smart contracts

Smart contracts under English law and application cases

Smart contracts are capable, in principle, of forming binding contracts which will be upheld under English law. 

The Legal Statement gives the green light to the use of this technology in the UK. 

This is an extremely significant development, both in terms of providing certainty and because it may mark the beginning of a new era for the adoption of smart contracts and the scope of legal principles in contract under English law.

In principle, the ordinary rules of English contract law should apply to smart contracts. 

There is no reason to distinguish them from traditional contracts for as long as the three key features of contract formation are present:

1)an agreement has been reached between the parties on sufficiently certain terms;

2)the parties intended to be legally bound by their agreement; and

3)parties have agreed a consideration.

Smart legal contracts are formed using 3 elements: legal prose, parameters and code: parties may have agreed some obligations are implemented by the code, and some obligations do not involve code at all. In this regard we must distinguish between operational and not operational clauses.

Operational clauses define actions: parties are required to perform certain actions; they could be  single or recurring payments,  or deliveries of digital or digitized goods (tokens, rent a car, book a room ). It can then execute the correct predefined action, agreed in advance by both parties resulting in zero delays or downtime to the relationship.

Non-operative clause (those clauses that define the rights and obligations of the parties) are excluded from this scope and are for example: interpretation clause, the choice of applicable law and jurisdiction, non-competition clause, data confidentiality.

The first group of clauses, the operational ones, present the following logic:“if-this-then-that”: parties are  therefore called upon to define conditions, actions, instruction, conseguences within the agreement.

We have two types of smart contracts: deterministic and non-deterministic. The first one takes into account events already included in the algorithm (date of payment, contract renewal date); the non-deterministic smart contract takes into account external elements (Interest rate, share price index): in this case the oracles will constitute a bridge between the real world and the smart contract.

Smart contracts is changing how legal matters are drafted, moving to an outcome-based approach incentivizes logistics to perform better. To do so, a comprehensive and clear picture of the business and operational practices for involved parties is necessary when defining and agreeing on terms in order to automate contracts. 

In other words, contracts will no longer be able to accommodate vagaries. For example, location and time need to be explicit. These increase awareness. 

Participants need to agree on “specific data,” which in this case includes the exact time zone to be used along with the specific time and what that means for contractual terms and fulfillment. Legal departments drafting contracts need to consider details like this in advance. 

This way of re-planning the contract improves the chances of success in achieving the objectives set by the parties, it becomes functional to the purposes; increases mutual trust and mutual commitment.

The advantages are efficiency, transparency, cost reduction, speed of reaction, and reduction of contract risks.

Precisely with regard to the latter, thanks to the use of smart contracts we can positively affect, by decreasing it, the risk of contract execution. In fact, thanks to automatic payments, the risk of default or partial or incorrect fulfillment decreases.

 Furthermore, always in the execution phase, the smart contract can speed up the transfers of wealth: think of the repayments in insurance contracts, the distribution of dividends, the payment of commissions to agents.

Lastly, the risks of errors are eliminated, not only in calculations, but in identifying the creditor and transferring the asset.

On the other hand, as regards the management of contractual contingencies, smart contracts make it possible to ascertain in real time the events that cause the financial imbalance between the performances or the supervening impossibility. Thanks to oracles, the occurrence of an unpredictable event is ascertained; consequently, the program measures the economic imbalance between the performances, with the possibility of terminating the contract or bringing it back to fair conditions, on the basis of what was established ex ante by the parties during the negotiation.

It is possible to modulate the contract in a dynamic way, flexible to objective changes and not merely arbitration by the parties.

As far as I am concerned, interesting and common application of this technology are:

1)Token for point collection:

The existing loyalty program models are only pain for consumers because there are “too many cards to carry” and the signup and redemption processes are overly complex.

Through blockchain consumers can receive and redeem loyalty tokens.

The procedure is simpler: once blockchain tokens are in the consumer`s wallet, they belong to them. The issuing company cannot expire them nor revoke them; the company cannot arbitrarily change the rules on its customers.

Furthermore, tokens could be swapped for other cryptocurrencies, they can be used for purchases of different brands, they can recognize discounts and do not expire.

2)In commercial agreements, smart contracts represent the evolution of contracts from static, textual repositories to dynamic documents that are both human and machine-readable. One of the most important cases is the implementation of a smart contract to modulate the price based on the level/quality of the service detected in services agreements. This type of application establishes the next phase in SLA management.

3)In the automotive sector, this technology enables to track and certify the compliance of all vehicle components and sub-components, from design to production enabling greater responsiveness, transparency and efficiency.

4)In the food industry we can create digital representations of a physical item, guarantee the authenticity of it, track and trace  the path of a product (from the field to the table and vice-versa) and certify the quality of product and processes, making continuous verification of the compliance of the product. Furthermore, it is possible to reconstruct critical issues that caused a compromise in the quality and take therefore the most appropriated actions in time.

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