Blockchain: What Legal Value For Smart Contracts?

lockchain: What Legal Value For Smart Contracts?

In the world of blockchain , the two practical applications we hear the most about are cryptocurrencies and smart contracts. In this article, we will focus on the second. The question will focus on the legal aspects of these “contracts” .

What is a smart contract?

A smart contract, rarely called under its French name intelligent contract , is a computer protocol designed to numerically facilitate, verify or enforce the negotiation or execution of a contract . In their ultimate version, smart contracts thus allow the realization of credible transactions without trusted third parties or without human intervention . These transactions are traceable and irreversible. A smart contract can also be programmed to execute specific clauses. In other words, smart contracts are not really contracts but computer programs. The term “smart” is perhaps a bit usurped since the smart contract only follows the instructions of a programmer.

In practice, the computer code provides specific actions for the execution or sanction the non-performance of an obligation. For example, “Loulou pays 100 to Toutou every 1st of the month” or “Toutou does not deliver the product P to Loulou if Loulou did not pay Toutou before the date D”.

Smart contracts are developed thanks to the Ethereum blockchain . They are even the main reason why his cryptocurrency, the ether, is to watch . Even if its news encourages depression …

The smart contract, however, did not come out of the hat of Vitalik Buterin, one of the co-founders of Ethereum. As early as 1996 , Nick Szabo had developed and conceptualized the smart contract. The latter is considered as one of the thinking heads of the concepts of cryptocurrency ( with Bitgold ) and blockchain.

What are the advantages of smart contracts?

The smart contract has many advantages to allow a good execution of the contractual obligations . Thus, when the parties to a contract lack confidence in each other for various reasons, the use of a smart contract could remedy this difficulty. For example, where the sums involved are significant or if external influences could corrupt the contract, the parties generally call on an intermediary.

However, an intermediary can have disadvantages . On the one hand, it costs money and sometimes a lot. On the other hand, this is difficult to accept for some but it is a human … A human is a living being endowed with emotions . It is therefore subject to be biased, fallible, sick, incompetent or even corruptible . The opposite of a computer program without soul … and much less expensive!

The computer code used for the execution of the contract would only be made according to the instructions of the parties . The realization is ensured by a computer programmer who would have no interest to benefit one or other of the parties. The latter would, in any case, have the last word to validate the said code . It would then be searchable, or auditable in good legal language, by the parties in full transparency during the performance of the contract . Above all, the actions planned in the smart contract would not be modifiable . A basic principle of blockchain technology. The change of mind of a party would therefore, in principle, be impossible.

The smart contract could also allow the fulfillment of all obligations of the parties in simple contracts. The computer protocol then involves the execution of logical formulas ” if … so “. We have a real example with Axa’s Fizzy contract , an insurance in the event of plane delays. Up to 15 days before departure, you can take out an expensive contract by giving the necessary information (flight number, nominal and bank details). If the flight is 2 hours late or more , the traveler is automatically compensated on his bank account, possibly a few minutes after the arrival of the flight. All this without any other human intervention than that of the traveler during the subscription! Here is a practical example of what a smart contract could bring.

Another example, this one inexperienced so far: in the administrative services, for any issuance of an identity document, a user gives the necessary information to obtain. This information is verified by the blockchain and, if complete and accurate, the document is delivered directly to the user. All without any displacement and no human intervention other than that of the user. A stupid and nasty execution of a computer code!

Are smart contracts legally contracts?

The technology seems compelling and would be real progress in many areas. But the answer to the question seems obvious. Legally, smart contracts are not contracts . They are, at best, supports to the conventional contract.

Article 1128 of the Civil Code states that the validity of a contract is based on the capacity of the parties to contract, their consent and a lawful and certain content. Some wonder about the ability to contract because a smart contract would mean the control of computer code to understand what we are committed to. But this theory seems to me a little smoky because this incapacity concerns only the minors and the protected majors ( art 1146) . It is not necessary to master the computer code as long as it is transcribed in intelligible language.

However, as seen recently, smart contracts have the only intelligence of their programmer. The latter will probably need a lawyer to draft certain clauses. The smart contract is then like the terms of execution of the classic contract when it is related to the effects of the contract.

Why smart contracts have no legal value?

More precisely, it is the smart contracts alone that have no legal value! A smart contract with a classic contract is not devoid of legal value. Nevertheless, this clarification does not alter as such the legal contradiction between contract law and smart contracts .

The first difficulty comes from the formation of the contract . Article 1113 of the Civil Code states that ” the contract is formed by the meeting of an offer and an acceptance by which the parties manifest their will to engage “. However, if the information present on the blockchain is encrypted, what about the agreement of wills if the parties are not identifiable? In addition, can we be certain that the offer has been understood by the person accepting it when the algorithm is complex? The smart contract leaves a void on these issues. In conclusion, only a conventional contract can make it possible to meet the formal requirements imposed on contracts . And I do not even mention contracts with reinforced formalism as those provided for in consumer law.

Another legal issue of the smart contract is linked to its end. Indeed, one of the principles of the blockchain is its inalterability and its inability to modify it . But, what about the change of the smart contract wanted by the parties? What about the request for nullity or termination? Today, smart contracts can not answer these questions

The only way to remedy this difficulty would be to provide, in the computer code , the possibility for a party to request the termination or nullity of the contract for a specific reason . In other words, on the one hand, this possibility must be foreseen in advance in the computer code because it could not be added retrospectively . On the other hand, the request must answer the logical formula ” if … so “. For example, “if Loulou does not deliver the good until Monday, so the contract is terminated”. Thus, it is not strictly speaking a request but the performance of an obligation . The party does not even have to ask for the termination as it is provided in the code.

In simple terms, there is no room for hazard in a smart contract . A party can not change their mind. If Toutou wishes to grant a delay to Loulou but the smart contract does not provide for it, the contract will be terminated if the possibility of granting a delay is not provided in the code. More generally, force majeure or unforeseenness are concepts unknown to the smart contract . It would be necessary to provide a multitude of clauses so that the non-fulfillment of an obligation for force majeure or unforeseenness is not transformed into enforced execution of the debtor.

In addition, the resolution of a contract is, to date, impossible. Indeed, the resolution is different from the termination in the sense that it cancels a contract retroactively. In other words, the contract never existed and it must disappear from the blockchain . Impossible thing in the blockchain as it is today known.

Finally, the questions of responsibility arise. Indeed, the realization of the smart contract can be carried out by an independent programmer, who is called oracle in the world of the blockchain. This oracle replaces, in a way, the trusted third party . If he makes a mistake in programming, what about his responsibility? Are the parties themselves responsible for anything? To date, the answer to these questions is unknown . We would therefore be in known cases of liability related to the conventional contract. But the legal basis for the responsibility of the oracle is not known. Conventional contractual liability? New case of responsibility?

Conclusion

The smart contract is a great creation with infinite applications . If technically, the offer is attractive, it supposes to adapt to the legislation in force. But on this point, the smart contract remains a vague concept .

A smart contract can only be the support of a classic contract. It will be a valuable aid for contractual performance if the contract in question is a simple contract. In the presence of a single condition and a single obligation, the smart contract is even an efficient protocol and the example of Fizzy demonstrates it. However, it alone does not meet the criteria for the formation of a contract, or the execution of a more complex contract assuming the possibility of hazards, cancellation, modification and resolution. It therefore has no legal value if it is not accompanied by a conventional contract .

However, the future is far from gloomy. The progress of artificial intelligence, greater flexibility of the blockchain without losing integrity and security, and the multiplicity of applications are likely to make optimistic the generalization of the smart contract. The legal difficulties presented in this article are all surmountable, even the resolution. But it will require several years of practice .