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What are Smart Contracts? (Part II)

What are Smart Contracts? (Part II)

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What are smart contracts? Our first introduction smart contract The analysis highlighted the lack of a clear definition that marks the difference and boundary with other similar concepts in the crypto space, including complementarity with artificial intelligence (AI).

Nevertheless, fewer questions arise benefits and cost savings: the simple fact that one copy is distributed to all parties and recorded in the ledger busts already efficiency and reduce transaction costs.

Its automaticity simplifies the enforcement process compared to traditional contracts: the parties cannot actually refuse to fulfill an obligation with a suspensive condition, because the smart contract does it by itself.

But whatever self implementedsmart contracts are not unanimously recognized legally enforceable: this quality is due to the formation of the treaty provisions of each country.

By its very nature, DLT is rooted in the absence of centralized oversight and legislative coverage.

So which law is competent to govern the obligation arising from these contracts?

Let’s look at the situation in the United Kingdom and the United States of America.

United Kingdom: Natural language for interpreting the parties’ intentions in relation to smart contracts

The UK system requires the following requirements to form a legally binding contract:

  • 1) a formal agreement: this involves an objectively defined offer and acceptance assumed by both parties.
  • 2) into accountwhich is a promise by one party in exchange for a promise by the other party.

If the agreement had been concluded in natural languagethis is analyzed to assess the existence of consideration: England and Wales interpret what the language would mean to a reasonable person according to the knowledge available to the parties at the time of the contract.

  • 3) certainty and perfection: for example, the terms cannot be too vague and must cover the essential objects. The content of the agreement must be practically interpretable, and no conflict must arise between natural language and coded terms. Yet the UK Supreme Court stated that the natural and ordinary meaning of the language should prevail in the event of a conflict.
  • 4) intention to create legal relations: The only doubts can arise if the parties expressly state that they do not intend to enter into a legally binding contract. Under UK contract law, we can confirm that a natural language A clause added to a smart contract stating that neither party wants to create legal relations might be effective.

Also, if the parties agree to an entirely distributed ledger without any natural language documents to back it up because they want their contract not to be governed by the traditional legal system, what would be the outcome?

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So which law is competent to govern the obligation arising from these contracts?

English courts pay attention to the behavior of the parties: the intention to create a legal relationship can be inferred from their intentions to provide business reality to their transactions; therefore, a court may consider it a legally binding contract.

  • 5) formality requirements. Agreements can be legally binding when made in writing, verbally or by conduct, but how can a smart contract be made in writing?

Writing must be interpreted broadly and includes typewriting and printing as well as other forms of presentation:

  • a) if the smart contract is made in the form of a natural language contract, it would meet the standard required for making a contract in writing;
  • b) if the smart contract is partially stored in computer code, it must also meet the standard requirement for the same broad interpretation of the word.

Below Rome I Regulation Under Article 3, where the parties have chosen the law applicable to their contracts, the UK courts will enforce that choice.

If no governing law has been selected, Article 4 states additional criteria that apply depending on the nature of the smart contract:

the sale of goods is regulated by the law of the seller’s place of residence, the provision of services by the law of the service provider’s place of residence, and so on.

USA and the concept of the meeting of the minds

In the US, each state has different contract law. However, one solid and generally accepted principle is that a legally binding contract has three main parts: a a meeting of the mindsan offer and acceptance and an exchange of consideration.

Some states require a contract to be in writing (statute of frauds) to be legally enforceable.

The writing must be signed by both parties (a typewritten and digital signature of the private key is sufficient to fulfill the obligations of the Fraud Act).

As a requirement adoption is satisfied when the party receiving the offer expresses its consent in an appropriate way, depending on the object of the contract: the transfer of funds through a smart contract can act as an offer (to release the action of the counterparty) or as an acceptance (when it initiates its implementation) unambiguously).

Both elements a meeting of the minds and into account need great clarity regarding contract terms: they should be defined and communicated in a way that avoids misunderstandings, since smart contracts are also coded.

A smart contract that has not been fully appreciated for its content by one party is unlikely to be legally enforceable against that party (lack of meeting of the minds).

What jurisdiction should apply to smart contracts?

U.S. courts tend to uphold the parties’ choice of law provisions, except where the chosen jurisdiction does not have a fully concrete relationship to the parties, or where the application of such jurisdiction would disturb public policy.

In the absence of a conflict of law provision, some additional criteria will help, depending on the subject of the smart contract. Competent jurisdiction may relate to:

  • a) domicile of the parties;
  • b) IP addresses of the parties;
  • c) the place where the contract was negotiated, codified, implemented or performed.

As a last resort, we should look at the prior agreement between the parties.

Sources

Oxford University,

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