Smart Contract: Towards a New Contract Law?

Introduction

Smart contract is a technology that, by the distributed ledger technology (DLT) blockchain in particular, allows to create a negotiation process capable of running without human intervention upon the occurrence of data assumptions, as predetermined by the programmer-developer according to the classic algorithm “if-then” and–if made up of external facts–ascertainable through input from the so-called “oracles” (Benatti, 2019; Di Sabato, 2017; Karamanlioğlu, 2018).

Indeed, the noun “contract” cannot be traced back to the classic legal concept of “a promise or agreement recognized by the law” (Chen-Whishart, 2018, p. 71) or, in more structured terms, of “an exchange relationship created by oral or written agreement between two or more persons, containing at least one promise, and recognized in law as enforceable” (Blum, 2007, p. 2). It is rather to be understood as a slogan. A smart contract is a “computer protocol,” that is a software that independently governs certain events that affect the relationship between two or more parties, on the basis of instructions inserted by them (Karamanlioğlu, 2018; Mik, 2017; Raskin, 2017). However, under certain conditions, a contract can be a smart contract as well, although only in the sense, by metonymy, of a means of exteriorization of an agreement (Capaccioli, 2016; Cuccuru, 2017; Parola et al., 2018).

The smart contract is not even smart, since today, in any case, a computer protocol operates in accordance with the instructions it receives and does not have the ability to “self-determine” or adapt. The smart contract cannot autonomously suspend its execution, unless there is a specific instruction (Karamanlioğlu, 2018).

Given these premises, this chapter aims to outline the smart contract from a legal point of view, also as to the historical and current regulatory context. The author’s analysis will show that the smart contract is a technologically advanced and versatile tool, which the parties of a contractual relationship can use for different purposes: 1) As a mere vehicle for the exchange of negotiating statements, as a certified e-mail is; 2) as a means of implementation of the contract the parties concluded in a “traditional” form; 3) as the source of the contractual constraint itself, thus making the smart contract “the contract.” The last possibility opens up scenarios which have hitherto been unexplored for contract law. Contract law is called to face the challenge (firstly, in cultural terms) of a technology that promises to disintermediate commercial relations, to eliminate the risk of default and to free the parties from the slavery of mutual trust. At this initial stage of adoption of the smart contract in the trade practice, it is still difficult to determine to what extent current contract rules are adequate to govern this phenomenon. The chapter will therefore conclude with a review of the strengths and weaknesses of the smart contract technology and with some suggestions for a future smart contract law.

Describing A Smart Contract

First of all, it is necessary to explain why the smart contract is not a contract in its traditional sense.

In the Italian legal system, the contract is defined as an agreement by which the parties regulate a patrimonial legal relationship (Article 1321 of the Italian Civil Code). The contracts are defined as “typical” and as “atypical” by law; they are drafted by the parties to perform interests which are worthy of protection (Article 1322 of the Italian Civil Code).

By a smart contract, the parties do not create a brand new contract, different from the above-mentioned kinds, but they apply a new technology to traditional contracts.

The four phases of the development of a smart contract are as follows: 1) Processing of the content by parties (or at lease by one of them); 2) transcription in the blockchain; 3) execution; 4) exhaustion of its effectiveness (Sillabel & Waltl, 2017).