Can SMART Contract Disputes and Public Policy Considerations be Reconciled in the ASEAN+6 Region? (Continue Part 1)

Why is there a potential tension between smart contract dispute resolution and the application of public policy?

In light of the ongoing debate as to the use of smart contract technologies?to enhance the way business is conducted,public policy considerations around such usage and the challenges with the widespread adoption of smart contract,?it is important to understand how?smart contract?can be used over and above?enhancing the way business is conducted.?

As observed by?Nick Szabo,?a computer scientist and cryptographer, the existence of smart contracts?is a?“new institutions, and new ways to formalize the relationships that make up these institutions, are now made possible by the digital revolution. He called these new contracts “smart,” because they are far more functional than their inanimate paper-based ancestors. No use of artificial intelligence is implied. A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on these promises”.?[10]

Ideal as it sounds, based on Nick Szabo’s observation, “Innovative technology does not necessitate innovative jurisprudence, and traditional legal analysis can help craft simple rules as a framework for this complex phenomenon”?[11].Therefore, there must be?opportunities to develop sustainable laws and public policy for smart contracting. And in the area of the legal and public policy issues revolving around smart contracting, it may be limited by the regularity of cases in different jurisdictions and individual territorial public policy considerations coming forth in the ASEAN+6 region. Hence, for the use of the smart contract to be further advance, there is a need to reconcile the issues of law and public policy considerations around it.?

It is arguably true that?legal principles and public policy are indeed an important part of the recognition and the enforceability of smart contract; however,?it is possible to believe that there is room for improvement in these areas by examining ways in which laws and public policy are developed in the ASEAN+6 region, given that, in practice, the smart contract is playing a more important role in?facilitating the exchange of nearly any good or service, and the pivotal role it plays?across industries.?

It is well received that smart contracting is broadly recognised as possessing the unique features of automatic execution, transparency, and immutability in a blockchain environment, not just by businesses across the globe, but also by researchers and practitioners for its benefits.?

It is well received that smart contracting is broadly recognized as possessing the unique features of automatic execution, transparency, and immutability in a blockchain environment, not just by businesses across the globe, but also by researchers and practitioners for its benefits.?

Although it must also be acknowledged that there are natural language and coding issues, however, this paper is intended to focus, explore, discuss and contribute to issues relating to the following main areas:?

(a) Can one apply traditional principles of contract law to smart contracts?

(b) What is the current Public Policy trend on awarding cryptocurrency in an arbitration award?

(c) Case law on the enforcement of smart contracts and/or enforcement against virtual assets (i.e. Cryptocurrency);?

(d) Jurisdictional issues and challenges in terms of public policy and laws particularly in the ASEAN+6 region.?

(e) The relevance of smart contract dispute resolution to legal practice and the real world.?

(f) Conclusion Observations.??

It is arguably true that there is an ongoing difficulties in many areas such as (a) the broader problems of enforceability, (b) uncertainty over jurisdiction and governing law, (c) formation, (d) modification, and (e) the public policy considerations.?It is also note-worthy to mention that governments have an important role to play to harmonize standard within the ASEAN+6 region with regards to the reconciliation of smart contract disputes and public policy considerations.

There may be issues in getting the courts to assist in the production or preservation of evidence and/or freezing of asserts, as some courts may not recognize smart contract as contract. Apart from the recognition of the enforceability of smart contracts, there may also be the possibility that even when a party successfully gets either an award or an order of the court or an interim measure, there might be issues on arbitrability and/or the enforceability of the court judgment.?

Can one apply traditional principles of contract law to smart contracts?

Defining the legal definition for “smart contract” has indeed been one of the most controversial issue. While some make distinction between smart contracts, smart contract code and smart legal contracts?[12],??some even emphasized that smart contracts are independent of the law?[13]. However, it is submitted that its legal evaluation has to be dependent on the law applying to the underlying contract?[14].

In the legal sense, it is possible to believe that as traditional contracts are encoded, the law applicable to smart contracts is decided according to general principles, which mean that the question of whether a legal contract was concluded is dependent on the applicable legal provisions, which may, for example require certain formalities which will lead to a differing assessment of smart contracts in different jurisdictions?[15].

In order to determine whether a smart contract can give rise to a legally enforceable contract, consideration must be given to whether each of the element necessary for a legal binding contract is met. It is to note that the initial stage of a contractual agreement is not significantly different between smart and traditional contracts, because, before any contractware can operate, parties must agree to some set of terms that initiate the program [16].

In the world of smart contracts, unlike traditional contracts, acceptance comes through performance. One can say they will initiate a smart contract but there is no smart contract. Smart contract can be posted to a ledger as an offer, and once action is taken to initiate acceptance, such as by transferring over certain amount of money to the code then the contract is formed.?

Just as there is bargained-for consideration in traditional contracts, there is consideration in smart contract?[17]. The courts believe that mutuality of obligation distinguishes a contract from a gift for which parties do not have the same rights of legal enforcement. That is one of the reason for having the doctrine of consideration.?

A component of contractual law regulates issues where the parties, as a matter of law, cannot vary in their contracts from the mandatory provision laid down by contract law. Certain legal principles, like, offer, acceptance, consideration, intention to create legal relationship, contractual intention, certainty, and completeness, are so fundamental to the regulation of economic activity that courts will not enforce otherwise valid contracts if these principles are not complied with. There are also limitations to the freedom of smart contracts.?

It was mentioned earlier that smart contracts are considered smart as they are self-executing. And of course, depending on their type of execution, they are divided into two categories. The first category are those whose precise execution is known at the time of creation, and the second category are those smart contracts whose execution is linked to a certain but unknow event or condition which cannot be encoded at the moment of creation.?

It is important to note that blockchain and the smart contracts stored on them are immutable (i.e. practicably impossible to change), as the code is distributed on the blockchain across the network and would require sufficient consensus of the network to alter. Hence, once a smart contract is executed, its execution similarly cannot be reversed even though a new transaction could be made by the parties to effectively nullify the result of the execution.??

Undeniably, smart contracts are widely used commercially. However, in the case of code-only smart contracts, the code that is executed and the outcome is produces, represents the only objective evidence of the terms agreed to by the parties, where in contrast to analysing traditional text-based contracts, courts will examine the final, written document to which the parties have agreed in order to determine whether the parities are in compliance or breach. But?in code-only smart contract cases, email exchanges between the parties as to what functions the smart contract “should” execute, or oral discussions to that effect, likely would yield to the definitive code lines as the determinative manifestation of the parties’ intent. Because, it has been long emphasized by courts that it is this final agreement that represent the mutual intent of the parties (i.e.?consensus ad idem?which is known as “the meeting of minds”)?[18].?

Amongst what have been mentioned, the question to ask at this juncture would be, is a “smart” contract an actual contract? For obvious reasons, in order for a “smart” contract to be an actual contract, it must definitely fulfil all the requirements for contractual formation as??discussed above.?

It is submitted that the beginning stage of a contractual agreement is similar between smart contracts and conventional contracts, because, before any contract-ware can operate, two parties must agree to some set of contractual terms?[19].??Therefore, it is a relieve to know that the rules on offer and acceptance will not in essence pose an obstacle to the recognition of smart contracts as legally binding, because, offer and acceptance, as well as the parties’ conducts, are evaluated objectively?[20]. Furthermore, when parties submit their cryptographic private keys to commit resources to a blockchain-based smart contract, that is proof of a commitment?[21].

When the ‘offeror’ post his smart contract on the blockchain in a binary computer code identifying clearly the terms of the transaction, it will be held to constitute an offer as opposed to invitation to treat?[22]. And once the suggested smart contract is posted on the blockchain and fulfilled requirements of being offer in terms of identification of the?essentialia negotii?of the contract, it is effective of an acceptance by the offeree?[23], and acceptance can be done by conduct.

For example, the offeror can write a smart contract stating that for 30 Ethereum that the offeror will transfer ownership of a bicycle, including the terms he wants and uploaded it to blockchain together with the digital token that represent the bicycle, and gas, which is payment for uploading the contract. Hence, this constitute an offer. Subsequently, the offeree who is willing to accept, will upload the 30 Ethereum to the smart contract, which constitutes an acceptance.?The smart contract will then detect the upload of 30?Ethereum?and automatically transfer that to the offeree’s wallet, while at the same time transferring the token to the offeror who uploaded the?30 Ethereum. The offeror does not need to vouch that he received the 30?Ethereum, the token for the bicycle is transferred without the offeror’s further verification or discretion.?Therefore, the acceptance can occur either by performance, or by the authorization of transfer by putting in the special cryptographic key (i.e. password)?[24].?

Performance of the terms in unliteral contact or a signature by inputting the personal cryptographic key can be clear act of acceptance. Therefore, the rules on offer an acceptance will not pose fundamental problems for the formation of smart contracts as the procedure of the formation of such agreement accustom to the elements of offer and acceptance?[25].

A point to note about contract law’s approach towards ‘automatic contracts’, is that a contract is formed when the coins are inserted into the machine in the case of?Thornton v Shoe Lane Parking?(similarly to?Szabo’s vending machine analogy), and the fact that the subsequent process occurs without human intervention does not preclude the formation of a contract?[26].?This can be reinforce by looking at the case of?R (Software Solutions Partners?Ltd) v HM Customs & Excise,?where?it was held that an ‘automatic medium for contract formation’ can result in valid contracts?[27].

In most common law jurisdictions, the existence of valid consideration represents a mandatory condition for any contract to be legally enforced. For a valid consideration, it is only required to be sufficient?[28], and not adequate. Hence, the value and equality of mutual exchange is legal irrelevant from the perspective of contract law formation. Therefore, it is arguably true that consideration requirement can be easily satisfied in case of smart contracts, as smart contracts entail an exchange of digital assets in an example provided above of 30 Ethereum for a bicycle.?

However, an interesting argument raised by?Webach?and?Cornell?where they pointed out that smart contracts do not contain an exchange of promises as it is usually the case for normal contracts and a requirement for a valid consideration. Both?Webach?and?Cornell?observed that?‘If someone balances a pail of water on top of a door, he does not promise to drop water on whoever next opens the door. Rather, he has merely set up the mechanical process by which that will happen. In a similar way, a contract to transfer one bitcoin upon such-and-such event occurring is not really a promise at all. It does not say ‘I will pay you one bitcoin if such-and-such happens’, but rather something like ‘You will be paid one bitcoin if such-and-such happens’...the so-called ‘[smart]?contract’ is not an exchange of promises or commitments. Creation of a smart contract – while setting certain events in motion – does not commit any party do no anything. There’s nothing being prospectively promised’?[29].?

The above observation is surely a departure from the realm of traditional contracts. But, that issue did not exclude the authors from reaching the conclusion that smart contracts are nonetheless legally valid contracts. Another author (Savelyev) also raised another question on whether a smart contract is not a contract because it does not contain any obligation? And he concluded that it is probably more correct to express that the main consequence of the conclusion of a smart contract is not an appearance of ‘obligations’ but the result of a self-limitation in certain rights by technical means?[30].

Furthermore,?Werbach?and?Cornell?also argued that, though such commitments might not constitute promises per se, smart contracts are indeed agreements that purport to alter the parties’ rights and obligations, and that an agreement may still be considered as a contract even if it leaves nothing open to be done or performed?[31]. Therefore, if one argues that smart contracts do not involve a ‘promise’, but more of a guarantee had ruled it out from being recognized as contract, and that is an unrealistic ideal view of contract law. Some considerations, such as: benefits, rights or detriment, loss or responsibility etc., will be conveyed under smart contracts inducing a reciprocal promise, and pragmatically, there will almost always be sufficient consideration?[32].?

Intention to create legal relations in commercial relationship is presumed in common law. However, this presumption is to be disproved by the party claiming that there is no such intention. It could be argued that for every smart contract entered into in commercial setting, the intention to create legal relationship will be presumed?[33]. Another more nuanced view that was offered by?Savelyev?is that by concluding a smart contract, the contracting parties have the intention to use an alternative regulatory system instead of traditional contract law.?

Therefore, he observed that there might not be a true intent to create legal relationship?[34]. But, the author also admits that if the result is factually the same in substance to the one regulated by “traditional contracts”, it can be argued that the nature of the relationship is the same.?

Most common law lawyers will know that, for a contract to be enforceable, parties need to have the capacity to enter such contract. However, most of the other existing blockchain platforms in fact does not check for full legal capacity (e.g. Ethereum). Instead, in principle, anyone can open an account without having sufficient capacity to do so. As there are no means that smart contracts can test for capacity, they can be entered by minors, drunks, or any other incapacitated person. Hence, people who are lacking capacity to sign a contract in the real world could potentially do so on the blockchain platform.?

On the other hand, if there was no capacity, the party then could invalidate the transfer of any assets ex post legally through an action in unjust enrichment and technically through a reverse transaction?[35]. However, this may be an unideal alternative due to the realm of?pseudonymous users with cryptographic strings of random letters and numbers. Hence, it may be difficult to identify who to sue. Additionally, a reverse transaction can only factually rewind the contract, but not legally void the transaction as it may remain on the blockchain since the blocks are immutable?[36].?

Notwithstanding the above, the fundamental point remains that if someone possesses legal capacity, he will be free to enter into legally binding smart contracts. Last but not least, the contracting parties to a smart contract are technically not even people but only cryptographic private keys which represent individual persons?[37]. Hence, could there even be a discussion of capacity, since the parties are technically not human? It is submitted that the case is not as such for autonomous contracts, as the private keys do not act by themselves, but are instructed by humans.?

Therefore, it is possible to believe that smart contracts are capable, by virtue of the flexibility and adaptability; at least of the English contract law and the very process of their formation, of being formed as legally valid contracts. It has been established until this point that smart contracts can in principle, fulfil the requirements for the formation of contracts.?

However, in the event when there are coding mistakes, in the absence of a governing traditional contract,??a court reviewing a smart contract in a dispute face difficulty establishing any evidence of the parties’ meeting of the minds other than the incorrect encoded smart contract. Therefore, the incorrect code may be deemed to represent the understanding of the parties. Therefore, courts may find it difficult to established the parties intention in a smart contract dispute, which can be said as the “meeting of minds” between the?parties.

It is well established in common law jurisdiction that the element of “meeting of minds” is important to contract formation, but, in French law, it is also essential to established consent to through a “meeting of minds” (i.e. the?accord de volontes) by identifying an offer by one party to do or not the do something as well as commensurate acceptance?[38].

In the Singapore case of?Quoine Pte Ltd v B2C2 Ltd [2020], it deals with the two novel issues of (a) where both contracting parties’ algorithm operated as they were meant to in?producing the resulting contract, could one party, nevertheless, be said to have been labouring under a mistaken belief in entering into the contract?, and (b) how should the law assess the state of the non-mistaken party, in circumstances where no human is involved at the time of the formation of the contract??[39].?

On the first issue, Quoine’s central disagreement in its defence was that the contracts underlying the dispute trades (i.e. Trading Contracts) were vitiated under uniletral mistake at common law and in equity. Quoine also alleged that the Margin Traders entered into the contracts with B2C2 for buying and selling Bitcoin and Ethereum under the mistaken belief that they were transacting at prices that accurately represented or did not deviate significantly from the true market price; and B2C2 had actual or at least constructive knowledge of such mistaken belief.?

In order for Quoine to succeed in its claim on the first issue, it has to prove that, (a)?In relation to unilateral mistake in common law, the relevant mistake must be about a fundamental term of the contract?[40], (b) B2C2 must either have actual knowledge (for unilateral mistake in common law) or constructive knowledge (for unilateral mistake in equity) of the mistake, and (c) in relation to unilateral mistake in equity, B2C2 was engaged in some unconscionable conduct in relation to the relevant mistake.?

However, the Court of Appeal disagreed with the lower court that the claimed on mistake was as to the terms of the contract. Conscious that the price at which the Trading Contracts were brought by operation of the parties’ respective algorithms and that these has operated exactly as they had been programmed to act, the mistake in this case was a mistaken presumption on the part of the Margin Traders as to how Quoine’s platform would operate (i.e. the platform will not fail). Such mistake was only a mistake presumption as to the circumstances under which the Trading Contracts would be concluded, instead of a mistake as to the price at which the Trading Contracts were entered into.?

With reference to the issue of knowledge, majority of the Court of Appeal confirmed that in the context of deterministic algorithm?[41], it was the programmer’s state of knowledge that was relevant to be attribute to the parties. The relevant timeframe for assessing the programmer knowledge was deemed to be from the point of programming up to the point that the relevant contract is formed.?This was supported by the view of?amicus curiae?Professor Goh Yihan, who recognised that the time of programming is when the programmer’s knowledge is the most concretised?[42].

Programmers are not expected to be “prophets” and mistakes can take a wide range of forms. But it is clear that, the law on unliteral mistake is concerned with (a) with a type or class of mistake, that is one concerning the fundamental terms of the contract (at least at common law); and (b) with the mental state of the non-mistaken party – whether it knew (or ought to have known) of the (type of) mistake and was acting to take advantage of it?[43].

However, “According to a paper published by the Association for Computing Machinery in 2016, coding bugs and other vulnerabilities were identified in nearly half of all smart contracts written on the Ethereum blockchain, potentially putting at risk $30 million worth of the virtual currency Ether. A review of Ethereum smart contracts conducted by Peter Vessenes, the co-founder of the Bitcoin Foundation, revealed at least 100 errors per 1,000 lines of code. The high error rate, in part, may be attributed to the fact that writing smart?contract code remains highly complex. Researchers at the University of Maryland’s cryptocurrency lab observe that “even for very simple smart contracts (e.g., a 'Rock, Paper, Scissors' game), designing and implementing them correctly was highly non-trivial”?[44].

These high error rates may result in the surge of dispute in relation to smart contracts. Although there are not much case authorities and materials that can be found in relation to smart contract dispute, the case of?Quoine Pte Ltd v B2C2 Ltd?had provide some guidance on how smart contract dispute can potentially be resolved by?the framework the Singapore Court of Appeal have developed. “It also enables the court to examine and consider the knowledge actually acquired after the point of programming and the actual conduct of the parties up to the time of the contract”. However, the court emphasise that this is directed at?actual?conduct. The court also said that “rather, working backwards from the output that emanated from the programs, we are driven to assess the relevant state of knowledge by examining that of?the programmers”?[45].

Therefore, are there challenges around encoded contracts vs natural language contract? Stay Tune for the continuation of this paper in my next publication.

[10]?Nick Szabo, “Smart Contracts: Building Blocks for Digital Market,” 1996.

[11]?Compare?Frank H. Easterbrook,?Cyberspace and the Law of the Horse, 1996 U. CHI. LEGAL F. 207 (1996) (arguing that the best way to learn and craft the law of a particular field is to study general rules),?with?Lawrence Lessig,?The Law of the Horse: What Cyberlaw Might Teach, 113 HARV. L. REV. 501 (1999) (arguing that the nature of cyberspace is unique and can reveal general principles of law);?and?RICHARD A. EPSTEIN, SIMPLE RULES FOR A COMPLEX WORLD, (Harv. Univ. Press. 1995) (arguing that basic legal principles can and should govern a complex, industrial society).

[12]. Stéphane Blemus, ‘Law and Blockchain: A Legal Perspective on Current Regulatory Trends Worldwide’ (2017) Corporate Finance and Capital Markets Law Review, 13; cf ISDA and Linklaters, ‘Whitepaper on Smart Contracts and Distributed Ledger - A Legal Perspective’ (2017) 4ff.

[13] Cf., e.g., Glatz (n 20) 115.

[14]?Markus Kaulartz and J?rn Heckmann, ‘Smart Contracts – Anwendungen der Blockchain-Technologie‘ (2016) CR 618, 622; Gerald Spindler and Maren K Woebbeking, ‘Smart Contracts und Verbraucherschutz’ in Tom Hinrich Braegelmann and Markus Kaulartz (eds),?Rechtshandbuch Smart Contracts?(C.H. Beck 2019) (forthcoming).

[15] Philipp Reusch and Niklas M. Weidner,?Future Law: Blockchain, Industrie 4.0, Internet of Things, Robotik?(Fachmedien Recht und Wirtschaft 2018) 109ff; Martin Heckelmann (n 14) 506f; cf., e.g., the requirements established by the “statute of frauds”, Cardozo Blockchain Project (n 19) 9 with further reference.

[16] The pieces of property do not need to be tangible; software systems can be embedded with contractware.

[17] Val D. Ricks,?In Defense of Mutuality of Obligation: Why "Both Should Be Bound, or Neither", 78 NEB. L. REV. 491, 494 (1999) (“Courts have held a promise traded for another promise to be enforceable for well over 400 years, since the early to mid-1500s. Courts currently say that a mutual (or reciprocal, or bargained-for) promise constitutes consideration for a promise, causing it to be enforceable.”).

[18] An Introduction to Smart Contracts and Their Potential and Inherent Limitations,?Saturday, May 26, 2018?<https://corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and-inherent-limitations/> at 5 July 2021.?

[19] Raskin, ‘The Law and Legality of Smart Contracts’, 322.

[20] ?Smit v Hughes?(1871) LR 6 QB 597, 607 (Blackburn J).

[21] Werbach & Cornell, ‘Contracts Ex Machina’, 368.Cf?Partridge v Crittenden?[1968] 2 All ER 421; cf?Carlill v Carbolic Smoke Ball Co Ltd?[1892] 1 QB 296.

[22] Cf?Partridge v Crittenden?[1968] 2 All ER 421; cf?Carlill v Carbolic Smoke Ball Co Ltd?[1892] 1 QB 296.

[23]?Doubtful however S?bbing, ‘Smart Contracts und Blockchain: Definitionen, Arbeitsweise, Rechtsfragen’, 46.?

[24]?G.Jaccard, ‘Smart Contracts and the Role of Law’?(2017)?Jusletter IT, 22; J.J. Szczerbowski, ‘Place of Smart Contracts in Civil Law. A Few Comments on Form and Interpretation’, 9 November 2017. Proceedings of the 12th?Annual Scientific Conference NEW TRENDS 2017.

[25]?This might as outlined already before be different for the other mentioned category of smart contract where the algorithyms act as an ‘artifical agent’.

[26] Thornton v Shoe Lane Parking?[1978] 2 QB 163 (Lord Denning MR).

[27] R (Software Solutions Partners Ltd) v HM Customs & Excise?[2007] EWHC 971, para. 67.

[28] Illustration case:?Chappel & Co Ltd v Nestlé Co Ltd?[1959] AC 87.?

[29]?Werbach & Cornell, ‘Contracts Ex Machina’, 340.

?[30] Savelyev, ‘Contract Law 2.0: ‘?Smart? Contracts As the Beginning of the End of Classic Contract Law’, 18.

[31] Werbach & Cornell, ‘Contracts Ex Machina’, 341.

[32] Werbach & Cornell, ‘Contracts Ex Machina’, 370.

[33] See e.g.?Esso Petroleum Limited v Commisioners of Customs and Excise?[1975] UKHL 4.

[34] Savelyev, ‘Contract Law 2.0: ?Smart? Contracts As the Beginning of the End of Classic Contract Law’, 11.?

[35] See also Jünemann & Kast, ‘Rechtsfragen beim Einsatz der Blockchain’, 532; Schrey & Thalhofer, ‘Rechtliche Aspekte der Blockchain’, 1436.?

[36] Schrey & Thalhofer, ‘Rechtliche Aspekte der Blockchain’,1436.

[37] Werbach & Cornell, ‘Contracts Ex Machina’, 371.

[38] French Civil Code, arts 1101, 1106.

[39] Quoine Pte Ltd v B2C2 Ltd?[2020] SGCA(I) 02. Civil Appeal No 81 of 201.?

? [40] The question of whether unilateral mistake in equity can extend beyond a mistake as to a term of the contract was not fully argued. The Court of Appeal was satisfied that it was not necessary to determine this question in this case.

[41] A deterministic algorithm is one which always produces precisely the same output given the same input and does not have the capacity to develop its own responses to varying condition.?

[42] Quione,?supra?note 1?at para?99.?

[43] Quoine Pte Ltd v B2C2 Ltd?[2020] SGCA(I) 02.?

? [44] O'Toole, Kelly and Hahn Discuss Why Smart Contracts Need Smart Corporate Lawyers,?February 7, 2018?https://www.potteranderson.com/newsroom-publications-OToole-Kelly-Hahn-Discuss-Why-Smart-Contracts-Need-Smart-Corporate-Lawyers.html?at 20 July 2021.

[45] Quione,?supra?note 1?at para?98.?