The notion of smart contract, although imagined a few decades ago, returned to the public’s attention as a result of the emergence of a favorable environment in which to develop. Being relatively new, but especially disruptive, in the sense that it is likely to produce a change in the paradigm of economic operations, the notion of smart contract knows a multitude of definitions, depending on the perspective of the field from which it is approached.
In essence, smart contracts are computer programs that incorporate the content of a traditional contract. Their main feature is that they are executed automatically, removing the need for human interpretation and intervention. This is also the main difference compared to traditional contracts, concluded online.
Smart contracts are deployed on distributed ledger technology platforms, with the best known, but not exclusive, being the blockchain type. Characteristic of these distributed ledgers is the fact that all the data that is in the respective network is found in each location where there is a node of the network, thus being verified and secured by cryptographic methods at any and all time. In essence, blockchain is a database with the potential to store and transfer tangible (car, real estate, etc.) and intangible assets (such as votes, reputation, intent, information, software).
From the combination of the features of the two presented notions, the smart contract and blockchain, the main features of the first result. Thus, smart contracts are differentiated by the fact that they are autonomous, self-sufficient and decentralized.
Autonomy assumes that the economic agent does not have to do anything after the smart contract becomes operational; self-sufficiency presupposes the ability of the contract to manage resources (provision of services, payment, etc.) without human intervention; finally, as a consequence of the blockchain platform, decentralization involves automatic distribution and execution in relation to all nodes of the network.
Despite the theoretical advantages and the growing economic interest, smart contracts are not currently widely used, a delay generated by a series of technical and legal challenges.
It is obvious that any economic operation, regardless of the way it is conducted, is subject to a law system. Similarly, we cannot consider that blockchain platforms and, implicitly, smart contracts, are outside legal systems, thus not being governed by the law, in a broad sense. However, regardless of the way we relate to the relationship between smart contracts and the traditional contracts, the current legislation is not able to provide solutions to sensitive situations that may incline the balance against smart contracts.
A first such situation is that of remedies and justifications for breach of contract. Currently, the doctrine of remedies and justification causes is the result of a long process of solving specific practical problems. With regard to smart contracts, the automatic performance of obligations deprives the debtor of the possibility of breach of contract or suspension of performance, even for a justifiable cause, if the parties have not expressly provided for this situation. A harsh inconsistency at this point, as smart contracts move contractual costs to the pre-contractual phase.
This harsh conclusion presupposes that, at the current legislative moment, the parties provide for all the contractual risks and the justifiable causes of breach of contract, as well as the remedies, in the content of the smart contract, in order to enjoy its main benefit, automatic execution.
Another difficult situation can be found in private international law, especially in the field of contract law. The discussion of the applicable law in regards to smart contracts cannot be carried out in the usual terms, since, in the absence of the agreement of the parties, the smart contract does not present elements to identify any particular link with the law of a particular state.
This conclusion is maintained and is even strengthened in the case of fully anonymized blockchain networks, making it impossible to identify the identity and nationality of the contracting parties.
At the end of this presentation, it is worth mentioning, briefly, the possibility that these smart contracts are a solution in anticipation of the problem. This last phrase assumes on the one hand that we cannot yet know all the possible applications of this technology, and on the other hand that we cannot reduce this concept only to the limits and goals that its creator had in mind.
The information above is part of the broader presentation titled “Legal perspectives and challenges on smart contract”, made by Eduard Florea at the National conference of students, masters and doctoral students in law, organized by the Faculty of Law, University “Lucian Blaga” Sibiu.
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