Smart Legal Contract as a Future of Contracts Enforcement

Since Friedrich Kessler wrote “Contracts of Adhesion-Some Thoughts About Freedom of Contract” in 1943, condemning narrow adherence to the principle of “freedom to contract” in the face of large scale enterprises’ growing preference for standard form contracts, Courts have balanced their desire to uphold contracts while protecting weaker parties from adhesion. Today, they face similar challenges with the rise of code-driven smart contracts and blockchain governance. Similar to Kessler’s world, where standard-form contracts were a tool for “excluding or controlling the ‘irrational factor’ in litigation” such as uncertain outcomes of judicial interpretation, automated smart contracts aim to put themselves outside the control of both contractual parties and the courts, thus removing any ability to breach or tamper with the original terms. Smart contract advocates contend that removing the judiciary as the governing body over contract law and imposing contractual performance via decentralized blockchain governance improves efficiency and certainty.
 But, how much can one really write a contract that completely circumvents the potential for legal intervention or judicial enforcement? Will smart contracts finally achieve the complete separation between private and public law that advocates of “freedom to contract” originally claimed, or does the common law legal system’s deep-rooted belief in the rule of law and due process prevent the judiciary from being excluded from contract enforcement regardless the medium? And is there a risk that, as smart contract sceptics posit, smart contract platforms and blockchain governance create a new feudal order with a “potentially illegitimate exercise of power” and “normatively suspect” wealth distributions?
 The short answer, as this paper will demonstrate, is that as long as smart contracts meet the traditional requirements of a contract, they cannot fall outside the establish legal system’s purview. The only thing a smart contract truly adds to traditional contracts is automated execution that is enforced by the blockchain’s consensus mechanism; this may provide some efficiency to the legal system by streamlining basic performance but it cannot be the only form of governance over smart contracts. While there may be procedural challenges to undoing or enforcing specific performance under smart contracts because of their decentralized features, any substantive problems that could occur within a smart contract are imminently addressable with and must be subjected to the principles and remedies found in traditional contract law. Finally, I will conclude with current developments in smart contracts which point to a potential for them to become an integral part of our legal system going forward. Overall, I will argue that smart contracts, if carefully drafted to consider potential pitfalls and the future needs of contracting parties to amend or enforce, can hold the potential to provide efficiencies and greater legal certainty to contracting parties. This is achieved, not through circumventing the legal system, but by working with it to automate simple performance enforcement and deferring more complex contractual breakdowns to the judiciary.

Smart contracts are widely employed in many industries as a result of the high-quality development of science and economic technology, as well as the introduction of blockchain, which can automatically conduct retrieval, verification, and payment tasks. Smart contracts as an emerging topic, particularly the study of smart legal contracts, must remain forward-looking, and the smart contract sector cannot wait for the legal status of smart contracts to be resolved before advancing. The relative lag of the law becomes unavoidable due to the unassembled and unpredictable character of the law and thus its legislation. In this paper, we explore the incorporation of smart contracts into the scope of legal regulation, the construction of a series of systems for smart contracts, and the prognosis of smart contracts in terms of contract logic, arbitration process, and formal verification from the current law. Furthermore, a smart contract payment template based on semantic-aware graph neural networks is proposed to address the traditional smart contract vulnerability detection payment template method's low detection accuracy and high false alarm rate, as well as the neural network-based method's insufficient mining of bytecode-level smart contract features. Experiments comparing the method described in this research to comparable methods reveal that the strategy proposed in this study improves all types of indicators significantly.

Introduction: the article is devoted to the analysis of legal regulation of smart contracts, the concept, content, and scope of their application. The author analyzes in detail foreign expe- rience of using smart contracts and suggests possible options for expanding the application area. The article also has a separate section that looks at smart contracts as compared with traditional institutions of civil law. Smart contracts are expected to find application in almost all areas of life in the future. As is often the case with new technologies, the use of smart con- tracts raises a number of civil law issues. Blockchain technology makes it possible not only to create new means of payment but also to autonomously manage almost any process. It can be used for individual contracts and even for the creation of autonomous decentralized systems. Purpose: to provide an insight into the institution of smart contracts and define their role in civ- il law. Methods: empirical methods of comparison, description, interpretation; theoretical me- thods of formal and dialectical logic; special scientific methods such as the legal-dogmatic me- thod, the methods of interpretation of legal norms and comparative legal research. Results: smart contracts are computer programs that perform legally significant actions according to predetermined algorithms set out in the form of a so-called program code. In practice, they are especially important in connection with the development of blockchain technology or (more generally) distributed ledger technology. Conclusions: the term ‘smart contract’ was defined by Nick Szabo in the 1990s as a sequence of commands represented in digital form, including transaction protocols that execute these agreements. Thus, smart contracts formulate rules and sanctions for agreements and execute them automatically. These are not necessarily contracts in the legal sense, but they are capable of controlling, tracking, and documenting legally signif- icant actions. Smart contracts can also be implemented using traditional, for example, mechan- ical technologies (e.g. in a vending machine). However, blockchain and distributed ledger tech- nologies make it possible to implement incomparably more complex rules and enforcement me- chanisms and offer a decentralized environment with an integrated settlement system. From a legal point of view, smart contracts perform two functions. On the one hand, they serve as a functional equivalent of a contract since their technological code can identify the services to be exchanged as well as the conditions under which they must be provided. Being the normative order of the digital, this code formulates the program of obligations of the parties. It resembles the legal order of a contract, without necessarily coinciding with it. On the other hand, smart contracts serve as a tool for the execution of contracts – by controlling, monitoring, and docu- menting the exchange of services. They can also facilitate the execution of conventional con- tracts by translating their provisions into a technical code, verifying the occurrence of agreed- upon events, and enforcing contracts. Smart contracts are suitable for contractual relation- ships, for example, for processing payments or delivering goods without the participation of the parties and an intermediate step in the form of direct execution. Smart contracts are gaining more and more popularity, especially in the financial sector. In addition to the so-called token economy (cryptocurrencies, ICO, etc.), there are also discussed algorithmic ETFs, online plat- forms for loans or project financing. Another important area of application is sharing economy. From a legal point of view, smart contracts can either be the subject of a contractual agreement or generate it on their own. There is sometimes put forward a thesis under the motto ‘Code is law’ that smart contracts give rise to a largely autonomous legal system and/ or are not subject to applicable law. However, this appears to be an erroneous conclusion

This chapter outlines the genesis of, and background to, the volume as the first interdisciplinary exposition of the ‘smart legal contract’. In doing so, it provides an assessment of many of the critical issues that arise from the interface between law and technology as they pertain to computational contracts. Topics include notable developments in law and practice, the issues of ‘smart contract’ terminology and ostensible extra-legality, and the emerging techno-legal concept of the ‘smart legal contract’. Allen and Hunn proceed to frame the ‘smart legal contract’ as a ‘contract stack’ combining human-readable and machine-readable artefacts capable of being arranged to incorporate both the traditional recordation functions of written contracts with software-based operationalization of contractual obligations. The future development of terminology is suggested. The chapter concludes by introducing the author chapters and their contribution to the volume as a landmark in the literature on computational contracting.

Smart contracts have been a topic of interest to lawyers for some time now. The question regularly arises as to whether a smart contract can also constitute a valid contract on its own. This article examines this question, focusing on the basic principles of Swiss contract law.

Interpretation of a legal agreement can be done by taking the internal and actual intention of the parties as a starting point (objective), or by taking the expression of those parties as a starting point (subjective). The legal systems under consideration here all pay attention to both objective and subjective criteria, yet differ in their details and nuances. In light of the fact that smart contracts might result in binding legal agreements, the impact of the technology on such interpretation regimes must be considered. First the nature of smart contracts must be considered. Smart contracts provide a take-it-or-leave-it offer to an offeree. Combined with the fact that the platform on which such smart contracts exist are pseudonymous, this means that the offeree is not a position to negotiate. For this reason, strong parallels can be drawn with standard form agreements. Standard form agreements are regulated on a European level in all legal systems in scope through the Unfair Contract Terms Directive. It is argued that the instruments contained in this Directive should be applied to smart contracts in situations in which a potential for a power discrepancy between the offeror and the offeree exists. In situations in which no such power discrepancy exists, the national rules on interpretation should apply. Whilst the previous chapter has shown that smart contracts might contain an expression of intent, and therefore might result in a binding legal agreement, this does create problems of interpretation. Unclear might be, for example, whether (and how) such regimes of interpretation should be applied to code, to natural language, or perhaps to both. Moreover, relevant questions are whether additional circumstances that are relevant in the interpretation of an agreement might surface on a smart contract platform and whether such circumstances can be considered when interpreting an agreement. This chapter presents a taxonomy of smart contracts that consists of four scenarios. In the first scenario the smart contract in and of itself is the legal agreement. In the second scenario there is a smart contract, but there is no accompanying legal agreement; the smart contract is mere code and the transfer is a mere transaction. The second scenario is unique in that there is no legal agreement whatsoever. In the third scenario the smart contract is accompanied by a legal agreement, but is separate thereof. In that case the smart contract is a tool to execute the legal agreement. Lastly, in the fourth scenario the smart contract and the accompanying legal agreement are merged.

Smart contracts on a blockchain network can be implemented to control digital value. A key question that arises is the extent to which smart contracts can, or should, operate as “smart legal contracts”. Simply put, can smart contracts meet requirements of validity at law and practical efficacy. In order to achieve the goal of value maximization, the efforts of policy-makers, standards organisations and regulators should be informed by first principles. Standards, and other regulatory activities, must be driven by consideration of the techno-legal functions of contracting. Blockchain-based smart contracts offer the potential to reduce transaction costs through new methods of stateful computation. When applied to commercial transactions, smart contracts can represent enforcement of an executed state. This paper argues that distributed ledger and smart contracts standards should seek to provide sufficient flexibility to facilitate contracting parties to coordinate in an optimal manner.

In recent years, advanced smart contract languages (ASCLs) have been proposed to solve the problem of difficult reading, comprehension, and collaboration when writing smart legal contracts among people in different fields. However, this kind of languages are still hard to put into practice due to the lack of an effective conversion method from the ASCLs to executable smart contract programs. Aiming at this problem, we take SPESC as example to explore how to design conversion rules from the contract in it to the target programming language in Solidity, and to propose a three-layer smart contract framework, including advanced smart-contract layer, general smart-contract layer, and executable machine-code layer. These rules provide an approach to convert the definition of SPESC contracting parties into party-contracts on target language, as well as to produce SPESC contract terms into main-contract on target language. Moreover, the proposed framework specifies not only program architecture and storage structure on general smart-contract layer, but also important mechanisms, including personnel management, timing control, exception handling, etc., which can assist programmers to write smart contract programs. Furthermore, taking four SPESC contracts as testing objects, we provide the whole process of converting from SPESC contracts to Solidity programs by the SPESC-Translator, and verify the efficiency and security of the conversion process, including coding, deploying, running, and testing through Ethereum. The instance results show that the conversion rules and the three-layer framework can simplify the writing of smart contracts, standardize the program structure, and help programmers to verify the correctness of the contract programs.

This book provides a landmark survey of computational contracting: one of the most important legal and practical trends for centuries. Computational contracts introduce software functionalities to operationalize, rather than merely record, acts of commercial coordination. In doing so, they bring together software and law in interesting and unchartered ways to create dynamic documents that present unique opportunities and challenges. Distributed ledger technologies have propelled ‘smart contracts’ into mainstream application over the last decade. The introduction of software into contractual relationships, however, may be implemented in a number of ways, of which such ‘smart contracts’ are only one. Broadly, it is possible both to express legal promises in code and to incorporate code-based elements within conventional (‘paper’) contracts. This volume examines the observed approaches and reflects critically on their relationship and the common issues raised. The organizing principle behind the volume is that emerging design patterns and considerations are beginning to form around the instantiation of code in contractual agreements—the ‘smart legal contract’. With incisive analyses from legal scholars, computer scientists, judges, and legal practitioners across common law jurisdictions, this volume addresses many of the foundational questions raised by smart contracts in legal theory and practice and provides a critical point of orientation in an emerging but still disparate literature.

Smart contracts are a means of facilitating, verifying and enforcing digital agreements. Blockchain technology, which includes an inherent consensus mechanism and programming languages, enables the concept of smart contracts. However, smart contracts written in an existing language, such as Solidity, Vyper, and others, are difficult for domain stakeholders and programmers to understand in order to develop code efficiently and without error, owing to a conceptual gap between the contractual provisions and the respective code. Our study addresses the problem by creating smart legal contract markup language (SLCML), an XML-based smart-contract language with pattern and transformation rules that automatically convert XML code to the Solidity language. In particular, we develop an XML schema (SLCML schema) that is used to instantiate any type of business contract understandable to IT and non-IT practitioners and is processed by computers. To reduce the effort and risk associated with smart contract development, we advocate a pattern for converting SLCML contracts to Solidity smart contracts, a smart contractual oriented computer language. We exemplify and assess our SLCML and transformation approach by defining a dairy supply chain contract based on real-world data.

The Evolution of Digital Trade from the North American Trade Agreement to the United States Mexico Canada Agreement

This article explores ‘smart contracts’ from first principles: What they are, whether they are properly called ‘contracts’, and what issues they raise for national contract law. A ‘smart’ contract purports to record contractual promises in language which is both intelligible to human beings and (ultimately) executable by machines. Rather than their automation of contractual performance, I argue that the most important aspect of the law and legality of smart contracts is the formalization of contracting language that they entail. Rather than taking a doctrinal approach focused on the presence of traditional indicia of contract formation, I examine the nature of contracts as legal entities created by words and documents. In most cases, smart contracts will be ‘wrapped in paper’ and nested in a national legal system. Borrowing from the idiom of computer science, I introduce the term ‘contract stack’ to highlight the complex nature of contracts as legal entities incorporating different ‘layers’, including speech acts by the parties in both natural and formal languages as well as mandatory legal rules. It is the interactions within this contract stack that will be most important to the development of contract law doctrines appropriate to smart contracts. To illustrate my points, I explore a few issues that smart contracts might raise for English contract law. I touch on the questions of illegality, jurisdiction, and evidence, but my focus in this paper is on exploring issues in contract law proper. This contribution should be helpful not only to lawyers attempting to understand smart contracts, but to those involved in coding smart contracts — and writing the languages used to code them.

Smart contracts are presented as a self-executing, autonomous alternative to traditional contracts that require enforcement by court involvement. The first experiences with smart contracts show that contracts involve more than conditional execution. This paper proposes a method for formalizing contract law in order to make this as far as possible tractable for incorporation in smart contracts. Contract law can be viewed as a set of rules for resolving disputes while also protecting legitimate interests of parties. Examination of a simple example shows that formalization is complicated by several issues that arise from lay expectations regarding (smart) contracts. This exercise also shows implicit assumptions and characteristics of contract law, and challenges whether such characteristics are unavoidable.

In this era of increasing cyber dependency in business dealings there is huge potential in the adoption of Distributed Ledger Technologies (DLT) particularly in the context of smart contract in the commercial world. The phenomenon of smart contract operates independently without the cumbersome need to engage any intermediary and is capable of executing specific task.(Thake, 2018) People relates it more to a piece of code (known as a software agent) that is designed to execute certain tasks if pre-defined conditions are met. Such tasks are often embedded within, and performed on a distributed ledger.”(Stark, 2016) However, if one accepts the contention that smart contract is not merely as a set of computer code but a smart legal contract which contains obligations and legal terms that are enforceable, hence, in programming or writing smart contract, one must ensure that the software developers who design smart contract take note of the legal rules and principles behind the specific type of contract in question. It has been argued that there is too much dependency on the programming aspect in the creation of smart contracts by programmers and computer scientists. (Khalil et al., 2017)

The global reality of the Fourth Industrial Revolution is evidenced by the adoption of Big Data analytics, Cloud Computing, Blockchain (cryptocurrencies, smart contracts, etc.), and the Internet of Things (smart buildings, artificial neural networks, machine learning, smart cities, etc.) which are becoming integrated into national legislation. As a result, countries must prioritize digitalization to keep pace with Industry 4.0. Smart legal contracts, which serve as a bridge between law and digitalization, are relatively new and challenging development for national legal systems. Although only a few countries have legally regulated smart legal contracts, all national legal systems will inevitably follow suit. This article aims to assess the North Macedonian legal system’s existing legislation and determine the optimal approach to integrating smart contracts. Should a new, special law (lex specialis) be enacted, or should provisions for smart legal contracts be added to the existing legal framework? The EU’s legal tendencies should also be considered to ensure North Macedonian law is harmonized with European Law. The structure of the article unfolds as follows: Introduction; The concept and main characteristics of smart legal contracts, Smart legal contracts concerning the North Macedonian Law on Obligations; Smart legal contracts concerning the North Macedonian Law on electronic commerce; New Law on smart legal contracts or amending the existing legislation in North Macedonia?, and Conclusion remarks. To achieve its goals, this article will employ several research methods, including normative analysis, descriptive and legal research, and applied legal research, comparison, analogy, and case law analyses.