What every lawyer should know: Smart Contracts

With the great development of globalization and economics at an international level, economic agents seek to implement new ways of carrying out all kinds of transactions in various parts of the world. In fact, although every day entrepreneurs seek speed when making purchases and sales of the different products or services they offer and demand in the market, legal certainty and trust have been issues of vital importance in the world of business over the years, issues on which new needs have emerged, and that the figure of "Smart Contracts" seem to resolve.

Traditionally, to carry out various transactions such as the purchase and sale of a real estate, the parties - buyer and seller - should write a document where all the agreements of said transaction (the sale price, the identification of the property , the form of payment, among others) will be specified in clauses, which govern the execution of the contract.

In the case of these traditional contracts, the parties usually agree on the means of resolving any conflict that may become in the future - Conciliation, Mediation, Arbitration, Courts - as well as the territorial place where it should be resolved, and the applicable legislation. Also, many times these contracts, in order to obtain legal certainty, should be legalized by the notary and apostilled.

However, with the emergence of electronic commerce - which day by day is more frequent - users are not completely safe from being victims of fraud or from any of the parties breaching their obligation, being in many cases tedious to resolve these types of disputes, having to determine what mean of conflict resolution corresponds, in which territory, under what applicable legislation, without not to mention the costs that should be incurred to defend their rights.

Smart Contracts have emerged as means of electronic commerce that, as technologically they have being developed, are considered to be the means of economic transactions of the future, and of which all lawyers should have knowledge.

Like the definition given above to define traditional contracts, the Smart Contracts are agreements between two or more parties to carry out economic transactions, with the difference that these agreements are self-executing. That is, these agreements, instead of being written on a paper document, are written digitally in computer language (programming codes), which means that, when a certain clause or agreement between the parties is fulfilled, the obligation is immediately run.

To understand a little better what Smart Contracts consist of, what the current doctrine usually does is to match them with candy dispensing machines. When a buyer wishes to buy, for example, cookies in one of these machines, when entering the price of the cookies, the dispensing machine automatically dispenses it; that is, there is an agreement between who provides the cookies, and who decides to buy it that at the time of payment by the buyer, the obligation (through the machine) to give the cookies will be executed.

In fact, unlike purchase and sale contracts in traditional contracts, in smart contracts the parties instead of drafting a paper contract, which perhaps, for legal security purposes, decide to legalize by notary and to register in public records, the parties can go to a Smart Contracts platform and program each of the clauses through the computer language, so that when the buyer has complied with paying the total sale price; for example, the public deed is immediately registered in the Public Registries in the name of the buyer or, on the contrary, that if the buyer does not make the agreed payment in the established time, the agreed penalty is immediately executed, without the need of intermediaries such as the notary, the registrar, and without needing any means of conflict resolution.

The Blockchain can be defined as a digital network that allows storing information records in an encrypted manner, known as blocks. Each of these blocks is related to a preceding block which causes a network of blocks to form. The doctrine and specialists compare Blockchain technology with the General Ledger used for accounting operations, which instead of being monitored by one or more people is protected by the network of computers that use this system. This means that if someone intends to alter the information of a registry, they must alter the information of each of the computers and in all the blocks.

If you are a lawyer or a law student you need to know about the Smarts Contracts and Blockchain technology, as it is pointed out that traditional hiring will be left in the future, without the intervention of notaries, arbitrators, judges, among other professionals of law, and that they will be replaced by this technology, which they must master to advise and ensure the legality of this new type of contract.

Author: Fernanda Zevallos – Especialist in Corparate Law and Intellectual Property
Law Firm: OMC Abogados & Consultores