Legal Engineering on the Blockchain – Smart contracts as legal conduct

In our short article ‘Legal Engineering on the Blockchain – Smart contracts as legal conduct’ in 29 Law and Critique 2 (2018) we focus on smart contracts not as crypto currency, but as applications that enable complex interactions such as trading in real world property and services, licensing of intellectual property, licensing access to property and services in the Internet of Things (IoT), as well as institutional coordination through Decentralised Autonomous Organisations (DAOs). The paper examines the relationship between smart contracts and law, and tries to develop a framework that emphasizes the legal character of smart contracts, without promoting the popular catch phrase ‘code is law’. In our thinking, concepts of ‘legality’, ‘lawfullness’ and ‘jurisdiction’ are more complex than can be encapsulated by architectures or technologies that regulate or condition behaviour.

 

We approach the relationship between smart contracts and law by asking, how do smart contracts relate to existing legal systems? Or put in other words, whether smart contracts need to be understood as a completely novel form of governance, or rather as embedded in established jurisdictional institutions? How do they stand apart? What is unique about them, and what echoes previous experiences in law making? To answer these questions we draw on theoretical conceptions of jurisdiction, the history of the common law and experiences from commercial and investment arbitration.

 

We suggest that smart contracts, and blockchain technology more broadly, should be thought of as an emerging jurisdictional environment that establishes a legal regime through practice. This regime is developed through two different law-making practices. The first one can be understood as a process of standardisation through the development of forms that are readable in code and in law. The second is the shaping of the interpretation of these legal forms through dispute resolution. The basic idea on standardisation is that form precedes the event. The only transactions that can be carried out on the blockchain are those that are written in readable code. Multiple entities such as Enterprise Ethereum Alliance, Mattereum, Open Law, Agrello, the R3 Consortium, Common Accord and Legalese, are participating in building a library of machine-readable contract modules. Most projects work with a version of a so-called Ricardian contract, developed by Ian Riggs, that consist of a natural language element and a code element. Other entities, such as the Lexon Foundation, are developing a human readable code language.

 

The writ system in the common law emerged in a similar way. Writs are an early library of engagements with the legal world. The readability of legal reality became contingent upon one’s ability to express it in the required form. The writ was a summons of the king by which particular interactions could be brought before the courts to be remedied. It is here that we see again how the form precedes the event. No writ no remedy, no remedy no wrong.

 

Thus, smart contract modules take on this same character of providing the forms for recognisable interactions. Consequently, those who define the form, define the possibilities of lawful relations. This is of particular relevance for smart contracts, because they not only contain the terms of an interaction, they automatically execute those terms. This does not mean that the smart contract executes the ‘true’ meaning of the agreement, it only means that it executes one possible interpretation of the agreement. Hence, dispute resolution is an integral practice, because it shapes the interpretation and permissibility of transactional forms.

 

This also means that the character of the dispute forum will determine the appropriate interpretative frame. In commercial arbitration, this has led to the establishment of a whole new industry characterised by private law principles. From international investment law and the current criticism against it we know that such a characterisation clashes with the public interest. In the blockchain ecosystem different start-ups propose different means for dispute resolution. The suggestions range from resort to national courts, to using established arbitral institutions, like in the Mattereum project. Others, such as Confideal, propose novel arbitral institutions with new procedural rules. Some, like Kleros, go as far as suggesting crowd sourced arbitration based on game theoretical incentive structures. What is at stake then in the competition over the appropriate forum is precisely the character that we will associate with smart contracts.

 

To sum up, we suggest that legal forms and the choice of forum are not simply technical choices, but are choices that frame the values we ascribe to a system. Framing analysis in terms of public and private interest might allow us to grasp the questions we are facing. What kinds of communities are built through blockchain and smart contracts? Will it be transnational business communities or an international civil society? Who can participate and what roles are available for participants in the system? Is there room for the public interest? We think that there is a great urgency to pay attention to this emerging jurisdiction and to enter the conversation in order to shape it in a socially desirable way.

 

Andrea Leiter & Jake Goldenfein

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