Legal Agreements on Smart Contract Platforms in European Systems of Private Law

A broad but very relevant context to regulation of smart contract platforms are the views presents by Reidenberg and, especially, Lessig. The technology under investigation might be considered as a radical example of ‘code being law’. In light of the ideological foundations of the technology, this might create threats for the effectiveness of legal systems. It will be shown that such threats are best considered through a comparative approach and illustrate why the French, German, Dutch and English legal systems provide a good basis for this comparison. With the English legal system being an integral part of this research, the impact of Brexit will be considered as well. Lastly, the chapter will touch upon the nature of the technology, and shown why it forces those who consider its legal implications, to look at both the law and technology in a different perspective. Rather than making a precise and concrete prediction on the outcome or the legal consequences of the technology, such predictions should be made on a spectrum.

Smart contract platforms are part of broader technological development. Such platforms, and the smart contracts that exists thereon, cannot be considered in isolation. The relevant social and technological context in which the broader technological development takes place is a relevant circumstance that helps to understand the goals and purpose of those who design such instruments. This chapter explores the distributed nature of such platforms from a purely technological perspective and does so with special attention to the public-key cryptography that forms the foundation for such platforms. The manner in which cryptography can be used to introduce transparency will be illustrated. Additionally, the ways in which trust can be created in a pseudonymous environment and the manner in which this aligns with the ideals of those who drove such developments will be outlined. Additionally, the immutable nature of the platforms will be explored. Additionally, this chapter will show how smart contracts work and explain their core-characteristics. On the basis of this exploration, it will be shown why smart contracts are, first and foremost, technical concepts rather than legal concepts. Lastly, decentralised autonomous organizations as an application of smart contracting technology will be explored. This serves as an example of the potential of the technology, and serves to illustrate the questions that might arise from this technology and the potential legal implications. This chapter aims to illustrate how the technology under investigation in this book differentiates itself through five aspects: immutability, transparency, pseudonymity, automatic execution, and automatic enforcement.

The legal systems under consideration here hold that contracts are formed through a process of offer and acceptance. In order to determine whether or not smart contracts might be accepted as legally binding agreements, the doctrines of contract formations in the different legal systems will be outlined. To this end, we will explore which persons have capacity to contract, what constitutes an offer, and what an offeree ought to do in order to accept an offer. It is only after such an outline has been provided, that the impact of the technology on such matters of law can be discussed. It is because of this, that the chapter at hand will consist of two distinct parts. The first part will provide an overview of the legal regimes that are relevant to the process of contract formation. The second part will give an overview of the impact of the technology, as outlined in the previous chapter, on those legal regimes. It will be shown that existing rules on capacity create challenges for designers and operators of platforms due to the pseudonymous yet transparent nature of platforms. Moreover, the potential to create novel actors, such as decentralized autonomous organisations, results in novel legal questions. It is argued that such actors should be given a certain legal recognition. Lastly, the comparative analysis underlying this chapter will show that all legal systems under investigation here provide ample instruments to give legal effect to smart contracts. Hence, it is shown that, whilst smart contracts are not by definition legal agreements, the legal systems recognise that they might be an expression of intent and therefore might result in a legal agreement.

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.

If a smart contract might be a legal agreement or might be relevant in the execution of a legal agreement, such a smart contract might be affected by a viating factor. Therefore, the situations that a party might be operating under the influence of a mistake, fraud, misrepresentation, duress, or undue influence should be explored. In order to do so, this chapter will give an outline of the rules on those aforementioned vitiating factors after which the impact of the technology on those rules will be considered. It will be shown that the technology might be leveraged by designers and operators of such platforms to prevent, to a certain extent, the occurrence of defects of consent. This can be done by ensuring, through smart and conscious use of the technology, a high degree of availability of information to the parties. It is argued that, if a vitiating factor occurs nonetheless and as a result of certain information being unavailable to one of the parties as a result of a strictly pseudonymous implementation of the technology, liability for the designer or operator might be the result. Moreover, in order to apply the current national systems on such vitiating factors the ‘location’ of a vitiating factor must be determined. A mistake might, for example, arise due to off-chain circumstances, but could also arise as a result of on-chain circumstances. Additionally, the impact of on-chain vitiating factors and off-chain vitiating factors is dependent on the scenario in which a smart contract exists. This chapter therefore expands on the four scenarios introduced in the previous chapter and outlines to which circumstances the applicable rules must be applied to.

The distributed nature of the technology under investigation means that any potential legal agreements that might exist on such platforms exist on the entire network simultaneously. This makes it challenging to determine which court has jurisdiction and which law that court should apply. These questions of private international law have been harmonized through Union legislation. This chapter explores the connecting factors provided by the European framework that answers these two questions. An outline of the impact of the technology on this European framework of private international law will provide an overview of the situations in which the technology might render the law less effective or even ineffective, and the situations in which the law will be effective. It will be shown that, at least as far as the determination of jurisdiction and applicable law is concerned, this European framework is quite capable of regulating legal agreement on smart contract platforms, with only small and quite detailed lacunas existing.

The core points raised are summarised. It is argued that the technology underpinning smart contract platforms has the potential to greatly reshape the manner in which contractual relations emerge, exist, and cease. However, on the basis of the previous chapters it is concluded that the legal systems under investigation here do provide effective instruments to deal with the challenges this creates.