THE REGULATION APPLICABLE TO THE SMART CONTRACT AND ITS SUBTYPES: SMART CODE CONTRACTS AND SMART LEGAL CONTRACT
Because of its decentralized, shared, consensual and immutable nature, Blockchain allows the operation and hosting of so-called Smart Contracts in the way Nick Zsabo had conceptualized it since 1994. The automatic and autonomous way in which Smart Contracts or Intelligent Contracts are executed has brought with it a scenario with a diversity of challenges from the legal point of view, since thanks to Blockchain some of the problems commonly presented by electronic contracts are resolved (such as manipulation of the wording or confirmation of issue and receipt). It is also important to mention that there are different types of Smart Contracts, two of them being Smart Code Contracts and Smart Legal Contracts.
Intelligent contracts are expected to bring together the advantages of the block chain and automated or stand-alone processes to provide validated and peer-to-peer contract formation without the need for independent verification (BELLAMY and HILL, 2016).
In the field of information technology, a Smart Contract is, in simple terms, a sequence of code and data that carries out the operation for which it was programmed; under this optic it would not be a contract in legal terms; a legal definition of an intelligent contract would be that of a computer program with coded self-executing instructions, where the code can, among other programmed instructions, contain those related to the fulfillment of clauses and where there is agreement of wills, thus concurring their relationship in the legal world.
In view of the foregoing, the term Intelligent Contracts refers to any agreement that produces legal consequences and whose main characteristic is the already mentioned self-executing nature; it is important to qualify that the execution of the content programmed and written in the Smart Contract does not depend on the will of the parties, but takes place automatically when the conditions previously established have been fulfilled. Therefore, placing it in legal terms, a Smart Contract refers to the agreement of the wills of the parties that are embodied in computer code.
According to certain doctrinal concepts, the Smart Contract would be a variation or even an evolution of the electronic contract, which has been consolidated in various legal systems around the world for two decades thanks to the global adoption of the Internet. An example of this can be seen in Spanish law, specifically in Law 34/2002 on Information Society Services and Electronic Commerce (LSSI), which incorporates Directive 2000/31/EC of the Council and the European Parliament which regulates certain legal aspects of Information Society Services, specifically those related to electronic commerce.
According to the above-mentioned law, an electronic contract is defined as one “in which the offer and the acceptance are transmitted by means of electronic data processing and storage equipment connected to a telecommunications network”. According to this precept, electronic means are the characteristic that distinguishes it from a traditional paper-based contract.
REGULATION APPLICABLE TO SMART CONTRACTS.
Despite the advantages offered by the use of Smart Contracts, this does not mean that there are no legal uncertainties around them, since if these contracts are executed by equipment that has previously been programmed for it or created by artificial intelligence, they would not be considered as contracts in the strict legal sense, since the machines have no will and therefore cannot generate any agreement, regardless of the high or low complexity of the clauses contained in their code; this is echoed in the statements of MCJOHN and MCJOHN (2017),
“…a smart contract is not smart nor is it a contract. The smart contract to sell goods, for example, is robotic, not smart.”
The strong possibility should also not be overlooked where, by mistake, the code was not properly programmed, which would generate legal consequences in the same way as with traditional contracts, since the error is one of the vices of consent, especially if the error is common to both parties and the reasons have expressly or tacitly constituted a presupposition based on the business; if so, it would constitute a ground for contesting the legal transaction, (i.e., the contract.) Thus the error is considered as a defect of consent in the following legal systems:
Article 1265, Spanish Civil Code: “Consent given in error, violence, intimidation or deceit shall be null and void”.
Article 1812, Mexican Federal Civil Code: “Consent is not valid if it has been given in error, torn away by violence or caught by fraud”.
Therefore, if the error exists, the viability of annulling the contract also arises, although this could be more complex by virtue of the automatic nature of the execution of the Intelligent Contract and the immutability of the contract. has Blockchain, in case he was staying there.
Both in Spain and in Mexico, to cite two cases of comparative law, there is no specific regulation or ordering on Smart Contracts in the same way as the one applicable to the electronic contract, due in part to the novelty of its form, and in another, because for now it is not strictly necessary, since, as mentioned in previous paragraphs, there are those who, not without reason, still doubt that they are authentic contracts.
Principally, there are three requirements that must be met in order for the regulations applicable to the electronic contract to also be applicable to Smart Contracts in accordance with Spanish law:
1.- Meets the essential requirements that must prevail in any contract. (Consent of the parties, a particular object, cause that gives rise to the contract)
2.- The way in which it is plasma.
3.- The possibility that the error may be presented as a defect of consent and the consequences that this defect may generate.
However, if it was created in its entirety by a machine, it cannot be considered as a contract despite the fact that it has these three main characteristics, since, as has already been mentioned, the machines lack complete will.
Some examples of the legal basis for the application of the electronic contract to Smart Contracts can be seen in the Spanish and Mexican Laws, which respectively say the following:
Article 23 of Law 34/2002, on Information Society Services and Electronic Commerce (LSSI): “…contracts entered into by electronic means shall produce all the effects provided for by the legal system, when the consent and the other requirements necessary for their validity concur.”.
Article 1803, Section I of the Federal Civil Code: “…electronic, optical or any other technology”.
SMART CODE CONTRACTS & SMART LEGAL CONTRACTS.
Although this reality about electronic contracting is not something new, it has been since the emergence of Blockchain technology when its presence has taken on greater significance. This technology also makes it possible to refer to two types of intelligent contracts: smart code contracts and smart legal contracts.
The former allude to the code sequences that form part or all of the pre-existing agreement and that are stored and executed in a chain of blocks, in addition to being verified by the users of the chain. An example of a Smart Code Contract would be as follows:
A company that rents autonomous vehicles asks each user to pay a certain amount in cryptoactives for the services it offers, and for this a Smart Contract would be programmed with the conditions established by the company and linking the digital wallets of both parties to this contract, automatically. As long as the agreed payments are fulfilled, the user will be able to continue as a lessee and will therefore continue to use the vehicle, but in the event that his digital wallet lacks the necessary funds, the car will cease to function, as long as the Smart Contract has programmed the necessary instructions that contemplate this scenario.
Smart Legal Contracts are very similar to Smart Code Contracts, since they also contain code sequences that express an agreement of wills, except that they are not executed or verified in a chain of blocks, in addition to the fact that the sections dump the code in the computer of a third party -where it will be executed automatically-, commonly a notary, who, as a notary public, provides legal certainty. These characteristics make them similar to contracts drafted in written form, so they would be a kind of “hybrid” contract because they have the characteristics of both an Intelligent Contract and a traditional contract.
In summary, these two types of Smart Contract share as a characteristic the implementation of code executed automatically once the agreed conditions have been previously fulfilled.
However, no matter how they are executed, verified, hosted or not in Blockchain, nor the differences or similarities between them, both are constituted by a code sequence and produce legal consequences.
CONTRACTS CREATED BY MACHINES.
The automatism of Smart Contracts (speaking of them in a broad sense) is characterized by the lack of need for human intervention, either for their execution or to verify their fulfillment, since the machines are in charge of carrying out these tasks when they have verified that the previously agreed conditions exist and acting mechanically according to the instructions for which they were programmed, this also makes the figure of the trusted intermediary unnecessary; by dispensing with human intervention, the execution of the contract becomes faster and more efficient, this also allows them to be created and executed automatically on a massive scale, which can be exploited at the business level because they can be elaborated very quickly.
In conclusion, the current regulation is perfectly applicable to Smart Contracts; however, if the legal scenario becomes more complex and relevant, the existing regulations would be insufficient because it is also possible that different types of Smart Contracts may arise from those mentioned in this text, and therefore, it would be necessary to adapt or adapt the current law or even more, the creation of a specific regulation for Smart Contracts, which would also imply important doctrinal changes in order to support the depth that the intelligent contract has with it.
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