Can Blockchain Solve the Hold-up Problem in Contracts?

Modification of contracts is a challenging issue in contract law. Smart contracts on blockchain ledgers provide a solution to implement liquidated damages without the need for courts. They offer a commitment power and can be used as pre-commitment devices, but courts may impose hurdles to their use.

Format: Paperback / softback
Length: 75 pages
Publication date: 18 November 2021
Publisher: Cambridge University Press

A vexing issue in contract law is the modification of agreements between two parties. When a contract is signed but before it is fully executed, one or both parties may alter the terms of the agreement. The question that arises is whether courts should uphold the modified agreement. One potential solution to this problem is to include robust provisions in the contract that make it difficult for parties to modify it or that make the facts relevant to modification verifiable. These provisions can be achieved through renegotiation-design and revelation mechanisms. However, implementing these mechanisms requires commitment power, which may be challenging to obtain.

Conventional contract technologies, such as liquidated damages, are often disfavored by courts and can be subject to renegotiation. Smart contracts, which are written on blockchain ledgers, offer a potential solution to this problem. We will explain the basic economics and legal relevance of these technologies, and argue that they can implement liquidated damages without the need for courts.

However, there are hurdles that courts may impose on the use of smart contracts on blockchain. We will address these hurdles and show that sophisticated parties ex ante commitment to them may lead courts to allow their use as pre-commitment devices.

In conclusion, modification of contracts is a challenging issue in contract law. Smart contracts on blockchain ledgers offer a potential solution to this problem by implementing liquidated damages without the need for courts. However, there are hurdles that courts may impose on the use of these technologies. By ex ante commitment to smart contracts, sophisticated parties may be able to overcome these hurdles and allow their use as pre-commitment devices.

Weight: 102g
Dimension: 152 x 228 x 9 (mm)
ISBN-13: 9781009001397
Edition number: New ed