Smart contracts are among the most prominent technological advancements that can transform the execution of traditional contracts by using blockchain technology to ensure automatic enforcement of terms without the need for an intermediary. This research aims to analyze the concept of smart contracts, their applications, the associated legal challenges, and propose a legal framework for their effective and secure implementation. The study will cover the definition and historical development of smart contracts, their applications in fields such as finance, e-commerce, and government services, highlighting how these contracts enhance efficiency and transparency. The research will also focus on legal challenges such as legal recognition, disputes, and enforcement of terms, analyzing current legislation to identify legal gaps. Furthermore, the research will explore the interaction between smart contracts and artificial intelligence, proposing a comprehensive legal framework to ensure compatibility with modern technological advancements and protect the rights of contracting parties. Finally, the ethical and social challenges will be reviewed, and practical recommendations will be provided to address them.