The essay outlines the so called “smart contract” from a legal point of view, also as to the historical and current regulatory context. In this perspective of analysis, the author deeply describes this technology and explores the new frontier. At the end, as a result of the in-deep analysis, the author shows that the smart contract is a technologically advanced and versatile tool, which the parties of a contractual relationship can use for different purposes.

SOMMARIO:

1. Introduction - 2. Describing a smart contract - 3. Using smart contract for the conclusion of a traditional contract - 4. The purely “executive” smart version of a traditional contract - 5. The new frontier: The “constitutive” smart contract - 6. Looking for a trade off between efficiency and justice: the special smart contract law

1. Introduction

Smart contract is a technology that, by the distributed ledger technology (DLT) [1], 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” [2]. Wittingly, a scholar sustained that smart contracts are neither “contract” nor “smart” [3]. Indeed, the noun “contract” cannot be traced back to the classic legal concept of “a promise or agreement recognized by the law” [4] 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” [5]. 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 [6]. 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 [7]. 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 [8]. 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 [continua ..]

2. 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 [1]. The first phase is the coding of the instructions for the operation of the smart contract [2]. The smart contract is characterized not by “what” it contains, but by “how” the content is processed, and precisely for the use of computer language instead of human language. This is a very delicate phase, considering that, on the one hand, the smart contract is written using a computer language [3] which is largely unknown even to many legal professionals, and that, on the other hand, this is the first and only time in which changes or corrections to the content can be made, as, after the transcription on the blockchain, it cannot be amended [4]. The second phase is divided into multiple steps of high technical complexity – that the author does not deem as necessary for the purpose of this analysis. Importantly, the smart contract is added permanently and unchangeably to the blockchain [5], accompanied by a time stamp that uniquely identifies the (date and time of the) transaction, but not its parties [6]. The difference from all other (known) forms of electronic bargaining is clear: The computer is only the tool through which a traditional contractual relationship is concluded or executed; vice versa, the use of the blockchain is able to move the contract into a dimension which neutralizes human interference. However, total disintermediation seems a slogan rather than a reality. In other words, stating that blockchain transactions are not disintermediated, but “differently intermediated” seems [continua ..]

3. Using smart contract for the conclusion of a traditional contract

It is well known that a contract can also be concluded “at a distance.” It is also well known that the smart contract can be used as a mere vehicle of communication among parties during the negotiations and to express the consent to the final draft of the “traditional” contract. However, the smart contract is not designed to be a trivial communication tool, but rather a sophisticated mechanism for the implementation of negotiated agreements. Any use for different purposes only makes it unnecessarily expensive and makes complex a process for which the smart contract is not designed.

4. The purely “executive” smart version of a traditional contract

The execution of a contract represents the natural course of use of a smart contract [1]. First, it is important to establish whether it is possible to use the smart contract to execute any type of contract. The answer should be–apparently–negative: Contracts that have instantaneous execution with simultaneous exhaustion of mutual performance are to be excluded, unless any additional obligations occur (e.g., the amount retained in escrow in a share purchase agreement). Likewise, a smart contract may not be used to perform services to produce or to deliver material goods or to achieve deferred translation effects. Instead, it will be allowed to use it whenever the service is for payment of sums or transfer of dematerialized goods (e.g., the smart contract that liquidates a sum in case of delay of a means of public transport or one that blocks the functioning of a machine or a vehicle or program in the absence of payment) [2]. The second legal issue is language, since it will be necessary to “translate” the parties’ obligations in the traditional contract into computer language, with the risk of errors or misunderstandings for which the “editor” will be responsible [3]. Moreover, the author believes that the translation into computer language of the contract concluded in the traditional way constitutes a peculiar hypothesis of repetition of the contract in a different form, which is necessary for its implementation [4]. The third theme concerns the function “if ... then ....” If the parties condition the effectiveness of the contract to an event or a date, it is probably correct to qualify the function “if... then...” as a condition (Article 1353 ff. of the Italian Civil Code) or term, subjecting it to its legal discipline. If, instead, the contract is already effective and the event only represents a prerequisite for the performance of the other party (e.g., the buyer will pay the price only after delivery by the seller), it certainly does not fall within the scope of the condition because the event does not affect the effects (but the obligations arising from the contract) and because, depending on the will of one of the parties, the condition would probably be invalid due to Article 1355 of the Italian Civil Code. In this case, the smart contract resembles an exception of contractual nonperformance pursuant to Article 1460 of the Italian Civil Code ex ante. In other [continua ..]

5. The new frontier: The “constitutive” smart contract

As the author mentioned above, the smart contract is not a (new) type of contract, but rather a tool that parties can use as a vehicle to express their human will. A sheet of paper, a computer document, and, in general, any material or immaterial support, under certain conditions, can become the means by which the existence of a contract is manifested, namely its “external appearance.” Indeed, by metonymy, even in the legislative language, the medium becomes itself its content, and therefore the sheet, the document or their support are themselves the contract. Undoubtedly, in some cases, such an “external appearance” is required for the validity of the contract (the so-called written form ad substantiam as per Article 1351 of the Italian Civil Code and the ad hoc provisions requiring it), while generally, by virtue of the “freedom of form” principle, it can only serve to prove its existence in court (written form ad probationem). Nothing seems to prevent the author from considering even the smart contract as a vehicle for the exteriorization of a contract, and, therefore, again by metonymy, as the contract that parties stipulate [1]. Scholars have divergent opinions on this conclusion, but the reasons supporting the denial seem rather inconsistent. The argument is based on the unchangeable, untraceable, and unstoppable nature of the smart contract (i.e., its “stability”) from which “the consequence – frankly excessive – that smart contracts could be beyond any possible control by the nation states and their legal jurisdiction” [2]. Undoubtedly, this is a realistic scenario, where the challenge for scholars, practitioners, and systems should be to strike a balance between freedom and private autonomy, on the one hand, and state authority, on the other hand. However, this entails several additional issues, and implies the whole spectrum of the contract discipline is declined in a “smart” way. Computer Language and Contract Content: The Problem of Automatic Insertion of Clauses The first issue concerns the adequacy of computer to the challenge of drafting an entire contract. It must not be forgotten that the smart contract is a software composed of a code that expresses functions or states. These functions or states are instructions to make the system “react”; moreover, to date, these instructions are based on a very limited catalog of options. [continua ..]

6. Looking for a trade off between efficiency and justice: the special smart contract law