Blockchain and Smart Contracts - Legal implications Kalle Hynönen, Mika Puittinen

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1 Blockchain and Smart Contracts - Legal implications Kalle Hynönen, Mika Puittinen

2 Agenda Blockchain technology and smart contracts what is it about? Smart contracts as a contract making instrument Legal challenges relating to blockchain and smart contracts - examples 2

3 Smart contracts Smart contracts are based on blockchain technology Cryptographer Nick Szabo defined smart contracts as machine-readable transaction protocols that implement the pre-defined terms in agreements They may also be described as a set of promises, specified in a digital form Smart contracts are self-executing The code automatically performs a predetermined function upon fulfilment of certain pre-defined contract terms Szabo visualized them by comparing the smart contract with a traditional vending machine When a buyer pays a certain amount, the machine will release the selected product In summary: smart contracts are computer programs that automatically bring about an action according to a set of pre-specified rules 3

4 4 The future of a will, sale of a house or a mortgage?

5 Uses of blockchain technology and smart contracts examples Registers and notaries Trade Transactions on virtual assets (e.g. cryptocurrencies) using smart contracts Assets are transferred between parties automatically upon certain pre-defined conditions having been fulfilled Licensing of intellectual property rights Use of IP is enabled when the royalties specified in a smart contract have been confirmed as paid Management of royalties takes place automatically The transition of holding is recorded in the blockchain - For example, licenses and supplies of goods can be tracked - Counterfeits can be traced when the goods are locatable Smart contracts are, however, hardly applicable to all types of transactions Complex contracts with elements that are subject to interpretation - e.g. M&A, complex outsourcing or other service contracts, agreements regarding nondigital commodities, etc. 5

6 Smart contracts as a contract making instrument

7 Determining the legal nature of smart contracts Is it possible to make binding legal acts in the form of a smart contract? Are they contracts in legal sense? Are they even smart? Freedom of contract as a presumptive legal principle Constraints may imposed by mandatory legislation - e.g. some countries may require that certain types of contracts (such as real estate transactions) be conducted in a specific form Binding legal act ( contract ) requires free will, expression of the will that comes to the recipient's knowledge and intention of the will to come to the recipient s knowledge The way, form or object of the expression does not have strict requirements Recipient s reasonable impression of the party s willingness to enter into a contract

8 Contract according to the Finnish Contracts Act The Finnish Contracts Act (Finnish: OikTL) Section 1 regulates the traditional conclusion of a contract So called offer-acceptance -mechanism Acceptance to an offer must be given within the time limit Original offer must be accepted as is A reply that purports to be an acceptance but which does not correspond to the offer shall be deemed a rejection constituting a new offer (Contracts Act, Section 6) The conditions for the reply, in particular Sections 2, 3 and 4 of the Contracts Act, should also be taken into account The Contracts Act also contains more detailed provisions on the authorization and the invalidity of the legal act 8

9 Alternatives for the offer acceptance - mechanism Contract based on negotiations Contracts based on standard contract clauses The constitutive facts of the contract (real contract) Contracts based on an actual actions, without verbal or written expressions of commitment Tacit agreement The parties will act in accordance with the validity the of contract, even if the contract itself can not be proven The Supreme Court (KKO 2010:23): The mechanism described in the Contracts Act does not cover all the situations for conclusion of contract E.g. contracts entered into using automatic dispensers 9

10 How is a smart contract compatible with existing contract law? Smart contract differs from a traditional contract based on actions, negotiation or writing Smart contract is a code-based computer program All smart contracts do not necessarily have a contractual nature Determining the contractual nature requires case-specific review Does the contract have parties or is it program executable in a distributed manner? Design and appearance of expression of intent influences the legal status of smart contracts As such, at least the Finnish contract law seems flexible with regard to new ways of contracting (see e.g. KKO 2010:23) Could the entry into a smart contract be construed e.g. as follows? The author of a smart contract expresses his will by shifting the contract to a blockchain and transferring assets to it The other party expresses its will and at the same time accepts the offer by fulfilling the terms of the contract 10

11 Legal challenges in relation to blockchain and smart contracts - examples

12 Errors in declaration, changes in circumstances and reversing transactions How to deal with material changes in circumstances? Smart contracts do not take into account the impact of changed circumstances on the legal status of the parties What if the basis of a performance is incorrect code? Contracts that do not meet the original intention Practical challenges in reversing transactions already executed and in enforcing the unjust enrichment For example, locating the funds after a transaction 12

13 Dispute resolution and presentation of evidence How are smart contracts interpreted in courts and arbitration? As a possible solution, dual integration: the contract is also drawn up as a human-readable document Challenges in maintaining the original purpose of contract in the translation What is the relation and order of precedence of human-readable and coded contract text? Which one has the priority if a contractual clause is missing? 13

14 Ambiguity Provisions that are subject to interpretation How can we use code to express the unprecise terms commonly used in contract law? For example, reasonable, "best efforts" or material Computers prefer I or 0 Significance of contract law principles used in interpretation A smart contract does not interpret contractual terms, for example, from the point of view of fairness and economic efficiency Assessment of the fulfilment of the contract terms Smart contracts are based on automatic execution Can technology reliably determine the fulfillment of the provisions that are subject to interpretation? Entire agreement clauses 14

15 Regulation Consumer protection A consumer must have a clear understanding of when the contract has been concluded and what its terms are Can smart contracts be understood by the human reader? The ability of Consumer Ombudsman/other authority to make definitions of policy/decisions on issues relating to smart contracts Other specially regulated sectors Data protection law Determining who is controller and who is processor Requirements for agreements under GDPR Data subjects rights (e.g. rectification, erasure, data portability, right to be forgotten) under GDPR Converting compulsory legislation into a code Choice of law e.g. in consumer contracts 15

Thank you! Mika Puittinen Partner Kalle Hynönen Senior Associate, Co-Head of IP +358 50 395 1673 +358 50 544 8981 mika.puittinen@krogerus.com kalle.

com Commercial Contracts and Outsourcing Intellectual Property Technology and Data Protection Intellectual Property Technology and Data Protection

16 Thank you! Mika Puittinen Partner Kalle Hynönen Senior Associate, Co-Head of IP Commercial Contracts and Outsourcing Intellectual Property Technology and Data Protection Intellectual Property Technology and Data Protection Commercial Contracts and Outsourcing Chambers Europe 2017 (TMT): Mika Puittinen is described by a client as having "very good experience in IT contracts and outsourcing." Legal 500 (EMEA) 2016 (Intellectual Property): Ranked as a recommended lawyer for intellectual property. "Kalle Hynönen is a rising star." 16

PRIVACY POLICY STATEMENT ON THE PROCESSING OF PERSONAL AND SENSITIVE DATA OF THE CUSTOMERS WITHIN THE MEANING OF ARTICLE 13 AND FF. OF REGULATION (EU)

PRIVACY POLICY STATEMENT ON THE PROCESSING OF PERSONAL AND SENSITIVE DATA OF THE CUSTOMERS WITHIN THE MEANING OF ARTICLE 13 AND FF. OF REGULATION (EU) 2016/679 Pursuant to article 13 and ff. of Regulation