SMART CONTRACT AND ESSENTIAL LEGAL ISSUES

Definition: contract...

The phenomenon of smart contract is not very new, and indeed computer scientist Nick Szabo gave the example, in coining the term in 1994, of the beverage vending machine as a means of automatically executing the exchange between the parties.

Today, such contracts can run on blockchains or, more generally, on Distributed Ledger Technologies (DLT), technologies whose use allows all the data and information relevant to the conclusion of an agreement and its execution to be held in a certain and unchangeable way.

DLT allow parties to contact each other directly, without a third party being able to block execution and, therefore, avoiding the possibility of default at the outset.

The smart contract, therefore, constitutes the transposition into computer code of a contract, with the peculiarity that upon the occurrence of a given event (if) the digitally linked effect (then) is produced, which may consist, for example, in the execution of the clauses contained in the contract, or in the adjustment of performance upon the occurrence of unforeseen events.

Smart contracts can also make use of artificial intelligence, but it is important to keep the two concepts distinct.

... or mere means of its conclusion?

The Italian Civil Code defines a contract in Article 1321: "a contract is an agreement by two or more parties to establish, regulate or extinguish between them a legal pecuniary relationship." Therefore, the agreement, according to the majority of interpreters, is an essential element of the contract, as well as one of its requirements according to what is expressly provided for in Article 1325 of the Italian Civil Code.

In the case of the smart contract, the agreement is realized, since the person executing the software adheres, in this way, to the contractual regulation predetermined by the code writer.

More precisely, however, the agreement must have as its object the performances due by the parties under the contract, which in the case of the smart contract are automatically realized. Therefore, it seems more correct to define smart contract as a mode of contract performance. It is, to all intents and purposes, a software that operates through distributed registers, while the actual contract is concluded upstream between the parties, who agree on the use of that code.

In fact, in a decree (Decree Law No. 135 of 2018, so-called Simplification Decree, Art. 8ter), the Italian legislator defined smart contract as "a computer program that operates on technologies based on distributed ledgers and whose execution automatically binds two or more parties on the basis of effects predefined by them."

Having made these considerations, it is important to point out that according to several interpreters, it is possible to apply to smart contracts the same rules that apply to "traditional contracts". However, in addressing smart contract it is necessary to take into account certain legal issues such as: the language to be used, the way the agreement is reached, the possibility of withdrawing from the contract, etc.

Between human language and computer language

Among the advantages offered by smart contracts it must be considered the elimination of the uncertainty profiles that result from the inherent ambiguity of human language. Even so, precisely because code is the computer translation of natural language, the ambiguity of the former sometimes ends up following the incompleteness of the latter.

Add to this the fact that the writing of a smart contract necessarily requires specific computer programming skills, so that the intermediation of computer scientists and engineers is indispensable in order to draft and sign the store. These professionals, therefore, have the task of gathering the will of the contracting parties, interpreting it and translating it into portions of code, so that between the content intended by the parties and that resulting from the final contract there ends up being, often, a discrepancy. The risk of such a discrepancy is, on closer inspection, that, especially in the case of unilateral preparation of the contract, the one who decides to adhere to it ends up signing an agreement that is not entirely consciously concluded.

At the same time, the semantic barrier represented by the code could be an obstacle to the full judicial protection of the parties, since the courts or arbitrators do not have the necessary knowledge to understand how the algorithm works.

References

• P. De Filippi, C. Wray, G. Sileno, Smart Contracts, 18 Nov 2020, available at https://policyreview.info/open-abstracts/smart-contracts.
• G. Farina, Gli smart contract, in Diritto dell’innovazione, edited by A. Blandini, Cedam, Milano, 2022, pp. 483-484.

• M. Maugeri, Smart contracts, in Enciclopedia del diritto. Contratto, Giuffrè, Milano, 2021, pp. 1132 ss.

• C. Pernice, Smart contract e automazione contrattuale: potenzialità e rischi della negoziazione algoritmica nell’era digitale, in Il ragionamento giuridico nell’era dell’intelligenza artificiale, edited by S. Dorigo, Pacini Giuridica, Pisa, 2020, pp. 163 ss.