How smart contract and DeFi disputes are resolved

The short version

• Code runs itself, but it cannot settle an oracle error, a bug, a mistake or an off-chain fact, so those disputes leave the chain. That is what happens when a smart contract fails.
• A smart contract is not automatically a binding legal contract. It binds only if it meets ordinary contract law, and Arizona and the England and Wales Law Commission confirm existing law can carry it.
• The usual fix is an arbitration clause wrapped around the code, or a court. JAMS publishes rules written for smart contracts, and the UK rules can even seat an on-chain process.
• A person still decides. JAMS limits the evidence to the code plus one code expert and keeps one arbitrator, and a court looks at the programmer’s intent, not the machine’s.
• On-chain “courts” exist, but a national court may not treat their outcome as an enforceable arbitral award, mostly over the New York Convention’s writing requirement.
• Regulators and courts now reach the code directly. The EU Data Act requires a way to stop a smart contract, and US regulators have charged oracle manipulation while a US court has ruled on immutable code.^{1,2,4,6,7,8,9,12,14,15}

What is a smart contract, and when does it cause a dispute?

A smart contract is self-executing code on a blockchain, a shared ledger kept across many computers (distributed ledger technology, or DLT). A dispute arises when what the code did is not what a party meant, or when something the code cannot see goes wrong. The statutes and institutional rules define it in similar terms, an event-driven program that runs on a shared, decentralised ledger and can move assets on it, or “a computer program used for the automated execution of an agreement or part thereof,” set out in the table below.^1,8,9

The code is usually only part of the deal. The American Arbitration Association (AAA) says that “in many cases” a smart contract “is not the full legal agreement,” and that whether it is enforceable turns on “offer, acceptance, consideration, capacity, and mutual assent.” A smart legal contract is the narrower case where the code is meant to carry a binding agreement. Commercial crypto and digital-asset arbitration, meaning property, tracing and recovery, is in crypto and digital asset arbitration. The wider map of a user’s options is in crypto exchange arbitration, the exchanges’ clauses in crypto exchange arbitration clauses, and where to complain in crypto exchange complaints.²

Which disputes can the code not settle?

Four kinds. An oracle that feeds wrong data, a bug or design flaw (a coding error), a mistake when the deal is formed, and an off-chain fact the code never sees.²

• Oracle failure. An oracle is an outside data feed that tells the code what happened, such as a price or a flight delay. If that feed is wrong, delayed or manipulated, the code can trigger an irreversible transfer it ran faithfully but should not have. AAA warns that a smart contract “may execute exactly as programmed but still produce a disputed or unfair result.”
• Code versus intent. When the code’s behaviour differs from what the parties meant, the fight is over whether the code controls or the written agreement does. AAA calls this unclear intent.
• Mistake at formation. Where a deal is struck by algorithms that always run the same way (deterministic algorithms), a court looks at the programmer’s knowledge, from “the point of programming up to the point that the relevant contract is formed,” not the trader’s (Quoine [97] to [99]).
• Off-chain performance. The code can run perfectly while the goods arrive late or defective. That is an ordinary breach claim the chain cannot settle, and once a transaction is confirmed it is “generally difficult to alter or reverse,” while any resulting loss “may be difficult, if not impossible, to reverse.”^2,7

Across all four, who is liable can be its own fight. AAA notes that where the identity of the developer, deployer or controlling party is “unknown or difficult to verify, it can be challenging to determine who is responsible for an error, malfunction, or security breach,” and that accountability is harder still when developers, platform operators, wallet providers, data providers and governance participants each play a part. That is why the record of who controls the code matters, as Van Loon below shows.^2,14

Are smart contracts legally enforceable?

Not automatically. A smart contract binds only if it meets ordinary contract law. Statute and official guidance now confirm that code is no bar to enforceability.^2,8

Arizona recognised this in statute early (HB 2417, 2017). A contract “may not be denied legal effect, validity or enforceability solely because that contract contains a smart contract term” (section 44-7061(C)), and the statute treats a blockchain signature as an electronic signature and a blockchain record as an electronic record (subsections (A) and (B)).⁸

In England and Wales the Law Commission advised on 25 November 2021 that “the current legal framework … is clearly able to facilitate and support the use of smart legal contracts,” “without the need for statutory law reform,” leaving deeds and private international law for further work. The UKJT had said in 2019 that a smart contract is “capable of having contractual force” and can be “identified, interpreted and enforced using ordinary and well-established legal principles,” and that a statutory signature requirement “can be met by using a private key.”^5,6

“Code is law” is the idea that the code’s execution is the whole of the deal. The code that runs a transaction does not displace the law that governs the bargain. The AAA notes that in many cases the smart contract “is not the full legal agreement.”²

How are smart contract disputes resolved off the chain?

The dispute is lifted off the chain into arbitration under a clause wrapped around the code, or into court, and a person decides it, the non-delegation principle that a named decider, not the code, resolves it. An arbitration clause is the term that sends a future dispute to a private decider instead of a court.¹

One institution publishes rules written for the job. JAMS offers these rules “for review and comment,” so they carry no adoption date. Under them an arbitrator is appointed “within 72 hours” of the arbitration statement (Rule 5(b)) and “is authorized to obtain information directly from the Smart Contract” (Rule 10).¹

The process is deliberately narrow. Discovery is “limited to the deposition of one competent individual expert witness as to the meaning of the Smart Contract coding,” and the only material the arbitrator reviews is “the written contract, the computer code and the witness’s testimony” (Rule 12(b)). A written award is due “in no event later than thirty (30) calendar days after the appointment” (Rule 13(a)). The reading is code-first: “The code will govern interpretation of the Smart Contract,” and the English-language terms count “only if there is an ambiguity or logic contradiction in the code” (Rule 13(c)).¹

AAA, the larger institution, administers business-to-business blockchain and smart-contract disputes as commercial matters and launched a specialist Web3 panel on 29 July 2026. Those institutions’ separate AI rules sit apart from their smart-contract work, in AAA and AI in arbitration, JAMS and AI in arbitration and AI in arbitration.^2,3

How do you write a dispute clause around a smart contract?

Pair the code with a natural-language agreement, pick a seat and governing law, and name the forum, because the code cannot hold all of this. The seat is the legal home of the arbitration; the governing law is the law that decides the dispute.²

This is the risk of relying on code with no written backup. AAA’s advice is to tie the code to a written agreement that sets out the parties’ rights and obligations, jurisdiction and the dispute resolution process. A smart contract, it says, “should not rely on code alone.”²

The model clauses show the pattern. The JAMS clause refers disputes to arbitration “in accordance with the JAMS Smart Contract Rules,” names English as the language, and leaves the seat as a blank (“[location]”). The UKJT rules are brought in by the words “Any dispute shall be resolved in accordance with UKJT Digital Dispute Resolution Rules” (Rule 3), text that “may be in electronic or encoded form,” and the seat is England and Wales (Rule 16). A clause written only in code may struggle against the New York Convention’s “agreement in writing” (art. II). How AI tools sit inside clause drafting is in AI and arbitration clauses, and how England and Wales supports arbitration in arbitration in London.^1,4,15

Can an on-chain process decide the dispute, and will a court enforce it?

Yes, an on-chain mechanism can decide and even enforce itself through escrow, but a national court may not treat the result as an enforceable arbitral award. This is on-chain dispute resolution, also called decentralised dispute resolution or decentralised arbitration: the process runs inside the blockchain itself, as opposed to off-chain in a tribunal or a court. Escrow means assets the code holds until a condition is met.⁴

The UK rules describe this, generically, as an “automatic dispute resolution process”: one that resolves a dispute “by the automatic selection of a person or panel or artificial intelligence agent whose vote or decision is implemented directly within the digital asset system” (Rule 2(c)). In practice a crowd of voters or an expert pool decides, and the outcome is paid from escrow.⁴

The UK rules then bridge on-chain and law. They treat a smart contract as a “digital asset” (Rule 2(a)), make the outcome of an automatic process “legally binding on interested parties” (Rule 4), let the tribunal “operate, modify, sign or cancel any digital asset … using any … cryptographic key, password or other digital access or control mechanism available to it” (Rule 11), and seat the process in England and Wales, where the award is “final and binding” under the Arbitration Act 1996 (Rule 16). JAMS bridges it a different way: a JAMS-certified copy of an award “will be deemed to comply with the requirements of Article IV(1)(a)” of the New York Convention (Rule 14(d)), with US enforcement under the Federal Arbitration Act, 9 U.S.C. section 1 et seq. (Rule 14(e)).^1,4,15

The gap is in the Convention itself. It recognises an arbitration “agreement in writing” (art. II) and lets a court refuse enforcement where the arbitration agreement was invalid (art. V(1)(a)), the procedure departed from what the parties agreed (art. V(1)(d)), or on public policy grounds (art. V(2)(b)). An anonymous on-chain crowd vote raises each of those doubts. Expert determination, which the UK rules allow for short factual issues, sits further out: the New York Convention does not apply to it. For ombudsman schemes and online dispute resolution generally, see AI in dispute resolution, and on recognising awards made with technology, AI and award enforcement.^4,15

What happens when DeFi code is exploited or manipulated?

When DeFi code is exploited, the loss is hard to undo on the chain, so the fight moves to regulators and courts. DeFi, decentralised finance, is financial services built to run on public blockchains without an intermediary.¹²

Oracle manipulation has been charged. The CFTC alleged a scheme to “unlawfully obtain over $110 million in digital assets” on a decentralised exchange by making an oracle report a token price that “jumped over 13-fold during a 30-minute span” (9 January 2023). The SEC alleged a withdrawal of “approximately $116 million” and treated the token as “a so-called governance token that was offered and sold as a security” (20 January 2023). Both were allegations when filed in January 2023.^12,13

Immutable code has reached the courts. In Van Loon v. Department of the Treasury the Fifth Circuit held on 26 November 2024 that a crypto-mixing service’s “immutable smart contracts … are not the ‘property’ of a foreign national or entity,” so they “cannot be blocked” under the sanctions statute. This was a sanctions ruling on immutable code, not a contract “code is law” holding.¹⁴

Formation and property were tested earlier. In Quoine (24 February 2020) the Singapore Court of Appeal (International) allowed the breach-of-trust appeal but kept open whether Bitcoin can be held on trust, so it did not decide that crypto is property. Its lasting authority is on algorithmic mistake. Asset tracing, freezing and recovery are in crypto and digital asset arbitration, and Singapore’s arbitration law is in arbitration in Singapore.⁷

What do new rules require of smart contracts?

The EU Data Act now requires any smart contract used to run a data-sharing agreement to have a safe way to be stopped, the so-called kill switch.⁹

Article 36(1)(b) requires “safe termination and interruption”: a mechanism “to terminate the continued execution of transactions” and internal functions that can “reset or instruct the contract to stop or interrupt the operation.” The same article requires access control, auditable archiving, and consistency “with the terms of the data sharing agreement that the smart contract executes,” plus a conformity assessment and an EU declaration of conformity (art. 36(2) and (3)).⁹

Scope it tightly. Article 36 applies to a smart contract used “for executing data sharing agreements” under the Data Act, not to every DeFi contract, and the duty falls on the vendor of the smart contract, not on every user. The Regulation applies from 12 September 2025. A 2025 Digital Omnibus proposal would amend the Data Act, but as of 30 October 2026 it is awaiting committee decision, a proposal only, and Article 36 as enacted stands. US states such as Arizona point the other way, recognising smart contracts rather than constraining them (section 44-7061).^8,9,10,11

What would make smart contract disputes fairer and faster?

In our view, smart contract dispute resolution comes down to the hard cases the code cannot settle on its own: an oracle that reports the wrong price, or a term the parties read one way and the code ran another. When that happens the dispute leaves the chain, and it is decided against a written rulebook, the natural-language agreement around the code (AAA treats the smart contract as “not the full legal agreement”), an institution’s smart-contract rules, or a court’s ordinary contract law. They come in volume, and most are small and look much alike. What makes them fair and fast is running each one the same way under those rules. The JAMS rules keep one code expert and a single arbitrator at the centre and cap the evidence (Rules 5(b), 12(b), 13(a)). The UK rules seat even an on-chain process in England and Wales and turn its result into an award a court can enforce (Rules 11, 16). A named person decides, any AI is kept to reading and drafting, and the record is one a court or a regulator can rely on later, as the New York Convention’s writing and authentication rules, the Fifth Circuit in Van Loon and the CFTC and SEC filings each required.^{1,2,4,12,13,14,15}

Open questions

• Whether a national court will treat the outcome of an anonymous on-chain crowd vote as an enforceable arbitral award under the New York Convention.
• Whether a clause written only in code meets the Convention’s “agreement in writing” (art. II).
• Whether crypto held or moved by a smart contract can be the subject of a trust, expressly left open in Quoine.
• How far the EU Data Act’s “safe termination” duty reaches beyond data-sharing smart contracts, and whether the pending Digital Omnibus amendments to the Data Act touch Article 36 at all.
• Who is liable when an immutable contract has no controller, after Van Loon held such code is not ownable property.^7,9,10,14,15