I'm not sure I understand you both. Knightdk, correct me if I'm wrong but I think you may have meant to say that even if a legitimate transaction is broadcast, because of the possibility of a bad transaction within that same block there is no guarantee the block will confirm and thus become irreversible. Franky1, I think you may have meant to say that many people can still mess around with their own transactions and cause issues within their blocks, thus causing them to be orphaned. But as I understand it, should there be a bad transaction, the revised block belonging to the first miner to solve the new hash will be the one used thereafter and the fork will continue from there, orphaning the block with a bad transaction or miner's error. But the legitimate transactions within that orphaned block will surely not destroyed or ignored -- even the slightest practical possibility of such an outcome would invalidate the BTC system completely and it would never have been tried.
Your are wrong. First, a bad transaction would completely invalidate a block, and if that happens then so properly functioning bodes will not remove the UTXOs spent in that block from their UTXO set.
Secondly, it is completely possible for a legitimate (meaning valid and confirmable) transaction to not be confirmed. Miners could simply choose not to add a legitimate transaction to a block. If could be because they don't want to, the transaction having a low fee, or having a dust output, among other reasons. All of those simply means that a valid transaction may not be confirmed once it is broadcast. You can be fairly certain if a transaction will confirm by checking a few things, but it is not guaranteed. You can check the fee and for dust outputs, but even if the fee is high and there is no dust, there is nothing that guarantees that it will confirm. All you can say is that it probably will.
What I think I am saying is that because an institution will have full control of its own BTC transactions and will ensure that each one obeys the rules, once they are published they are as good as confirmed for the institution's own purposes, and so can immediately be used for a range of internal reasons, including initiating or concluding smart-contracts.
Yes, they could. And actually most clients do just that. Most bitcoin clients will allow you to spend unconfirmed UTXOs if the transaction they come from originated from you because it knows how it made the transaction and it can trust itself to not double spend against itself.