Smart Contracts and Smart Legal Contracts
Dr. Agustina Pérez Comenale spoke with Dr. Gustavo Gauthier and Dr. Nicolás Gómez, leaders in the application of blockchain technology in digital contracting and other use cases in the legal field.
Dr. Gustavo Gauthier is Attorney-at-law, partner at Brum Costa Abogados, Magister in Labor and Social Security Law, Adjunct Professor of Labor and Social Security Law at the Law School of UDELAR (Universidad de la República), and Professor of the Postgraduate Course in Applied Labor Law at the University of Montevideo.
Dr. Nicolás Gómez is Attorney-at-law, a member of the Litigation Department of Brum Costa Abogados, a Dr. in Law and Social Sciences, and a Postgraduate degree in Applied Procedural Law.
Introduction: Digital Contracts, Smart Contracts and Smart Legal Contracts.
Dr. Agustina Pérez Comenale points out that “when we speak of digital contracting we refer to any contract that is drawn up through electronic tools. We are not talking about the IT contract itself, software contracts or the like, but about any type of contracts that involve IT or technological tools.
There is a new section of contracts or a new contract model that began to be used a few years ago, the famous CLM, Contract Lifecycle Management, the life cycle of the contract, which facilitates the preparation of contracts. Not only the pre-contractual part, but later in its execution.
Finally, what are the Smart Contracts, all the contracts or instructions that are made to the blockchain or chain of blocks. There are different blockchains, public and private, in which it can be programmed and there are programming languages, with loops, conditions, which it is very important to consider when selecting the platform that we are going to be operating.
Smart Contracts are instructions that we give the platform to operate and make certain instructions automatically without the need for human intervention.
Smart Legal Contract is the use of automatic execution for the conventions established between the parties. Here it implies a role for the legal professional who will be preparing the contract and will be putting it into practice, in the pre-contractual and clause stage, listing various issues such as the audit of the program among others.
It is important to understand the technology and the different types of contracts that we must see which is the best suited to a given situation. We must always bear in mind that we are using technology does not mean that it is good or profitable, but to understand it to see how to apply it in each circumstance”.
“The pre-contractual stage or the preparation of the contract is extremely important”, says Pérez Comenale, “being equipped with automatic execution, such as the Smart contract or the Smart legal contract, it is very important to be able to at least try to contemplate the different possible scenarios that may arise during the execution of the contract.
It is important in the pre-contractual stage to consider some clauses, such as the typical clauses of any contract because we stick to the legal nature of contracts, which is highly debatable even the concept of Smart Contracts, if we are dealing with related contracts, or contracts of adhesion or if it is simply a tool and we take the nature of the contract itself as its own nature”.
Implementing digital contracts at Brum Costa Abogados.
Dr. Nicolás Gómez and his team, on a practical level, have put together demos of different contracts, and then he will tell us about his experience and the challenges and benefits when using them.
Gómez points out that “in the second half of 2019 we started working on the development, either as a demo or a future project of smart contracts, with the ZirconTech team and especially with Martin Machin. We began to test and put into practice several situations that we understood that we could fit within these smart contracts. From the demos and this testing, we found several challenges that we were avoiding and that led us to the practical concepts that we are going to deal with”.
Monax: A platform embedded in blockchain that already solves technical difficulties for legal professionals.
“In the first place, what we got around was the difficulty that we all think that these types of tools have, which is the practical difficulty that lawyers think that we have to sit down to program or do jobs that are outside of our professional training. But ultimately, the ZirconTech team presented us with a tool that is a platform that was already inserted in the blockchain ecosystem, where that task was already simplified. The idea was simply to diagram the contract flows and the different stages that were being raffled, and ultimately that first challenge was overcome very easily, and we did not have to think for hours and hours to see what to do, if we need a programmer, etc. We simply needed a multidisciplinary team like the one we created. From that moment on we started with certain demos as simple service lease contracts, then Dr. Gustavo Gauthier will talk about the employment contract. In short, what we saw was the testing in practice”.
“In principle, the tool presented has certain implementations that facilitated and that were even aligned with our law, because we were working within a blockchain where each step that we took within the contract was registered and within the traceability that even one can be downloaded. So, after we draw up a small contract we started with certain challenges. The first of them was to have the legal prose, the contract itself, we talked about the nature of the Smart Contract, we see it as a tool, the Smart Legal Contract that we work on, and what we saw is that we could already include the drafting of the contract and contrast it with the scheduling of the flow of the different stages that were to be derived from that contract.
Generating a more hybrid system where certain clauses are aligned to problem solving or skills. But that challenge was ready.”
“Surprisingly for us, then, already framing within the 18600 Law, we had electronic documents that were being generated on the platform with all the steps and each of the details of the smart contract. And the platform already had an electronic signature tool that was aligned with what our regulations understand as a common electronic signature. Generally, if both parties agree to use it, it was already included in the drafting of the contract within the tool, and it did not generate major difficulties”.
Advanced electronic signature integration.
“Exploring a little more we saw that the advanced electronic signature can be added to the tool, where the legal aspects are broader, and has the effectiveness of a private document certified by a notary public, and each of these stages can be done in the platform”.
Pérez Comenale points out regarding what Gómez mentions, “one of the great challenges is precisely the identity and the type of signature that we are using, that the persons signing are who they say they are, that is, it is a no small detail. But also at the interpretation level, because here we are first with an alphanumeric language and then we are with a programming language”.
“In practice there is a contest to see which one prevails, if first I go to program and then I see the contract written in a visible way so that anyone can understand it. How all that is managed, that is part of the contract cycle and see what platform they are going to use. If they are going to hire a programmer and are going to program the contract directly or use a market platform, which already incorporates this kind of interpretation or translation from alphanumeric language to programming language through the platform”.
Records in pre-contractual stages and during the execution of the contract.
Dr. Nicolás Gómez mentions as another element, “that the tool allows to have a record, not only of the progress of the contract stages but also of the pre-contractual stages, where the emails and all the documents that the parties exchanged can be included, if they signed a prior confidentiality agreement, also including it, which is useful for this later stage where there may be certain problems between the parties or a third party may have to be resorted to resolve some kind of difference ”.
Pérez Comenale says that “all this is very important in the pre-contractual stage and the typical conflict resolution clauses. Today there are several platforms such as Kleros that are already based on blockchain and offer the resolution of disputes in different types of contracts, then they can be foreseen, and also the automatic compensation clauses, thinking about the automatic execution that characterizes this type of contracts”.
“Another challenge that we see replicated in several articles when talking about Smart contracts is the enforceability it has, is that once it starts running, the parties cannot stop it and eventually things may happen that were not foreseen, if there are programming errors or there is a bad translation to the code. But it can be programmed in agreement with the parties and put a clause of forced detention so that a third party can resolve the dispute that may arise from it, as in the case of Kleros.
Integration with oracles and information from the outside world.
Gómez marks “also the connection from the decentralized world from the blockchain of contracts with the real world because many of the elements that we need are not within the contract and require connection with the outside world, and that is why we learned the existence of the oracles that communicate with the outside world. For simple tasks such as seeing the dollar price to make a payment or the payment gateways themselves to make a hold if it is an escrow or automatic payment system. For public organizations, if it is an agricultural traceability contract, and expand the useful framework that can be given to the tool”.
“It is essential that the oracles have reliable information, it is essential because in the face of this automation it is necessary to ensure the veracity of the information.”
Next, Dr. Gustavo Gauthier will comment on how all these contracts are applicable, what they are for, what benefit they can have by complicating it if it can be resolved on paper. What are the benefits beyond security, encryption, confidentiality, immutability, etc., what are the practical applications. Gauthier will talk about employment contracts and rental contracts among others.
Gauthier: “The smart contract is a crossroads between the technological and the legal”
“The issue of smart contracts like almost all technological issues puts us in front of a challenge of imagination at the present time,” says Gauthier. “The smart contract is a crossroads between the technological and the legal. And that crossroads inevitably crosses us with tech professionals as well. We cannot, from the law, only be able to advance in digital or smart contracts without having the support of engineers, programmers or analysts who know about the technology.
“The process that we did begins that way because the engineers consulted us to see what we thought about an idea of some contracts that they were trying to program. And we, in turn, were thinking about how to make or realize a smart contract idea. And that first requires an analysis of the point of view of the contractual type that one tries to bring to a smart contract, because there may be a very simple contract and the logical evolution would indicate that it would be necessary to start with this type of contract. For example, a freelance service lease contract, or an international employment contract whose payment is made through cryptocurrencies. One can have a contract practically encapsulated in a blockchain and that can be executed 100% within the blockchain. Today it is already possible and much more than we think.
Functionality of the dogmatics of a legal contract with respect to a smart contract: employment contracts.
“Now when we think of more complex contracts, one must ask in each case if the urban lease contract or the work contract, if the dogmatics of those contracts are functional with respect to the smart contract. An analysis that we made of the employment contract, precisely the dogmatic fits quite well with an automatic execution. Because we all know that, with the fact of work, from the first day that a person begins to work, automatically a series of regulations are applied to him, which are already foreseen, which are mandatory, which are unavailable to the parties, that the parties they cannot modify, and they only must comply, apart from the fact that this does not operate at 100%. But perfectly an employment contract that is not too sophisticated can be fulfilled with what is already provided exclusively in the legislation. Both the legislation that has a heteronomous, legal source, decrees, resolutions, as well as that of an autonomous source such as collective agreements, an award of wages councils for referring to Uruguay”.
“From that perspective the contract could be executed more or less automatically.” And Gauthier says “more or less because the employment contract has some peculiarities, and that is that it varies over time. Normally the worker goes up in his career, his salary improves, he changes his category. But also, in the life of the employment contract, situations may appear where it is necessary to innovate certain conditions, where it is not clear whether there is a benefit or not, or if there is a benefit in exchange for a loss.
Here blockchain technology poses a challenge for us. Although we have the advantage of the immutability of the contract registered in the blockchain, that same immutability can be too strong, a corset for the necessary changes that allow the survival of the contract. This is a challenge in this matter”.
Communication of the Smart Contract with actors from the outside world.
“And also, being such a regulated contract, it is a challenge, how that contract is communicated with the outside world. Because necessarily the employment contract has a permanent dialogue with the outside. The worker must be registered in the State (government), in the BPS (Social Security Bank), in the MTSS (Employment and Social Security Ministry), he must make pension contributions and his taxes. Also, the contract then if it is not paid with cryptocurrencies, the contract will have to dialogue with the banking system. In the sense that the contract will have to send an order to a bank, and that bank will have to prepare, or it will have to accept receiving orders from a program or a contract and not from a person with a token to pay the salary”.
There is also the discussion of wallets, as well as once the salary is deposited, the contributions for social security are generated, which must also be prepared to receive not only the nominated statement of that worker, but also the contributions of that worker. that they will come from software, from a contract, and not from a person in the flesh, or from a traditional company.
They are all challenges, and the first dialogue that the contract must have is with the company’s salary settlement system, which in turn has to be connected to the time control system, in order to be able to repeat the cycle of the contract to consult if that person was attending, how many days did it and for having come those days what corresponds to be paid as salary.
There are several challenges that are posed in terms of that dialogue that the intelligent employment contract must have today with the outside world through oracles.
We can think of practical cases such as the employment contract that involves all these challenges. And tomorrow we can think of simpler contracts, returning to the smart contract per se, and not so much the Smart Legal Contract with all this mentioned scenario that has several challenges due to the clauses and all the information it handles.
Gauthier: “operating automatically through smart contracts would give speed and legal certainty”
Tomorrow, there are many acts, such as transfers of shares, communications to the Central Bank. If they could operate automatically through a smart contract, it would give speed and legal certainty, and we could see all the benefits that this type of contract entails.
What has been seen with all these demos is that in practice there is the great challenge of external information to the network.
Challenges and benefits: “communication auditable and accepted by the government”
“The challenge that this communication be auditable, but accepted by the State (government), by the different government agencies that have to do with contracts. Here one can talk about the benefits, because one can ask, and is all this complication worth it? What would be the benefit and for whom the benefits of having smart employment contracts.
The first benefit is certainty and legal security for the worker, for the employer, but also for the government. Because the worker with a smart contract is sure that the law will be respected because it is already included in the algorithm that was designed, and the contract will comply exactly with the law and will not take a step if the previous condition is not met. His contributions will be poured in a timely manner, there will be no deviations from the contributions. The employer, in turn, will notably reduce its time and payroll administration costs, and it will also avoid errors, which sometimes imply errors that can end in individual, collective or union disputes for paying a payroll wrong.
For the government there are also benefits, the benefit of ensuring that employers comply with the regulations, avoiding tax evasion. Teh team of labor inspectors instead of going to the companies to check if the regulations are complied with, is no longer necessary. These inspectors can be referred to control occupational health and safety conditions, which are things that must be checked more in the territory.
On the other hand, the government can have information in real time on the functioning of the labor market, and this is vital for labor policies, because having that information in real time means that the government can react faster to different labor policies than different governments want to carry out at a certain time.
Dr. Gustavo Gauthier concludes that “the benefits can far outweigh the challenges and problems that may be posed in the design or in putting this type of contract into practice.“
Dr. Agustina Pérez Comenale closes and comments that with all this there would be a lot of speed and order, which is lacking in this branch of law, and is both a public and a private benefit. All this experience is essential to inspire others, tomorrow with the Brum Costa platform and another, to start managing contracts in this way and move forward, because the biggest barrier is cultural.