**2.2 Smart contract v traditional natural language contract**

Contracts define the rights and obligations between the parties. The legal principles of contract law are well established, and their application is pervasive in our daily life. Contracts written in the natural language can be traced back to the Middle Ages and they form the bedrock of doing business. No alternative forms had been considered until the birth of smart contracts. With such attractiveness emerging from blockchain technology, can smart contracts replace natural language contracts entirely? The question begs a comparison of the smart contract with the contract written in natural language.

A short answer is no, not at present. The smart contract has its limitations on handling only the pre-determined outcomes programmed in the software. By contrast, the nature of natural language contracts is flexible and ambiguous. It allows room for courts to interpret contracts and exercise judgement to maintain justice and fairness. Smart contracts cannot handle the nuances and intricacy of various clauses in complex commercial contracts.

**Figure 1** sets out, in unidirectional, the various stages of the development of smart contracts with the eventuality of replacing natural language with computer code. Stage 0 is the traditional natural language contract that we have been using since

#### **Figure 1.**

*A unidirectional illustration of the smart contract development.*

ancient times. It is possible to draw up a traditional contract with certain functions encoded in digital form. The transformation starts in Stage I by writing the straightforward rules-based functions responding to specific inputs, like payment is processed when the goods are delivered and verified. The logic is if the delivery of goods is fulfilled, the payment will be released in a simple contractual arrangement for the payment of a purchase.

Stage II extends the rules-based functions to more complex cases that define parties' performance obligations, like the automatic deduction of liquidated damages for late delivery of work when the level of damages is pre-estimated and agreed upon before the work starts. Therefore, the logic is the payment function will not be triggered until the goods are delivered. However, if the delivery is late, the sum equal to the liquidated damages will be deducted automatically.

Stage III is more advanced with interactions between the natural language contract and coded computer software. Following the above example, will the delay be caused by the occurrence of an event that excuses the late delivery and avoids the application of liquidated damages? The ultimate Stage IV is a complete replacement of a natural language contract with computer code.
