The existence and applicability of smart contracts under Serbian law
“At its core, the law is based on information and we are in the midst of an information revolution.” (Richard Susskind)
One of the aspects of this revolution is undoubtedly the smart contract.
Defined by the Serbian Digital Assets Law, Article 2, Paragraph 39, an agreement or smart contract is a computer program or protocol, based on distributed database technology or similar technologies, which, in whole or in part, automatically executes, controls or documents legally relevant events or actions in accordance with a previously signed agreement, whereas the specified agreement can be entered into electronically through such program or protocol. Defined more simply, they are “self-executing electronic instructions written in computer code”1 operating on the basis of the principle “If A, then B” and stored on a blockchain platform.
A typical and well-known example are vending machines, where the machine releases the chosen good so that the buyer can collect it when he enters a payment method into the machine. Other examples include the Kickstarter app, or how insurance works, or banks.
Since smart agreements are self-executing, it is difficult to imagine situations where a dispute could arise from the non-execution of the agreement, and therefore situations where the intervention of a judge would be necessary.
However, the automaticity of the execution of smart contracts does not mean that they cannot be challenged and disputed. For example, most blockchain platforms do not verify the capability of the user engaging in the transaction. This means that theoretically a child could create an account and be a user. This is, however, a lack of consent under Serbian law (Article 56 of the law of contract and tort) and a ground on the basis of which the transaction could be challenged ex post.
But who would be legitimate to decide in such a situation? The logical and natural answer would probably be a court – or a judge, but do smart deals have a legal nature and do they produce legal consequences for judicial bodies to have the legitimacy to decide in such situations?
To answer this question, we must first determine the answer to another – whether smart contracts meet the requirements of Serbian law regarding the existence of contracts… There is no unanimity among law professors and legal experts as to the answer to the latter. Some scholars observe that smart contracts are means of performing obligations arising from other agreements2, rather than actual legal agreements. Some, however, recognize that despite their atypical form, mandatory features and elements of agreements are flexible enough to encompass new forms of agreements like the smart contract, which could replace typical written agreements in the near future, like the observe some scholars. The self-applicability of smart deals is undoubtedly an attractive advantage.
Here we share the view that smart agreements are indeed contracts from the point of view of Serbian law, with some minor reservations, because the basic elements of the agreement are fulfilled, and they are therefore enforceable in Serbia in the majority of cases.
First, the acceptance of both parties is manifested respectively in the act of creating the smart agreement which includes creating the terms of the agreement in the form of a digital code and storing it in a distributed database, and in the act of acceptance of the proposed terms of the agreement. However, it could be disputed that this condition is met regarding the party that will automatically execute the contract via the blockchain, because its will is not explicitly expressed during the execution phase.
The previously mentioned consent refers to two mandatory elements that are also respected in the smart contract: the price (consideration) and the object of the contract. This results from the fact that in every smart contract there is reciprocity of giving, so each party is conditioned to give or do by entering into a smart contract. Secondly, the smart contract like any other contract creates obligations, even in the event that for some reason the execution is not possible (in particular in the event of a technical problem). For example, if an ATM stops dispensing cash, the bank would still be obligated to return the cash to the customer who requested it.
Apart from the elements mentioned above, there are no other specific requirements for the contracts which could create an obstacle to the recognition of the smart agreement as such. Indeed, in contract law, the principle is freedom of form (article 67). However, for a limited number of contracts, there are specific formal requirements, including legalization before a notary, as is the case for real estate sales. Moreover, the smart contract seems inadequate for certain types of legal relations, for example in security law, when the intervention of a third party could be necessary.
Now that we have concluded that the smart contract represents a contract in accordance with Serbian law, the next question is how to prove its existence to courts or other legal bodies in the event of a dispute. Two situations can be distinguished here. First, that where a traditional agreement coexists with the smart agreement, in particular for reasons of legal certainty, or situations where we are in the presence of a hybrid agreement. In these situations, the intervention of the Court would be simplified because the Court will take as a reference the traditional written agreement. Making a traditional agreement to accompany the smart agreement is also a solution that we recommend to our client in order to facilitate the resolution of a possible dispute. Indeed, in the second situation where a smart agreement would be autonomous (in the situation of a pure smart contract), the judges would need the help of an expert who could “translate” the language of soundness into human language for them. . Considering that judicial practice is not accustomed to these unconventional agreements, certain difficulties in managing them could arise. As one author has rightly observed, “classical law falls short of the virtual environment”. 4
But the question remains whether the Serbian courts will have jurisdiction if the legal relationship has an international element. This question could easily arise as the practice of the smart contract is mainly developed in foreign countries. To find out which law is applicable and which court in the country has jurisdiction, it is necessary to refer to the smart agreement itself, since the rule is the autonomy of the parties, embodying the principle of contractual freedom. However, if the applicable law and the competent jurisdiction are not determined, rules of private international law will intervene to settle the situation. This should often be the case when it comes to smart contracts, given that it is difficult to fit a choice of law and forum into the very simple “If A, then B” equation.
Each country has its own rules of private international law, however, international conventions offer us universal solutions to conflicts of laws and conflicts of jurisdiction. One of them is the EU’s Rome I regulation which resolves conflict of laws and covers obligations in civil and commercial matters. It also lays down the principle of freedom of choice in contractual matters (Article 3), but it largely covers the issue since no express choice of law must be made: it can be clearly demonstrated by the clauses of the contract or by the circumstances of the case. Rome I also regulates situations where no choice of law has been made in its article 4 introducing a list of criteria for different types of contracts and devotes articles to specific contracts such as insurance contracts. It also regulates matters such as incapacity or formal validity. The precondition for the application of all these rules would of course be the view that the smart agreement in question is in fact legally binding5 and as such falls within the material scope of the Regulation, as well as territorial. The Brussels Ibis Regulation, its counterpart for jurisdiction, provides for similar solutions.
Just as each country has its own laws under international law, Serbian law, which is based on international conventions and agreements, has its own rules. However, a smart deal is not a type of contract, determined by the subject, but a form of entering into a contract. In this respect, the determination of the applicable law when one party is Serbian and the other is a non-EU foreign citizen (as for EU citizens, the aforementioned regulations will apply) will depend on the subject matter of the dispute. agreement, that is to say if, for example, it is a contract of transport, insurance, sale, etc. For example, in the case of an insurance contract, the head office of the insurer at the time of receipt of the offer will be relevant in determining the applicable law.
Although open questions and ambiguities remain, smart contracts certainly represent the future of contract law. For the moment, they are limited to simple relations, essentially financial, but better legislative regulation as well as the increase in judicial practice in the treatment of these contracts, will certainly increase their application. It is the principle of self-opposability of smart contracts which is undoubtedly its main characteristic which makes us believe that smart contracts will become in the future one of the main means of contractualization.