“The only thing constant is change” – Heraclitus

True to the above, our society has evolved through centuries and one of the many factors that have helped us evolve is the use of technology.  Technology has touched more or less every aspect of our society and the aspect that we are going to discuss in this article is ‘Smart Contracts’.

In this article, we will take a look at what a Contract is and what makes it a legal document and why a Smart Contract is a new form of writing the traditional Contract. This article is for audience who are aware of the term Contract but not of what elements make it a legal document and are also new to the term ‘Smart Contract’.  This article is a part of a series – which target in smaller capsules of why Smart Contract is the advent of a technological revolution.

Part A – Contracts

What is a Contract?

A contract is a voluntary arrangement between two or more parties that is enforceable by law as a binding legal agreement. A contract arises when the parties agree that there is an agreement. Formation of a contract generally requires an (i) offer, (ii) acceptance, (iii) consideration, and (iv) a mutual intent to be bound [the must-have clauses]. Another must-have condition in various jurisdictions is the ‘capacity’ of the parties entering into a contract, ie, they must be ‘competent persons’.

Elements of a contract

Singapore’s contract law is based on British common law and is in line with the above definition.
[Image courtesy: https://medium.com/@ConsenSys/unpacking-the-term-smart-contract-e63238f7db65#.iqfdtdikp]

Apart from the above mentioned, what are some of the other good-to-have clauses in a Contract?

(i) Jurisdiction, (ii) Tenor, (iii) Limitation of Liability, (iv) Guarantees / Warranties, (v) Termination.

What are some of the factors that are not relevant to the execution of a valid contract?

(i) Place of execution – i.e., it is not necessary that contracts have to be executed where the parties reside or where the performance of the contract has to take place;

(ii) Signature on the same page – a contract will continue to remain valid if the parties to the contract have signed it in different pages and places – this is understood as signature in counterparts;

(iii) Format of the contract – depending on the nature of contract and the governing law – most contracts are valid if hand-written, typed and printed, or in fact, even oral (though ‘evidence’ may be an issue over here)

Part B – Electronic Contracts including contracts executed over the internet

What are Electronic Contracts?

Generally understood, an electronic contract is any kind of contract formed in the course of e-commerce by the interaction of two or more individuals using electronic means, such as e-mail, the interaction of an individual with an electronic agent, such as a computer program, or the interaction of at least two electronic agents that are programmed to recognise the existence of a contract.  Common form of such electronic-contract is the User-license agreements that users generally ‘accept’ by using a product or service.

Today, almost every country accepts contracts that are fully executed over a computer and most countries have laws governing such electronic contracts. For e.g. in Singapore, the Electronic Transactions Act allows electronic offers and acceptances between parties to form contracts.

How are electronic agreements executed?

There are various ways in which electronic agreements are executed.  The most simple form of electronic agreement being executed is the End User License Agreement of a software or service, where the user (through his unique id) “accepts” the agreement.  More complex electronic contracts will use “digital signature” to mirror the wet signature and hard copy contracts.

What are digital signatures?

Digital Signatures

Similar to digital contracts, it is a standard norm for countries to regulate the digital signatures.  Most countries require digital signatures that are issued by a trusted third party known as a Certification Authority, to be appended or used in electronic agreements.

Part C – Smart Contracts

Smart Contracts on the Blockchain

[image courtesy: https://bitsonblocks.net]

What is a Smart Contract?

In the easiest form, it is a contract which is captured in a software that automatically performs the obligations the parties have committed, under their agreement.

In other words, it is an integration of a noun (contract) and a verb (the automatic execution).

Antony Lewis from Bitsonblocks.net has simply put Smart Contracts as little programs that execute “if this happens then do that”, run and verified by many computers to ensure trustworthiness.  

How does Smart Contract automate the process?

Keeping the technicals aside [for which you may approach us], a Smart Contract has to be drafted / coded and then digitally signed by the parties to be ‘initiated’.  The Smart Contract will have thresholds of performance and / or confirmations required between the parties involved.  These provisions / confirmations will trigger the automation settlement of the contract.

Would that mean that Smart Contract can be just put into automatic action?

Not exactly.  A Smart Contract does perform the action that it is designed for; however, to “run” a Smart Contract (currently on an Ethereum blockchain), you need to “fuel” it.  The basis of fueling a Smart Contract is like hiring the services of the network for it to actually execute its command.  We would again like to draw your attention to a snippet from Antony Lewis who draws this marvellous example: “Just like you put money into a vending machine to make it vend, with public blockchains you need to pay to run the contract. With a blockchain such as Ethereum, you initiate a smart contract by paying it ETH (Ether, Ethereum’s native cryptocurrency) – this is the digital equivalent of putting money into a vending machine.”

[refer: Three common misconceptions about smart contracts]

How much does it cost to fuel a Smart Contract?

While it depends on (a) the Smart Contract code, (b) the current market price of the network – all in all – it still costs less than US$1 to deploy a Smart Contract.

Could Smart Contracts be used to create rights and obligations similar to that of a Contract?

Since a Smart Contract is the same Contract that exists today, only that it is automated, it is possible to use a Smart Contract to create the same rights and obligations that would be created under a normal contract.

Can a Smart Contract be produced in a Court of Law in case of dispute? Also, would the digital signature on the Smart Contract be respected in the Court of Law?

Our friends at RHTLaw Taylor Wessing are of the view that a smart contract is essentially just a digital contract with coding that allows changes to be made to the contract given subsequent relevant changes in the factual circumstances. Accordingly, whether a smart contract is validly made will depend on whether the usual legal requirements on the formation of contracts are met – i.e., offer and acceptance (a ‘meeting of the minds’), intention to create legal relations, and consideration.

  • Ms Lisa Farrah Ho, Mr Mark Jacobsen and Mr Nizam Ismail

Thus, a Smart Contract which is drafted with care and in compliance with the underlying law that will be governing the transaction, it should be a legally valid and be able to be produced in a Court of Law.

Digital Signature on the Smart Contract

RHTLaw Taylor Wessing are of the view that most jurisdictions treat digital signatures as having equal legal effect as wet ink signatures and will not refuse an electronic signature admissibility in court, or treat it as invalid, solely on the basis of it being electronic in nature. The validity or admissibility of digital signatures is, nevertheless, still subject to issues such as authenticity and whether it genuinely represents the intention of the signatory to enter into a legally binding agreement.

  • Ms Lisa Farrah Ho, Mr Mark Jacobsen and Mr Nizam Ismail

In our opinion, yes, a Court of Law should respect the digital signature that is affixed on the Smart Contract.  However, we would like to disclose that there is no precedence on this for obvious reasons.

Are there any types of agreements where entering into a ‘smart contract’ would not be enforceable?

Contracts that would be considered void under the governing law of the smart contract (e.g., for illegality or being against public policy) would not be enforceable. Contracts that would be voidable (e.g., for fraud) could be enforced if the innocent party chooses not to void the contract.

  • Ms Lisa Farrah Ho, Mr Mark Jacobsen and Mr Nizam Ismail

If a Smart Contract is executed on a Blockchain – in which jurisdiction will it be governed?

The question of which jurisdiction’s laws apply to a smart contract that has touchpoints with multiple jurisdictions (e.g., because the contracting parties are from different countries) can be resolved by specifying the governing law of the smart contract.

Please note that contracts, including smart contracts, cannot exist in multiple jurisdictions. In other words, a contract may have only one governing law.

  • Ms Lisa Farrah Ho, Mr Mark Jacobsen and Mr Nizam Ismail

How is Smart Contract beneficial?

Following is a small comparative of Smart Contracts vs Traditional Contracts

Comparative of Smart Contracts vs Traditional Contracts

[image courtsey: http://www.pwc.com/us/en/technology-forecast/2016/blockchain/sca-process-performance-tradition-contracts-table.png]

Part D – Applicability from a Singapore perspective

Does Singapore regulate Electronic Contracts?

In Singapore, the Electronic Transactions Act (ETA) govern electronic signatures and electronic contracts.

Singapore has been one of the first countries in the world to enact a law that governs electronic contracts and digital signatures, and has been the first to implement the United Nations Convention on the Use of Electronic Communications in International Contracts, adopted by the General Assembly of the United Nations on 23rd November 2005 (the UN Convention).

Section 11 of the ETA explicitly states that contracts can be entered into electronically. This provision states that all electronic contracts are legally valid and enforceable by law in Singapore. The Contract Law in Singapore outlines the general rules for the formation of a contract such as an offer and acceptance of a contract, intention to create a legal and binding relation between the parties, etc. These rules are also applicable to e-contracts.

Are there any types of contracts in Singapore which should NOT be executed in the form of a Smart Contract?

Yes, transactions such as the creation and execution of a will, negotiable instruments, power of attorney, real estate transactions, and a couple of more transactions are out of the purview of the ETA and hence, such transactions should not be executed through a Smart Contract.

So would the Singapore Court respect electronic contracts?

Yes, in fact, the Evidence Act was also amended in 1997 to allow the use of electronic records as evidence in the courts.

Does the Singapore regulation recognise digital signature?

Yes, the ETA recognises the use of electronic and digital signatures.

An electronic signature is an acknowledgement provided in an electronic format that a business can use to demonstrate acceptance by a party and that can electronically be used to authenticate the party involved.

The ETA defines and recognises digital signature as: an electronic signature consisting of a transformation of an electronic record using an asymmetric cryptosystem and a hash function such that a person having the initial untransformed electronic record and the signer’s public key can accurately determine:

  • whether the transformation was created using the private key that corresponds to the signer’s public key; and
  • whether the initial electronic record has been altered since the transformation was made.

Disclaimer

Attores Pte Ltd (‘the Company’) is a Singapore based private limited company which renders Smart Contract as a Service.  Advice, graphics, images and information contained above is presented for general educational and information purposes only and is a representation of the Company’s opinion. The Company has not sought any legal counsel’s opinion on the above.  It is not intended to be a legal or other expert advice or services, and should not be used in place of consultation with appropriate professionals. The information contained in this article should not be considered exhaustive and the user should seek the advice of appropriate professionals.

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