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What legal value for smart contracts?

Smart contracts or "contrats intelligents" are computer code linked to the blockchain that automatically execute all or part of a pre-existing contract. As one author points out, the smart contract "comes over the contract like a digital clone. (...) Smart contracts do not replace contracts but strengthen them".

 

When a smart contract exists alone, regardless of a conventional contract of which it would be the (partial) execution, it shall be, in case of dispute or interpretation difficulty, to refer to the parties’ intent reflected by the computer code.

I - How to prove a smart contract? What validity?

 

A. In civil matters

 

In principle, a contract is formed by the simple exchange of consents between the parties on the essential elements of the contract without the writing being a condition of the contract existence.

 

In case of dispute, between individuals or between a professional and an individual, the proof of the contract is provided by all legal means when its value does not exceed EUR 1.500. Beyond this value, the proof of this contract must be provided in writing. However, some contracts must be recorded in writing to be valid. This is the case of assignments of patents and trademarks (French Intellectual Property Code, article L.613-8 and L.714-1), for example.

 

At this stage, the first question to ask is: is a smart contract a valid writing? Indeed, it is actually merely a computer code.

 

The (positive) answer is given by Article 1365 of the (new) French Civil Code: "The writing results from a series of letters, characters, figures or of any other signs or symbols having an intelligible meaning, whatever their support". This broad definition of writing may certainly include computer code, subject to the present parties’ understanding.

 

It is then necessary to determine if the blockchain makes it possible today to prove the existence and the content of a legal act within the meaning of the (new) article 1366 of the French Civil Code which imposes a dual condition of validity of the electronic writing:

  • identification of the author; and

  • the guarantee of maintaining the integrity of the act.

 

These two conditions are explained by Article 1367 of the French Civil Code: "When [the signature] is electronic, it consists in using a reliable means of identification that guarantees its link with the act it is attached to. The reliability of this means shall be presumed, until proof to the contrary, when an electronic signature is created, when the identity of the signatory is assured and when the integrity of the act is guaranteed, under the conditions laid down by decree en Conseil d’Etat".

 

The proof is guaranteed by reliable means of security relating to the verification of the identity of the signatory and the informational integrity of the act.

 

Note that where the writing is required as the validity of the act (contract of patents and trademarks assignment for example), article 1174 does merely a reference to the system of proof of contracts: "When a writing is required for the validity of a contract, it may be established and stored in electronic form as provided in Articles 1366 and 1367 (...)".

 

The notion of identification is different from that of identity or family name (indeed, one can for example sign with an illegible autograph or a pseudonym). What matters is that the signatory is identifiable and manifest by signing his adhesion to the act. In other words, it is necessary for the identifier to be linked in a sufficiently certain manner to a person who shall then be identified by this one.

 

In a public blockchain, the identification is provided by a public key (which is not publicly linked to a natural or legal person) and the signature by the private key. It would not be impossible to consider the couple "public key/ private key" used by public blockchain to sign transactions as a means of identification. However, this approach suffers from two major drawbacks:

  • In practice, if the party against whom one intends to prove obligations remains hidden behind his public key, the exercise shall be worthless.

  • The public blockchain shall not benefit from the presumption of reliability of Article 1367 of the French Civil Code.

 

Therefore, in case of dispute, the judge shall be convinced, with expertise to support the process reliability.

 

B. In commercial matters

 

Between traders, the proof is free, whatever the amount of the transaction (French Commercial Code, article L.110-3).

 

 

II - How to ensure a certain identification of the users of a public blockchain?

 

For a contract concluded through the blockchain to be provable (and in some cases valid), it shall be necessary to identify the insured parties, or to be certain, by an electronic signature created under conditions fixed by decree in the Council of State, or by another process left to the discretion of the judge. It is Decree No. 2001-272 of 30 March 2001 which details the conditions applicable to the so-called "secure" electronic signature, benefiting from the presumption of reliability of Article 1367.

 

Article 1(2) states that a secure electronic signature is an electronic signature that satisfies the following requirements:

  • Be specific to the signatory;

  • Be created by means that the signatory can keep under its exclusive control;

  • Guarantee with the act to which it attaches a link such that any subsequent modification of the act is detectable.

 

Article 2 of the Decree lays down the conditions which make it possible to presume a reliable electronic signature process. Thus, this method must implement a secure electronic signature, established through a secure device. In addition, verification of this signature necessarily relies on the use of a qualified electronic certificate. If the secure electronic signature does not guarantee these two cumulative conditions, then the presumption shall not be recognized, and it shall be subject to the same regime as a simple electronic signature.

 

Thus, the law requires the electronic signature verification by means of a certificate issued by a qualified and approved service provider. The intervention of this provider is contrary to the initial logic of the blockchain which presupposes total disintermediation. Therefore, the blockchain cannot benefit from the presumption of reliability committed to the electronic signature, for lack of issuance of certificate by an authorized provider.

 

The elDAs Regulation has not changed this scheme. Therefore, in the current state of the law, two cases are possible:

  • A secure electronic signature function is added to the blockchain, with the intervention of an authorized (qualified) certification service provider under the conditions of the decree of 30 March 2001. Such an addition is technically possible, even if it significantly increases the device. The smart contract so signed would then benefit from a presumption of reliability (and therefore of validity for a judge);

  • Another identification process is added. Solutions adapted to blockchain technology are already offered in the market, for example uport on ethereum or the ÆTERNAM project. These solutions rely on trusted third-party (eg in the post office) to certify the identity of a user, with the advantage of allowing him to decide alone the management of his digital identity. These solutions shall certainly be developed, but today they shall be considered as mere means of proof left to the discretion of the judge. Once again, standardization (in progress) can play a reassuring role in this area. Note in this regard a judgment of the French Court of Cassation of 6 April 2016 which seems to indicate a certain relaxation of the case law on the admissibility of unsecure electronic signatures within the meaning of the decree of 30 March 2001.

 

Unlike the first solution, it should be noted that at the moment the second alternative would not offer a presumption of reliability and validity for a judge.

 

 

III - The law for trust in the digital economy (LCEN Act)

 

The LCEN Act introduced in the French Civil Code (Civil Code, Art. 1369-2) a special regime for contracts concluded electronically. This is the famous double-click rule: the user validates and/or corrects his order (1st click), then accepted the offer (2nd click).

 

If so, this formalism should be coded in the smart contract.

 

 

IV - The regime of dual integration

 

For the online contract to be valid there must be non-flawed consent and understanding by all parties of the commitments made.

 

It is essential that the smart contract be accompanied by clear explanations on its use (what is invited to do article 1369-1, 1° of the French Civil Code: ‘The offer, furthermore, states: 1° The various steps to follow for conclude the contract electronically (...)") and is subject to general and/or specific terms of service (GTS or STS) which together with the main contract form the complete contractual framework (always in compliance with Article 1369-1 of the French Civil Code).

 

As already mentioned, such contractual terms and conditions precedent to the smart contract can also adjust the system of proof.

 

It should be noted that practical solutions adapted to smart contracts already exist. Those are called "double integration": process that allows to integrate legally qualified contracts such as in smart contracts. The "double integration" also makes it possible to use all the means of appeal and dispute resolution but also to make the contract enforceable if the contract – also exist outside the smart contracts – shall automatically be recognized by the competent jurisdiction but the smart contract shall be used for the contract administration governing the contract.

 

In the near future, the market offers smart contract models with standards and software to convert conventional contracts into computer codes (see Common Accord project). One example, the use of an internationally recognized and encoded on the blockchain standardized license agreement would open up many perspectives in terms of automating the management of intellectual property rights portfolios for licensees and for national offices.

 

 

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3èmes Assises des Technologies Financières - Jeudi 17 octobre 2019

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