What Canadian businesses need to know about smart contracts 


We sat down with Shuchita Gupta, lawyer at Caravel Law, to discuss how smart contracts are shaping the future of contract law in Canada. 

The adoption of blockchain technology by businesses across Canada is increasing rapidly. While some see the blockchain ecosystem, including cryptocurrency and NFTs, as a passing fad, many legitimate global organizations are already harnessing the power of the blockchain to streamline and optimize their operations and processes. 

One of the ways organizations are doing this is by leveraging the benefits of smart contracts to increase the speed, efficiency and accuracy of legal agreements. 

But smart contracts are still relatively unregulated in Canada, and as such, there are some critical watch-outs for those looking to implement these cutting-edge programs within their business. 

What are smart contracts? 

Smart contracts are programs stored on a blockchain that execute when predetermined conditions are met. They are generally used to automate the execution of agreements so all participants are immediately certain of the outcome.

Critically, smart contracts don’t rely on third parties (including intermediaries, adjudicators, or banks) to execute various conditions. And they generally perform two basic transactions as part of a contract: 

  1. Ensuring immediate payment of funds upon certain triggering events, and 
  2. Imposing financial penalties if certain objective conditions are not met

These contracts can exist as “code-only smart contracts”, where two parties reach an oral understanding of the business agreement and turn that understanding into executable code. Smart contracts can also be used as part of a written legal contract to execute specific functions of the contract, and these are often referred to as “ancillary smart contracts.”

What are the benefits of smart contracts?

There are a number of key benefits smart contracts offer businesses, which make them incredibly attractive as an alternative to traditional legal contracts. 


As soon as the conditions are met within a smart contract, the contract is executed immediately. Smart contracts are completely digital and automated, which means there is no paperwork to process or time wasted fixing errors. 


Because all blockchain transitions are autonomous, decentralized, and encrypted, they are incredibly difficult to manipulate or hack. And because each record is connected to the previous and following records on a distributed ledger, a hacker would need to alter the entire chain to change a single record – an arduous and challenging task. 


With no need for third parties, and because encrypted records of transactions are available to all involved parties, there’s very little chance that the information in the contract has been altered or manipulated to benefit a specific party. 


The code underlying the smart contract is transparent and publicly verifiable, which provides interested parties with assurances in regards to the logic and execution protocol of the smart contract. 

Cost savings 

Smart contracts remove the need for third parties to handle transactions, which significantly reduces related intermediary fees. 

Use cases for smart contracts

Smart contract applications include financial activities like trading, investing, lending, and borrowing. They can be used for applications across a wide variety of industries, including gaming, healthcare, logistics, real estate and more. 

For example, The Home Depot uses smart contracts for supply chain management to quickly resolve disputes with vendors.

Insurance giant AXA uses smart contracts to store and process payouts for flight-delay insurance. 

Looking into the future, HSBC and IBM have announced plans to replace cash with their new Central Bank Digital Currency (CBDC). 

Banks integrating blockchain technology into their operations will help legitimize the cryptocurrency market and suggest that smart contracts may soon open up to dealing in fiat currency. 

[Read our blog: Non-Fungible Tokens(NFTs): what are you actually buying?]

How are smart contracts treated in Canada?

Smart contracts are still not well-defined in Canadian law. 

While these blockchain-based contracts offer the potential to transform business transactions, it’s imperative the regulation of smart contracts keeps up with technological innovation.

We know that failure to regulate technological innovation that impacts traditional legal frameworks can create significant risks to the legal system in the long term. 

But without any clear legislation, it’s unknown whether code-based smart contracts will be treated with the same legal force as traditional written contracts. 

What business owners need to know before using smart contracts 

Despite the absence of smart contract regulation in Canada, there are steps businesses should take to ensure the smart contracts they create continue to follow Canadian contract law best practices. 

Though contract law in Canada is nuanced and complex, the basic elements of any enforceable contract include the following: 

  1. An offer and acceptance
  2. Consideration
  3. An intention to create legal relations
  4. Certainty as to the terms of the contract 

It’s important to be aware that smart contracts are immutable, meaning they cannot be changed or altered since they are permanently written on the blockchain. As such, you’ll want to ensure you have all your bases covered once the contract is written, including adding indemnity clauses, arbitration clauses and governing law and venue clauses like you would in a traditional contract.

While smart contracts might seem like an attractive and cost-effective option, in order to ensure they’ll effectively protect the interests of your business, you’ll still want a legal professional to review the terms of your smart contract and ensure it adheres to contract law best practices. 

Need help drafting a smart contract or understanding more about how you can use them in your business? Caravel Law is an alternative legal firm with over 70 qualified and experienced lawyers to help support your legal needs. Get in touch with our team to find out more.

  • Share:

Work with a law firm that gives your business the attention it deserves.

Contact us