A smart contract is a new class of applications that are built on top of a blockchain. Where terms are written into codes and when a condition is satisfied, the contract will be AUTOMATICALLY executed w/o any chance of downtime censorship or fraud. It cuts the middleman.
According to Atty. Rafael Padilla, a lawyer’s definition of a smart contract is an agreement whose execution or enforcement has been automated either totally or partially.
- Execution/ enforcement — certain and tamper proof
- Automated — terms are executed by computer code.
Back when people were still skeptical about the Internet. No one expected businesses such as Google, Facebook, and Youtube to arise. He mentioned that it is not far-fetched for DAPPs, which are powered by smart contracts, to take the same path. Currently, more and more people are drawn by the fascinating revolution of Smart Contracts for its numerous benefits.
Here are some:
1. Cost reduction
2. Efficiency Improvements
3. Risk Reductions
4. Simplification of legal documentation processes
5. Drives adoption of standards
6. Legal costs can be shared and mutualized via common components
7. Dematerialization (get rid of the paper)
8. Trust Minimization
9. Expand credit and other contracting opportunities
Despite these benefits, it is still not widely accepted by the most. Due to its vague regulations in the government. People are still very concerned with the validity of these “Smart Contracts.” Because regardless of its benefits, by the end of the day if the law will not recognize it, then it loses its purpose.
This explains why most people still prefer Traditional Contracts even if it can be tedious. This is what we are accustomed to. It has been long-established in our legal processes. It seems like it is the only thing recognized. But that is not the case.
Fortunately, we got a chance to attend a discussion by Manila Ethereum Meetup: Blockchain and the Law Series — Part 2: Smart Contracts as Legal Contracts, where Atty. Rafael Padilla addressed the common legal concerns regarding smart contract as a legal contract and whether it is enforceable.
Here are some laws that answer to the validity of Smart Contracts:
Non-Discrimination Rule per E-commerce Act (R.A 8792, 2000)
Section 6, Legal recognition of electronic data message — Information shall not be denied validity or enforceability solely on the ground that it is in the form of electronic data message or purporting to give rise to such legal effect, or that it is merely incorporated by reference in that electronic message.
According to Atty. Rafael, “Section 6, does not make an electronic document valid and enforceable. It simply does not discriminate against electronic documents, i.e., there should be no disparity of treatment between data messages and paper documents as evidence.”
The validity and enforceability of a smart contract must be determined on a case to case basis in light of the specific factual and legal contexts.
Civil Code Provisions on Contracts
Article 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service.
Requisites of contract (Article 1318)
1. Consent of the contracting parties;
2. Object certain which is the subject matter of the contract.
3. Cause of the obligation which is established.
Functional Equivalent Rule
Under the Electronic Commerce Act, an electronic document is the functional equivalent of paper-based documents while an electronic signature is the functional equivalent of traditional signature (Sec. 7 and Sec. 8)
Sec. 12, Admissibility and Evidentiary Weight of Electronic Data Message or Electronic Documents. In Any legal proceedings, nothing in the application of the rules on evidence shall deny the admissibility of an electronic document data message or electronic document in evidence — (a) on the sole ground that it is in electronic form.”
Rules on Electronic signature evidence (Rule 1 Section 1 Definition of terms)
- Asymmetric or public ecosystem — means a system capable of generating a secure key pair consisting of a private key for creating a digital signature and a public key for verifying the digital signature.
- Digital Signatures — Refers to an electronic signature consisting of a transformation of an electronic document or an electronic data message using an asymmetric or public cryptosystem such that a person having the initial untransformed electronic document and the signer’s public key can accurately determine (I) whether the transformation was created using the private key that corresponds to the signer’s public key. (II) whether the initial electronic document has been altered after the transformation was made.
- Electronic data message — refers to information generated, sent, received or stored by electronic, optical or similar means.
- Electronic Document — refers to information or the representation of information data figures symbols or other modes of written expression, described or however represented, by which a right is established or an obligation extinguished, or by which a fact may be proved and affirmed, which received recorded, transmitted, stored, processed an retrieved or produced electronically. It includes digitally signed documents and any printout or output, readable by sight or other means. Which accurately reflects the electronic data message or electronic document.
- Key Pair — In an asymmetric cryptosystem refers to the private key and it’s mathematically related public key such that the latter can verify the digital signature that the former created.
- Private Key — refers to a key of a key pair used to create a digital signature.
- Public Key — refers to the key of a key paid used to verify a digital signature.
Under the Electronic Commerce Act, where the law requires a document to be writing, that requirement is met by an electronic document if it maintains integrity and reliability (SEC 7).
An Electronic document must remain complete and unaltered since it was first generated in its final form and that it is reliable in the light of the purpose for which it was generated and all relevant circumstances.
This will definitely boost people’s trust with Smart Contracts. Though the regulations may still be vague at the moment. It is a new technology. It is good to know that our government has some laws to protect people in a Smart Contract.
That’s all folks!
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