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Smart Legal contracts: legally-recognised contracts
Smart Legal contracts: legally-recognised contracts
Blockchain

Smart Legal contracts: legally-recognised contracts

By Caterina Ferrara - 14 Oct 2019

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Smart contracts have legal recognition. The need to adapt to the dynamism and speed of modern business relations also requires an evolution of legislative tools, with a reduction in costs and greater automation in the execution of contracts.

Among these tools, there are certainly smart legal contracts that take advantage of blockchain technology.

The most recent report by the European Union Observatory and Forum for Blockchain has also recently introduced smart legal contracts, which are automatically processed and executed using code and a programming language.

To be precise, part of the contractual terms are encoded and inserted on the blockchain and the system determines if the conditions are true and effective; when the defined conditions are met, what has been agreed by the contracting parties is executed.

Smart legal contracts, therefore, remove the need for a third party to act as an intermediary, significantly reducing contractual costs. They are also more secure because the code language gives no room for interpretation, ambiguity or divergence.

But what is the relationship between legal contracts, smart contracts and smart legal contracts on the blockchain? The brilliant Nick Szabo already thought of smart contracts back in the 90s and recently, with the spread of blockchain technology, these have found a real form and possibility of application. 

According to the Italian legal system, a contract, as traditionally conceived, corresponds to the agreement of two or more parties to regulate, settle or terminate a legal relationship between them, but it also represents a tool through which real rights are acquired as well as obligations are imposed (art. 1321 of the Civil Code). It contains “essential” and “accidental” elements, respectively: 

  • agreement, 
  • cause, 
  • object, 
  • form and condition, 
  • term, 
  • burden.

In February, the Simplification Decree 2019 introduced in Italy, in addition to the regulatory definition of distributed ledger technologies (DLT), also the definition of “smart contracts”, equating the latter to documents drawn up in writing, thus taking a huge step forward in the European panorama.

However, the latest report of the European Union Observatory and Forum for Blockchain makes a distinction between “smart legal contracts” and “smart contracts with legal implications”. The former would differ from the latter in the requirements of: 

  • form (respect for European law), 
  • signature (via TSP), 
  • immutability. 

Unfortunately, the meaning of the latter, the “smart contracts with legal implications”, and their potential scope of action remain unclear.

The European perspective, therefore, is still far from Italian law because blockchain transactions continue to be devoid of legal value. Despite this, understanding the difference between a “smart legal contract” and a “smart contract” remains essential.

 

Caterina Ferrara
Caterina Ferrara

Caterina is Blockchain Business Consultant at Almaviva. She is also the Blockchain Ladies & Neuralia Founder.

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