Switzerland
Answer ... First, it is important to determine whether smart contracts may be concluded based on the parties’ declaration of intent, which is a prerequisite for the conclusion of a contract according to Article 1, paragraph 1 of the Swiss Code of Obligations. In the blockchain world, a smart contract is a program written by a user in order to carry out a transaction with other users on the blockchain that accept the terms of that transaction. A smart contract can thus be legally assimilated to an accepted offer and therefore to a contract.
However, the essential elements of the proposed contract must be clearly spelled out in the program, and must be sufficiently precise, clear and understandable to be validly accepted by all parties in accordance with Article 1 of the Swiss Code of Obligations.
According to Swiss case law, if the real intent of the parties cannot be determined, the judge must interpret the declarations that the parties have made and their behaviour according to the principle of trust. Under the principle of trust, the objective meaning of its declaration or behaviour is attributed to a party, as the objective pursued by the parties or other circumstances might demonstrate their intent. The judge will determine how a declaration or an attitude should be understood according to the rules of good faith, taking into account all circumstances.
Accordingly, the behaviour of a party will be sufficient to determine its intent based on the execution of the transaction. Thus, in any case, a smart contract should be considered valid in accordance with Article 1, paragraph 1 of the Swiss Code of Obligations.
Switzerland
Answer ... The Swiss Financial Market Supervisory Authority (FINMA) is Switzerland’s independent financial markets regulator. Its mandate is to supervise banks, insurance companies, exchanges, securities dealers, collective investment schemes and their asset managers and fund management companies. It also regulates distributors and insurance intermediaries. It is charged with protecting creditors, investors and policyholders. FINMA is responsible for ensuring that Switzerland’s financial markets function effectively.
As indicated above, FINMA has issued guidelines in relation to initial coin offerings and security token offerings, but not specifically on smart contracts. The Federal Council Report on the Legal Framework for Distributed Ledger Technology (DLT) and Blockchain in Switzerland explains on a high-level basis what smart contracts are and how they can be implemented within the issuance of tokens.
In addition, Switzerland benefits from a strong innovation community, in which private actors participate to promote the implementation of DLT within the country. On 27 April 2018 the Swiss Legal Tech Association issued a white paper on smart contracts; and in October 2018 the Capital Market Technology Association issued a blueprint explaining the main features of a smart contract for the tokenisation of shares.
Switzerland
Answer ... Commercial agreements are full of clauses that protect the parties from various liabilities. Not all clauses are suitable for automation and self-execution through code. Even where a clause might technically be capable of automation, this might not always be desirable.
For instance, imagine that a supplier of goods initiates a smart legal contract with a retailer. The payment terms could be defined in codes and executed automatically upon delivery. However, the retailer would likely insist that the contract include an indemnity clause. There would be no point representing this clause in code, since it is not something that can self-execute.
It is thus important to distinguish between operational clauses within legal contracts that can be automated and non-operational clauses that are less susceptible to self-execution.
Operational clauses generally refer to obligations that require a deterministic action on the occurrence of a specified event or at a specified time – for example, a payment against performance or a transfer of assets.
Switzerland
Answer ... As indicated above, non-operational clauses are less susceptible to self-execution by a smart contract.
‘Non-operational clauses’ are clauses that have no conditional logic, such as governing law and jurisdiction clauses, entire agreement clauses, severability clauses and even confidentiality clauses.
There are also legal formulations that are subject to interpretation and involve a human judgement – for example, ‘best efforts’, ‘good faith’, ‘to the knowledge’, ‘reasonable step’ and ‘material adverse change’. These formulations clearly have a legal meaning, but they are not susceptible to be encoded within a smart contract.
Different legal regimes will involve different interpretations of what these terms might mean, which are often heavily contextual and driven by the facts and circumstances.
Even if smart legal contracts are functionally comprised of code, they will need to fall under the umbrella of an overall relationship that creates legally enforceable rights.
Indeed, for a smart legal contract to be legally enforceable, there would need to be a legal contract that satisfies the requirements of the relevant governing law, but with some element of that legal contract being electronically automated. With smart contract code only, by contrast, no legal contract might exist at all.
This is why smart legal contracts will involve a mix of digital coding and traditional legal language.
Switzerland
Answer ... Smart contracts operate independently of the surrounding legal framework, but those that wish to use them will have to deal with legal issues regardless, which could include the following:
- What if one party did not have the legal capacity to enter into the smart contract? Article 13 of the Swiss Civil Code states that a person must be over 18 years old and must have the capacity to consent in order to have the capacity to act (Articles 14 and Articles 16).
- What if the code does not perform as the parties expected? If the programming code does not reflect the real intent of the parties, one could argue that there is a defect of consent.
- How can parties change self-executed obligations of the smart contract if they mutually agree to amend the contract? As smart contracts are self-executed transactions and immutable, it is not possible to amend the transaction.
- What if the content of the smart contract is unlawful? A contract cannot have terms that are impossible, unlawful or immoral (Article 20, paragraph 1 of the Swiss Code of Obligations). In such cases, the contract will be deemed null and void.
- A contract following an unfair advantage due to a discrepancy between performance and counter-performance may also be considered unilaterally not binding.
Given the current state of the legislation, a smart contract is suited more as an execution mechanism for a set of deterministic obligations rather than as a contract in itself.
Switzerland
Answer ... The challenges with smart contracts primarily arise during the pre-contractual phase. The parties must ensure that the code corresponds exactly to their declared intent, because once the code is written, interventions are no longer possible and the contract executes itself automatically.
Lawyers who are familiar with coding can convert a traditional contract into a smart contract by identifying which contract terms, as well as practical and legal details, will be implemented as a smart contract and which (if any) will not.
Key algorithms for performing the parties’ intentions can be specified. Legal issues can be identified and addressed.
The important issues should not be left by the contracting parties to a software developer’s sole discretion.
The parties can also integrate the advice of legal counsel into the instructions given to the software developer. It is possible to add comments that explain or annotate the source code of the program when programming the smart contract. These comments may be used to include some (legal) wording in the coding language in order to precisely define the intent of the parties. These comments may also be used as a basis for interpretation in case of disputes. If there is a conflict between the code and the comments, the latter may prevail over the code to ensure that the real intent of the parties is considered.
Even fully self-executing contracts will ultimately need to refer to legal terms that will define each party’s rights in case of litigation.
Switzerland
Answer ... A public blockchain is a permissionless blockchain. Anyone can join the blockchain network – meaning that anyone can read, write or participate in a public blockchain. Public blockchains are decentralised; no one has control over the network; and they are secure in the sense that the data cannot be changed once validated on the blockchain.
On the other hand, a private blockchain is a permissioned blockchain. Permissioned networks impose restrictions on who can participate in the network and on what transactions may be conducted through it.
The above considerations in relation to smart contracts do not differ significantly between private and public blockchain, as the implementation of smart contracts is technically the same. That said, the issue of which data can be inserted within smart contracts is highly sensitive. Data that is available on a public blockchain is available to anyone. It may be anonymised, but advances in technology such as quantum computing might render ineffective the cryptographic consensus mechanism that underpins the blockchain protocol.
One possibility is to write the hash of transactions on the blockchain while storing the transactions themselves off-chain. This will allow transactions and related data to be erased, while maintaining their integrity on the blockchain, leaving only a trace of the deleted information.