The legislator is challenged by the technical improvement to set up a legislation framework that keeps effective control and a pace with it. Malta adopted Blockchain legislation and the Malta Digital Innovation Authority (MDIA) was established last year. In the Part 1 of this Article smart contracts were examined through the elements of the legal contracts and the referred legislation. In order to continue this examination line the lifecycle of the contract is analyzed in this Part.

Negotiations

Entering into any agreement starts with negotiations between the parties. As the consent is reached parties shall also decide the form based on the type of the contract. Certain contracts are only valid in written form or shall be certified by notary.

Parties may decide if they ensure the enforcement of any obligation by smart contract on a Blockchain platform. They have to agree who shall program the smart contract and set up the conditions of the agreement with a third party programmer. In case of entering into such agreement the programmer shall be liable for the damage caused by any breach according to Civil Code.

However damage might arise from any discrepancy between the legal and the smart contract. In order to avoid such damage the parties shall provide a very simple logic based and precise statement on the obligations aimed to be enforced by smart contract.

The registration of the smart contracts under Maltese law is a very complex issue. The innovative technology arrangements will be more likely ideas programmed on Blockchain or applications based on interaction of smart contracts, rather than a once used smart contract of the parties. If parties decide to apply for any registration in Malta the personnel, financial funds and the legal and technical structure have to meet the requirements of the registration.

In a case of any interaction with another smart contract or using a Blockchain platform to program smart contract, the parties using the services of another platform or smart contract need to test and ensure that their smart contract is operating in a safe way according to the expectations.

Performance

“Many kinds of contractual clauses (such as collateral, bonding, delineation of property rights, etc.) can be embedded in the hardware and software we deal with, in such a way as to make breach of contract expensive (if desired, sometimes prohibitively so) for the breacher.[1] 

Undeniably the main benefit of smart contracts is that the obligations are automatically enforceable by the computer code. Based on this characteristic, smart contracts might be regarded as a guarantee for the performance of the obligation. Accordingly the parties of a legal contract may decide to ensure the performance of some obligations by smart contracts instead of penalty, surety or any other traditional guarantee.

The registered smart contracts have to operate without interruption complying with the legal and technical requirements; moreover cooperate with MDIA and other authorities.

Amendments

Any relevant circumstances or the law may change after entering into an agreement. In such cases the automated enforcement of smart contracts can be definitely regarded as a disadvantage, since the amendment or termination of the smart contract by mutual consent of the parties might be impossible or expensive.

Taking into consideration that MDIA is also entitled to amend the conditions and the guidelines from time to time by providing a six-month preparatory period, the innovative technology arrangement shall have an in-built technology features, to enable the technical administrator to intervene in a transparent and effective manner in the event of a material cause of loss to any user or a material breach of law.

Renewal

Following the mutual performance of their obligations and an evaluation of the contractual relationship the parties based on their experience might extend or renew the contract. In such cases the former smart contract can be used again easily as template by updating the data.

The certification of innovative technology arrangement is granted for two years. It is renewable; however the administrator might decide not to apply for certification again. In a case of innovative technology arrangements not falling under the scope of Virtual Financial Assets Act, the arrangement is allowed to continue the operation in Malta, since the certification is voluntary.

However they should be obliged to compensate their users for loosing the privilege, sureness and trust provided by the MDIA certification.

Dispute resolution, court procedure and smart contract as evidence

The MDIA Act inevitably sets up the rules and procedures for the administrative review of any decisions of the authority by the Administrative Review Tribunal. However the legal disputes may arise between the DLT platform and its users on the on hand and between users creating own smart contracts on the DLT platform on the other hand.

One kind of possible dispute has a consumer protection characteristic, while the other is more close to the civil law approach. Regarding the registered innovative technology arrangements the applicable law is the Law of Malta and the disputes shall be referred to the courts of Malta. However the users will not only be limited to the territory of Malta, they will be participating on such platforms from all over the world.

Accordingly the dispute resolution shall be an efficient, quick, cheap, electronic procedure to ensure the users the access and the possibility of enforcing their right from abroad. The Blockchain Strategy does not contain any project regarding the effective and alternative dispute resolution for the Blockchain.[2]In contrast to Malta last year a task force was set up to work on the rules and regulation on the first Blockchain court in Dubai.[3]

There are in-built consensus mechanisms e.g. “Proof of Work”, “Proof of Stake” etc. in the Blockchain to verify the new blocks. Shall such in-built consensus mechanisms be interpreted as the parties resigned from their rights to remedy? Is it possible to resign of the right to the remedy by programming a smart contract even if a legal contract shall be regarded void or voidable?

Regarding the court procedure or any alternate dispute resolution the rules have to set up how to use the information, the transaction in a Blockchain as an evidence without jeopardizing the privacy of the user by connecting a person to the public key.

Enforcement of the court judgments

The aim of the Blockchain is to eliminate the middleman. It might be possible to replace the current system for the enforcement of the judgments by smart contracts[4].

Assuming that e-residency results that the citizens have own wallets on the Blockchain containing personal data and access to the financial assets can a citizen be forced to enter into a smart contract by a legally binding court judgment in the future?

Conclusions

The particular value of the Blockchain Strategy is to deal with the impact of the Blockchain in its complexity launching projects in different fields by focusing on the economical growth and innovation. The innovation and the opportunities in the technology itself are in the center of the Maltese Blockchain legislation as well.

Smart contracts are considered as innovative technology arrangements, with the possible registration by MDIA. As it can be concluded the innovation focused approach itself does not provide entire solution for smart contracts sharing similar characteristics with legal contracts.

Regardless of the current Blockchain legislation the smart contracts shall be introduced in a Civil Code as well, most probably as a special guarantee of the enforcement of the obligation.

Consequently as soon as the smart contracts will be defined by the civil law, civil procedure rules shall be amended and alternate dispute resolution shall be introduced according to the particularity of this technology.

[1] Nick Szabo: The Idea of Smart Contracts

[2] The Blockchain Strategy has programs for the Smart Governance, Public Registries and E-Residency. All of these projects effect the fundamental rights of the citizens. The Courts shall be prepared how to deal with the infringement of fundamental rights on the Blockchain.

[3] DIFC Courts and Smart Dubai launch joint taskforce for world’s first Court of the Blockchain

[4] The project for E-residency in the Blockchain Strategy aims to find a legal identification for IoTs and Blockchain. In a case of any court decision shall be enforced in favour of or against such arrangements, the most effective way might be to program it in a smart contract.

References:

1. Chapter 16 Civil Code of Malta
2. ACT No. XXXI of 2018 AN ACT to provide for the establishment of an Authority to be known as the Malta Digital Innovation Authority, to support the development and implementation of the guiding principles described in this Act and to promote consistent principles for the development of visions, skills, and other qualities relating to technology innovation, including distributed or decentralised technology, and to exercise regulatory functions regarding innovative technology, arrangements and related services and to make provision with respect to matters ancillary thereto or connected therewith.
3. ACT No. XXX of 2018 AN  ACT to  regulate  the field  of  Initial Virtual  Financial  Asset Offerings  and Virtual  Financial  Assets and  to  make provision  for matters ancillary or incidental thereto or connected therewith.
4. ACT No. XXXIII of 2018 AN ACT to provide for the regulation of designated innovative technology arrangements referred to in this Act, as well as of designated innovative technology services referred to in this Act, and for the exercise by or on behalf of the Malta Digital Innovation Authority of regulatory functions with regard thereto.
5. New Scientist, The End of Money: The story of bitcoin, cryptocurrencies and the blockchain revolution, John Murray Learning Publishers, ISBN: 978-1857886696, 2017.
6. Don Tapscott, Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business and the World, Portfolio Penguin, ISBN: 978-0241237854, 2016.
7. Primavera De Filippi, Aaron Wright: Blockchain and the Law: The Rule of Code
8. Guido Governatori, Florian Idelberger, Zoran Milosevic, Regis Riveret, Giovanni Sartor, Xiwei Xu: On legal contracts, imperative and declarative smart contracts, and blockchain systems (Journal: Artificial Intelligence and Law > Issue 4/2018)
9. Mark Giancaspro: Is a ‘smart contract’ really smart idea? Insight from a legal perspective (journal: Computer Law & Security Review 33 (2017) 825-833)