Smart Contracts Regulation in Kuwait: Legal Framework and Risks
Financial Services Focus
Mohamed Abouakl Associate,Dispute Resolution
Smart Contracts became an integral criterion of modern financial transactions, due to their efficiency, security, automation and immutability. Smart Contracts avoid and guard against the traditional risk of tampering, default and misrepresentation, as it depends mainly on blockchains, triggering self-execution. Nevertheless, they raise significant legal concerns in jurisdictions with developing digital regulations. In this article, we shall shed some light on the scope of applicability of Smart Contracts in Kuwait.
Surprisingly, the term “Smart Contract” is not as contemporary as expected, it was first used in 1997, and in order to understand the term “Smart Contract”, we need first to address the definition of Contracts Subject to Condition Precedent and Blockchains.
A Contract Subject to Condition Precedent is a contract in which a party shall not have duty to perform, unless some condition is fulfilled “Promise Modifier”, and the Condition Precedent could be defined as the one that must occur before an absolute duty of immediate performance arises. Hence, if the Condition Precedent is not fulfilled, the party is deemed discharged from liability, as the conditional promise never matured.
A blockchain is a cryptographically secured ledger, which uses cryptographically secured technologies to ensure the security of the recording and validating of cryptocurrency transactions.
Blockchain is based on three dimensions, namely the function of blockchain, the structure of blockchain, and the accessibility of blockchain. It is worth mentioning that Cryptocurrency and digital assets are the most widely recognized applications of blockchain technology. However, many industries are exploring potential blockchain-based solutions, including smart contract applications.
Now, A smart contract is an agreement whose execution is automated. This automatic execution is often affected through a computer running code that has translated legal prose into an executable program. This program has control over the physical or digital objects needed to effect execution. For instance, a banking software that automatically transfers money if certain conditions are met6.
Smart Contracts are recognized in Kuwait, as precedent conditioned one, in which the severability doctrine is applicable.
State of Kuwait does not have a specific legal framework governing Smart Contracts, therefore the legality and enforcement of Smart Contracts shall be analysed by virtue of the existing laws governing Contracts and Electronic Transactions in general, namely the Kuwaiti Civil Code No. 67 of 1980 and Law No. 20 of 2014 concerning Electronic Transactions. As per the Kuwaiti Civil Code, in order for a contract to be concluded, binding its parties, the following conditions must be fulfilled: a) Offer; b) Acceptance, c) Capacity; and d) Lawful Subject Matter. For the Smart Contract Purposes, as opposed to Ordinary Contracts, the issue of enforceability and conclusion shall be limited two the first conditions, namely Offer and Acceptance.
The Kuwaiti applicable laws did not specify a certain form of offer and Acceptance, in order for Mutual Consent to be fulfilled11. Moreover, the Civil Code organized and recognized the Condition Precedent in Contracts. Furthermore, the law sets forth expressly that Electronic Signatures are deemed effective and legally binding, unless stated otherwise, for instance Real Estate Ownership Contracts. The concept of contracting through electronic automated systems generally is recognized in Kuwait, provided that:
The contractual record may be kept in such form as created, sent or received or in any other form whereby the accuracy of the data contained therein at the time of such creation, sending or receipt can be easily verified;
The data contained in the document or record can be kept and stored, so that it may be retrieved at any time;
The data contained therein identifies the person that creates or receive it and confirms the date and time of sending or receiving;
To be kept in the form of an electronic document or record in accordance with such terms and conditions as determined by the competent authority that regulates such activity;
Without prejudice to the provisions of any other law that expressly provides to keep a document or record, data or information in a certain electronic form or to follow certain procedures, or to keep it through a certain electronic medium; and
Without prejudice to any additional requirements resolved by the governmental agencies to keep electronic records within their jurisdiction area.
Thus, no legal grounds might hinder the enforceability of Smart Contracts in Kuwait, and the general rule of Party Autonomy shall prevail18. Nevertheless, there are no legal precedents -yet- addressing the Smart Contracts issue, which gives rise to broad discretion of the court to decide the validity and enforceability of the same.
As stated supra, the Kuwaiti Supreme Court does not have any precedents regarding Smart Contracts, therefore there is a risk regarding the court discretion in deciding whether the Smarts Contracts falls within the scope of §8 and 11 of Law No. 20 of 2014 concerning Electronic Transactions applicability, which are addressing -precisely- automated electronic systems as well as automatic operation. If Smart Contracts are not deemed within the aforementioned scope, they shall not be recognized and admitted by the Kuwaiti Courts, which would lead the parties to resort to the general rule of Unjust Enrichment, in order to reclaim the amounts already collected by the Smart Contract Operation System.
Until and unless the Kuwaiti Legislators draft a new bill governing Smart Contracts precisely, the parties to a Smart Contract governed by Kuwaiti Laws and subject to Kuwaiti Courts jurisdictions shall set forth and incorporate the following elements:
Stating expressly that it is deemed a Precedent-Conditioned-Contract, automatically operated through automated electronic systems;
Stating expressly that the obligations(s) of performance shall not arise, unless and until the condition(s) precedent are fulfilled in a consequent manner;
Stating expressly that in case of failure to fulfil the condition(s) precedent, there shall be no absolute duty of performance, consequently no party is at breach, and hence any amounts paid shall be redistributed again to the Creditors through blockchain or based on unjust enrichment;
Stating expressly that in case the condition(s) precedent is fulfilled, the duty of performance is deemed absolute and the obliged party failed to perform, then the aforementioned party is deemed in breach, which entails restitution and/or damages, if any;
Ensuring that the statutory conditions of electronic contracting -stating supra- are fulfilled;
Ensuring that the statutory conditions of contracting -stated supra- are fulfilled; and
Ensuring that the Subject Matter of the Smart Contract is conformity with Kuwaiti Public Policy.
Smart Contracts are likely enforceable and recognizable as per the applicable regulations in Kuwait, despite the lack of legal precedents supporting the same. Nevertheless, there are several aspects to incorporate into the Smart Contract, in order to avoid unpredictability in the court’s interpretation and enforcement of the same.
For further information,please contact Mohamed Abouakl.
Published in March 2025
