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The evolution of property in contracting: how contract and property are changing in the decentralised digital world

on April 14, 2021

Photo by Trakti

Smart contracts are capable, in principle, of forming binding contracts which will be upheld under English law.

This may mark the beginning of a new era for the adoption of Smart Contracts and the scope of legal principles in contract under English law: a Law Commission report evolution on the topics of contract and property.

Smart contracts are changing how legal matters are drafted, moving to an outcome-based approach incentivizes logistics to perform better. To do so, a comprehensive and clear picture of the business and operational practices for involved parties is necessary when defining and agreeing on terms in order to automate contracts.

This way of re-planning the contract improves the chances of success in achieving the objectives set by the parties, it becomes functional to the purposes; increases mutual trust and mutual commitment.

The advantages are efficiency, transparency, cost reduction, speed of reaction, and reduction of contract risks.

The Law Commission report analysed pretty well the current legal framework to ensure that it facilitates the use of smart contracts.
In this article we like to focus on two other aspects, which will be then analysed and explored better in the next article.

The first topic is flexibility

The two forms of flexibility that characterized semantic contracts -linguistic ambiguity and enforcement discretion – are eliminated by using Smart Contracts.

However, precision pose a new challenge: how to introduce flexibility within an agreement where one or more of the performance are automated by Smart Contracts.

Benito Arrunada in “Prospects of Blockchain in contracts and property” introduce the concept of relation contract to solve the problem: it should therefore favour “relational contracting,” understood as the type of exchange that is safeguarded by parties’ reputation and expected gains from trade (Klein and Leffler, 1981; Shapiro, 1983; Levin, 2003). This should affect the ability of parties not only to self-enforce the contractual terms without the intervention of third parties but also to complete the contract ex post, filling the gaps and adapting it to unforeseen contingencies (i.e., “relational” à la Williamson, 1985).
In Trakti, in our smart legal contracts, we introduce flexibility exploiting tokens or introducing tolerance and grades.

However, while such adaptations are mostly compatible with existing concepts of contract law, other aspects of Smart Contracts might not only challenge the existing contract law, but rather the concept of contract law as such. As the possibility to enforce legally unenforceable agreements through Smart Contracts shows, the technical possibilities of Smart Contracts can constitute a trusted third party. Even beyond legally unenforceable agreements, the self-execution of Smart Contracts will contribute to establishing them as a private regulatory framework. (The impact of Smart Contracts on traditional concepts of contract law, Maren K. Woebbeking).

The second topic is the property and how it changes in the digital era

This crucial aspect will be analysed shortly in the next articles together with Enrico Rossi, research fellow at UCL.

The Law Commission report did not deal with the relationship between property rights and Smart Contract. Probably the theme will be subject of the future study.
Legal systems are becoming more comfortable not just with treating Smart Contracts as legally enforceable but also considering digital assets as property. Parties can exchange on the blockchain digital tokens existing only in the blockchain ledger or can exchange representations of claims in all types of physical or digital assets existing outside the ledger. If the parties trade claims on assets existing outside, the blockchain ledger requires interfaces between the digital and the real worlds. But the key issue is to what extent they perform a legal transformation, a sort of second “public contract,” through which mere claims against specific individuals are upgraded into property rights valid against the whole world (Arruñada, 2003). It seems that blockchain transactions do not represent a change in ownership but only transferring the possession of the asset, or maybe less than possession, just the ability to exercise control on the asset. Equating ownership with possession in this way has profound implications (Narayanan et al., 2016, p. 274).

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References

Arruñada, 2003 Property Enforcement as Organized Consent.” Journal of 
Law, Economics, and Organization  

Arruñada,“Prospects of Blockchain in contracts and property” 

Narayanan et al., 2016, p. 274 Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction  

Williamson, Oliver E. 1985. The Economic Institutions of Capitalism, The Free Press, New York  

Woebbeking, The Impact of Smart Contracts on Traditional Concepts of Contract Law,. 10 (2019) JIPITEC 106 para 1
 

Serena ZeniThe evolution of property in contracting: how contract and property are changing in the decentralised digital world

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