I'm talking about implementing a "court" inside a smart contract. That is, the "court" is just one or more entities that control the private keys necessary to govern the funds locked in the contract.
I'm not sure I understand your last sentence, escrow is a common mechanism in traditional finance, which seems to work for financial operations including loans. But you may well be right on this point, I just don't really understand what you mean.
Well, there are different types of loans. What you're describing is a collateralised loan which is the only type of loan that is feasible to implement with smart contract. Such a loan isn't very useful because the borrower has to post a sum equivalent to the amount borrowed as collateral, which means the borrower isn't really borrowing anything. Undercollateralised loans are more useful, because they can be used to actually finance projects, but these loans can only work if the lender has the ability to seize the lender's assets in the event of default, otherwise the lender would take the money and never pay the loan back. Such loans are not possible with cryptocurrencies because cryptocurrencies are "unconfiscatable", they cannot be seized. The escrow mechanism that you mention doesn't work because because it requires the lender to post collateral and then it's no longer an undercollateralised loan.
Ah I see the miscommunication, I wasn't really talking about loans but just more like settlements between parties which can use escrow. I definitely see your point about most loans being unimplementable purely as smart contracts. I guess I'm not quite as convinced as you that there can't be a useful role for smart contracts as one portion of a system that also includes legal contracts and traditional liability. It seems to me that it's harder to take out and especially to underwrite loans than it needs to be and I think there's some room for improvement there, though I'm certainly not completely convinced that this will come to fruition.
Thanks for your patience in making me see what you meant!
I'm not sure I understand your last sentence, escrow is a common mechanism in traditional finance, which seems to work for financial operations including loans. But you may well be right on this point, I just don't really understand what you mean.