this content and the terms governing your use of this website.

Footnotes

1. The term "smart contract" was coined by computer scientist Nick Szabo in 1994. See Nick Szabo, "Smart Contracts" (1994), available at: https://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/szabo.best.vwh.net/smart.contracts.html. ↩

2. Wyoming Statutes, Title 17, Chapter 31: Decentralized Autonomous Organization Supplement (2021), https://www.wyoleg.gov/Legislation/2021/SF0038. Wyoming was the first US state to provide a legal framework for DAOs. ↩

3. The essential elements of contract formation in Australian law are established in Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95; Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424. ↩

4. UK Jurisdiction Taskforce, "Legal Statement on Cryptoassets and Smart Contracts" (November 2019), https://lawtechuk.io/explore/legal-statement-on-cryptoassets-and-smart-contracts. The Taskforce comprised senior judges, barristers, and solicitors convened by the LawTech Delivery Panel. ↩

5. Electronic Transactions Act 1999 (Cth), https://www.legislation.gov.au/Series/C2004A00553. The Act implements the UNCITRAL Model Law on Electronic Commerce. ↩

6. Stellard Pty Ltd v North Queensland Fuel Pty Ltd [2015] QSC 119, https://www.queenslandjudgments.com.au/caselaw/qsc/2015/119. ↩

7. The equitable doctrine of rectification is established in Pukallus v Cameron (1982) 180 CLR 447 and Simic v New South Wales Land and Housing Corporation [2016] HCA 47. ↩

8. For analysis of The DAO hack and its implications, see Mehar, M.I. et al., "Understanding a Revolutionary and Flawed Grand Experiment in Blockchain: The DAO Attack" (2019) 21 Journal of Cases on Information Technology 19. ↩

9. Marshall Islands Non-Profit Entities (Amendment) Act 2022, providing for DAO registration. See Decentralized Autonomous Organization Act ↩

10. Under Australian partnership law (Partnership Act 1892 (NSW) and equivalent state legislation), persons carrying on business in common with a view to profit are partners with joint and several liability. Unincorporated associations may also expose members to personal liability depending on the association's structure and activities. ↩