Contractual Security in Smart Contracts
Technology, Media & Telecoms Focus
The topic of data security or security in electronic transactions has become increasingly important among institutions and individuals with the expansion of smart electronic activities.
Law Update: Issue 368 - Technology, Media & Telecoms Focus
Ali Talib Fezea Associate,Dispute Resolution
Moaml FadhilTrainee Lawyer,Dispute Resolution
The topic of data security or security in electronic transactions has become increasingly important among institutions and individuals with the expansion of smart electronic activities. Undoubtedly, smart contracts, a new form of contracting conducted through intelligent software servers via digital platforms at various stages of the contracting process, from negotiations to smart execution, are at the forefront of these activities. Therefore, let us first understand the meaning of smart contracts and then the concept of contractual security in these contracts.
The concept of smart contracts is one of the emerging and modern concepts, still undergoing experimentation and implementation. Hence, researchers have provided various definitions for smart contracts, each approaching it from a specific perspective and labeling it with several names, including blockchain contracts, crypto contracts, digital contracts, and self-executing contracts. Iraqi law defines electronic contracts in Article 11 of Electronic Signature and Electronic Transactions Law No. 78 of 2012, stating that “the commitment issued by one of the contractors with the acceptance of the other in a manner that proves its effect on the contracted party, which is done electronically.”
It seems from this definition that it is absolute, constituting a general principle applicable to all electronic contracts existing at present or those that technological development will produce in the future. It is noted that it is limited to making electronic contracting solely through electronic means, regardless of electronic intelligence as a means of contracting without executing the contract itself, its content, electronic signature, and execution. Perhaps the closest definition to smart contracts is the one provided by some legal scholars, which is "an electronic contract made on blockchain technology using an encrypted algorithm that represents the terms and conditions of the contract or transaction conducted between two or more persons." Electronic contracts are characterized by several features, among the most important of which are self-execution of smart contracts, impossibility of digital penetration, dispensing with representatives of contracting parties, sending original documents rather than copies, reducing contracting costs, speed in completing the contract at various stages, and the impossibility of retracting or amending smart contracts after completion.
Given the specificity of these contractual models, the need and necessity to delve into the negotiation period that smart contracts undergo, which is conducted by smart programs, emerges. This negotiation period precedes the completion and conclusion of the contract. According to the foregoing, the content of the period before the conclusion of the smart contract passes through two stages: the first stage is the stage of smart negotiations, and the second stage is the stage of smart completion.
Smart negotiations in smart contracts are considered one of the digital methods conducted through smart programs, given the characteristics of these programs, most notably their independence in decision-making, timing, and under what circumstances they should be executed. These advantages enable them to conduct this process and engage in this phase instead of users. As smart programs negotiate among themselves, each aims to achieve the goals and interests of its user, resulting in what is known as competitive smart negotiation, similar to traditional negotiations between ordinary agents (natural persons). This includes repeated and reciprocal offers between these programs and digital smart servers until either an agreement is reached and the contract is concluded or negotiations are terminated. The negotiation process by smart programs representing the parties intending to conclude a contract (users) is not random. Instead, there are rules and controls that these smart software servers operate under, whether in terms of the number of parties involved in negotiations or the maximum allowed rounds for negotiations. These rules may vary depending on the design of digital platforms, the capabilities of smart programs, and the negotiation strategy processing mechanism of these smart servers working for the benefit of their users.
For example, if a person wishes to purchase a smart car through the digital platform where smart contracts are conducted, they would provide their smart program with instructions and conditions for the purchase process, such as the manufacturer, car type, and year of manufacture. The smart program then communicates with the smart server of the company present on this platform, negotiating on the price, payment method, car quality, durability, resistance to the buyer's environment, specifications, and post-sale company guarantees. If the buyer finds the company's offer unsuitable, they can make a counteroffer, termed a smart counteroffer. Here, the seller's program (the company) reviews the offer to assess the possibility of contracting according to this offer. Negotiations and the conclusion of smart contracts are achieved through these offers and digital correspondences between these smart programs.
The Iraqi law recognized electronic negotiations in Article 18/First of Electronic Signature and Electronic Transactions Law No. 78 of 2012, stating that "acceptance and agreement in the contract may be made electronically." Finally, either an agreement is reached, or no contract is formed. In the case of an agreement between the seller and the buyer, Iraqi law stipulates that the contract must be associated with the electronic signature of both the seller and the buyer.
After smart negotiations are completed by smart programs representing parties interested in concluding a contract through digital platforms based on blockchain or other platforms, they may ultimately result in a positive response from one of the negotiating smart parties and acceptance from the other party, thus concluding and completing the smart contract. Article 18/Second of the Electronic Signature and Electronic Transactions Law No. 78 of 2012 stated that "electronic documents issued by the site, whether issued by it, on its behalf, or by an electronic intermediary prepared to work automatically by the site or on its behalf." This article addressed the issue of attribution, i.e., who bears the legal consequences of expressions issued by smart programs within digital platforms. The person using these programs is considered the creator, and the actions of these programs are attributed to them. As the creator of this digital message, whether it is an acceptance or agreement, the message is considered issued by them and attributed to them, as long as it is sent by them or by another person acting on their behalf or by the automated program expressing their will.
For further information,please contact Ali Talib Fezea and Moaml Fadhil.
Published in May 2024
