Smart Contracts and Formal Legal Requirements
Smart contracts are computer protocols that directly fulfill contractual services between two or more parties without them having to intervene. The goal of smart contracts is to increase legal certainty and reduce transaction costs. Blockchain technology ensures that the agreed terms cannot be changed and execution is automatic.
Smart Contract Fulfillment
Smart contracts are especially suited to standardized transactions between any contracting parties. If the services owed are fulfilled completely electronically, a smart contract is an efficient solution for smoothly executing a contract. One such case is when digital assets or rights of use are acquired in exchange for payment with cryptocurrencies.
But as soon as there is contact with the analog world or transactions become more complex, the limits on automation become apparent.
If a smart contract cannot ensure the full and automatic execution of the contract, the contracting parties must have recourse to the law if performance fails.
One example is the delivery and payment of goods that subsequently turn out to be defective. The law sets out various rights to enforce unfulfilled contracts. These range from free subsequent delivery or rectification of defects to withdrawal from the contract and the reversal of services already rendered.
But legal remedies for enforcing a contract are only available if there is actually a legally valid contract. Whether a smart contract actually meets legal validity requirements will depend on the content and form of what is agreed.
Valid contract under current law
A contract is formed by the offer and acceptance of matching mutual expressions of will that contain the essential elements of the contract. Contracts can also be concluded at the click of a mouse or through an “electronic software agent.”
Normally, contracts are valid even if they do not have a specific form, although in the case of individual legal transactions, the Swiss Code of Obligations provides for the written form (e.g. to assign claims under Art. 165 CO).
The conditions for the written form are fulfilled if the signature is handwritten. Alternatively, the law allows for an electronic signature under the Federal Act on Electronic Signatures. This must be based on a qualifying certificate from a recognized provider of certification services. The following e-signature providers have been approved in Switzerland: Swisscom (Schweiz) AG, QuoVadis Trustlink Schweiz AG, SwissSign AG and the Federal Office of Information Technology, Systems and Telecommunication.
Based on the current state of blockchain technology and available e-signatures, "written" contracts can therefore also be concluded as smart contracts.
But if the law imposes more stringent formal requirements (e.g. a declaration must be made in writing in the user's own hand) or even prescribes public notarization, it will not be possible to conclude a purely digital contract. This is the case with a guarantee, or the purchase of real estate, or inheritance contracts, for example.
Writing for efficient enforcement
Certain formal requirements must also be observed in order to efficiently enforce unpaid claims.
Apart from general considerations concerning evidence, a written acknowledgement of debt can considerably accelerate the enforcement of a claim in debt enforcement and bankruptcy proceedings.
This consists of a written declaration by the debtor, under which he or she undertakes to pay a certain amount of money (“Rechtsöffnungstitel”). Various contracts can be used as an acknowledgement of a debt, such as purchase, service, loan, or insurance contracts.
Even if the written form is not necessary to validly conclude a contract, it may still be worthwhile using it or to provide a smart contract with an e-signature where there is the possibility of a payment default.