I have read only praise today on what this new tool could bring us. Not a week goes by without a customer asking me why we don’t offer this service.

From a technical, legal and contextual point of view, let’s try to deepen the subject:

Smart = intelligent, Contract = Contract. While correcting this unfounded qualifier (it’s not a contract and it’s not smart), let’s see what it’s all about:

Smart-contracts are irrevocable computer programs, deployed on a blockchain, which execute predefined instructions. They integrate “if/then” functions (if such a condition is met, then the consequence is executed) like an automaton: if I put a coin in the machine, then it will serve me a coffee. In theory, there is therefore no longer any need for a bar, a waiter and a cash register.

It is a simple program which comes to the support of a legally concluded contract, capable of ensuring its binding force by the automatism of its execution .

Let’s take a simple example:

  • If the passenger has taken out delay insurance with the airline
  • If the control tower has recorded a delay above the contract threshold
  • So the passenger is compensated even before getting off the plane

Said in this way, and in comparison with what we experience in these situations (declaration/proof/sending/challenging…), we can see all the advantages of the process. It automates what was handled manually, excludes interpretation. The fact remains that behind this concept hides for its designers the fact of guaranteeing the binding force of contracts no longer by law, but by computer code:  “Code is law”  to use the famous expression of Lawrence Lessig . We will come back to it.

Are they safe, what are they applicable to? Let’s make together an inventory of techno, law and uses.

What are the advantages ?

In fact, the writer of a smart-contract writes the code on the blockchain. The smart-contract thus becomes impossible to modify. On a public blockchain, its content can be consulted by any holder of the contract, in complete transparency. It is this accessibility that creates trust between players, and that makes smart-contracts wait for this technology to exist.

The advantages of smart contracts are therefore real. These allow you to:

  • secure an agreement thanks to the transparency and immutability of the blockchain ( the blockchain, a virtuous machine)
  • automate a cause and effect relationship, eliminate the risk of interpretation
  • reduce intermediate costs in developing, monitoring and awarding a contract (as long as they are not retained, reinforced or replaced by others – CQFD, see below).

It all makes you want to, doesn’t it? let’s go on

What are the technological risks?

What makes the strength of smart-contracts, that is to say their immutability, can also be their greatest weakness. If a programmer who created the smart-contract introduced a flaw or weakness (even unintentional), it is impossible to fix it once the contract is anchored on a blockchain. If hackers manage to exploit it, the worst can happen, like when   hacking the project ”The DAO” . Following this famous hack, the Ethereum community had made the painful choice (because it was against the protocol) to re-write the transaction history recorded in the blockchain a posteriori in order to dispossess the hacker of his loot and restore it. to the victims. They have thus undermined the main principles of data immutability.

To overcome this drawback, and because the computer code is necessarily written by a specialist who does not have the authority to validate it, then the code could be established (and/or validated) by a third party who is authoritative from one point from a technological and contractual point of view. He will have to answer (and commit to its consequences?) to the question  “is the code flawless, does it perfectly reflect the will of the parties and the completeness of the agreements?”.  When you know the rigor you need to have to translate with the same contractual meaning one language into another, you can already imagine some difficulties.

What are the functional risks?

In contractual matters, it is possible, even frequent, that the drafting of one or more stipulations appears incomplete, clumsy or sibylline, making the understanding of the content uncertain or interpretable. This content, once it is automated, turns out to be more dangerous than it seems: the computer code does not know imprecision: it says yes, no, and never maybe. The writers of the text (and then of the code) must therefore imagine all the hypotheses and their answers, even if they are cascading.

In a code, what is not written does not exist.

Let’s take an example, a priori the simplest: in my former life as an entrepreneur in the construction industry, I always signed contracts which provided for penalties in the event of delay (1/3000th per calendar day, for example). Everything was written in a few lines. Fortunately, in the life of the contract they have not always been applied! Indeed, was I at the origin of this delay, was I the only one to have generated it, were there no external causes? Yes, often indeed. These subjects were then negotiated, always, and sometimes judged.

However, we do not negotiate with a code.

What are the legal risks?

Article 1365 of the Civil Code  defines writing as   “ a series of letters, characters, numbers or any other signs or symbols with an intelligible meaning, whatever their medium”.  As long as the authority quoted above guarantees the correct transcription of the clauses into a code and that this code is deemed intelligible, then we can move on to the next subject. I’m sorry for my non-response, but the ground, for lack of being slippery, is not mine.

the fact remains that the legal solidity of the blockchain has gained credibility over the past year:  the blockchain and the law of evidence

Article 1356 of the Civil Code specifies that “  contracts cannot contradict the irrefutable presumptions established by law, nor modify the faith attached to the confession or the oath. Nor can they establish an irrefutable presumption in favor of one of the parties”.

It should be understood that despite the spirit of its designers, the code will not be law and that the councils and intermediaries mentioned above as being able to be replaced should see their prerogatives confirmed, even reinforced.

The law, its spirit and its application

In French law, a distinction is made between law and fact. The Court of Cassation is only judge of the law and the judges of the merits (courts of the first degree and courts of appeal). The law thus attributes to the judges the sovereign power of appreciation, that is to say the power which makes it possible to appreciate an element of fact. This power is said to be sovereign in the sense that it escapes the control of the Court of Cassation.

Ordinance No. 2016-131 of February 10, 2016 reforming the law of obligations introduces provisions that substantially modify the prerogatives of the judge with regard to the contract. The judge is now authorized to modify the contract in certain circumstances, and not only to ensure its respect or to destroy it in the event of non-performance. One thinks of course of the theory of hardship, enshrined in the new article 1195 of the Civil Code. Thus, in the event of an “unforeseeable change in circumstances at the time of the conclusion of the contract [which] makes performance excessively onerous for one party”, the judge may “revise the contract or terminate it, on the date and under the conditions that he fixes”. Even if the cases of application of this text should remain limited, the content of the contract may escape the will of the parties and be subject to the interference of the judge. Also, the judge will have to interpret the contract, either to clarify its meaning or to fill in the gaps:

  • In the first case, it will be an explanatory interpretation: the search for the meaning of the contract must be carried out in accordance with the will of the parties.
  • In the second case, it will be a question of filling the gaps in the contract: the interpretation of the judge will then become creative, so that he will be able to interpret the contract in the light of the law, equity and customs.

In summary, to take the example cited in the preamble, we can push the reasoning as follows:

  • If the passenger has taken out delay insurance with the airline,
  • If the control tower has recorded a delay above the contract threshold,
  • So the passenger is compensated even before getting off the plane,
  • And if I think otherwise, then we start again from the beginning, but we don’t know how to stop the machine.

Obviously, in this example, and because it remains simple, the interference of the judge does not hold. The judge will only interpret as a last resort, and will first seek the common intention of the parties. If it is clear, the judge will not have to interpret. If it is not, the judge can be seized and will do his job.

The question of the validity of the consent of the parties could also arise: how to be certain that a code has been accepted in a free and informed manner when we are in the presence of an algorithm that can be considered unintelligible by the signatories? ? The theory of defects of consent could find fertile ground in the use of smart-contracts.

What are the topics that smart-contracts do not solve?

If we agree that it is possible, with great precautions, to ensure the fidelity and the solidity of the computer content of a smart-contract, it is more uncertain to validate an event that took place outside Blockchain. Since the causes are always external to the blockchain (it is the consequences which are automated), it will always be necessary to have a third party (or oracle) present who will make it possible to affirm that the origin which triggers the consequence is proven. This third party, located outside Blockchain, poses the same subject that exists outside smart-contract: can we trust this intermediary? It is for this reason that oracles and trusted third parties exist, that their role and their prerogatives should remain unchanged.

The projects that have emerged

In 2017, AXA launched the first French application called FIZZI, whose use case (plane delay) is the one we took as an example. This service has since been discontinued. It’s not so much for technical reasons, but for matters related to too weak marketing ( end clap for fizzy )

Several protocols now make it possible to execute complex smart-contracts. They are often used for financial derivative applications called “DeFi”. This new use case attracts investors as much as amateurs and scammers. Vitalik Buterin, founder of Ethereum and defender of smart-contracts, is one of the first to warn of the dangers and abuses that remain possible with fanciful projects ( dangers linked to decentralized finance ). The point of view is shared by Simon Poiraud, president of ADAN “in the meantime, it’s the far west” see the article   explosion of decentralized finance

To stay in the exotic, we can cite the  Kleros project  which goes so far as to propose a decentralized court application. Well then !

And that’s all…

Synthesis

It does not seem risky to us to assert that, for simple contracts, if the use case knows how to find its attractiveness, and therefore its clientele, the advantages will outweigh the disadvantages.

What about complex contracts. Should they be dismissed from the outset, because the life of contracts is made up of hazards, because the transcription of a text into a code is random, because the choice of a solid blockchain is not so simple and because a judge would be able to interpret what has been written and coded?

Because conflicts always arise from badly drafted clauses or erroneous or abusive interpretations, because a well-written and well-understood contract will always protect the signatories, because it is sometimes too easy not to do or not to pay (let’s also think of international trade and therefore of the various jurisdictions), because imprecise drafting (or bad faith) underlies the interpretation, so the rigor imposed by smart-contracts is a virtue that we would like to avoid pass.

Let’s imagine a complex contract, with and without smart-contract: it is being executed, one of the parties interprets a clause, expresses its disagreement:

https://www.contractchain.io/wp-content/uploads/With-and-without-smart-contract-5.jpg

What synthesis can we make of this situation if it integrates a smart-contract?

  • that the development and coding time will necessarily be longer than what is done in today’s life
  • that automation will simplify what is well understood, written and coded
  • that this automation will complicate what was not imagined, what is badly written or badly coded
  • that in the event of disagreement, it obliges the continuity of the clauses of the contract (not of the execution which remains the responsibility of a human decision), and that it will therefore always be to the detriment of the person who has expressed a disagreement (encouraging him to stay wise?)
  • that this forced continuity of part of the contract will undoubtedly create more tense situations

And so that in absolute terms, we don’t know if we have simplified or made the situation more complex.

What if we inserted  summary  or arbitration clauses into the code?

What if we tried to automate only what deserves to be automated (i.e. with a simple program that replaces an energy-intensive action), thus making the contract less smart, more hybrid, simpler, and therefore more suitable to reality?

The smart-contract therefore requires a strong ability to imagine everything that could happen, great contractual rigor and computer coding, as well as the choice of a solid and mature blockchain.

I don’t know if it’s possible, but if we have previously ensured that a smart-contract will not create more blockages than fluidity, that its relevance in terms of time and money is proven, then I am sure we’d all be better off if it was.

Moreover, the subject of the interest of the process seems to me to be the most essential. On the subjects of innovation, you must first understand what technology can bring you, and then forget it to focus on the interest brought to the user and his environment. You have to get out of  “I can do it, therefore I do it” . Otherwise, you would be exposing yourself to guaranteed failure (no market) or to creating a need by building electric cars weighing more than 2 tons without being concerned about the origin of the energy and its impact (sorry for this point of view).

If I was not mistaken in my analysis, we understand that with smart-contracts, the barriers are neither technological nor legal, but are exclusively the responsibility of man, of what he can or wants to do with it.

And that’s happy!

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