Academic journal article Chicago Journal of International Law

What Does the CISG Have to Say about Smart Contracts? A Legal Analysis

Academic journal article Chicago Journal of International Law

What Does the CISG Have to Say about Smart Contracts? A Legal Analysis

Article excerpt

I. Introduction

A smart contract is a set of computer code that "automatically executes all or parts of an agreement and is stored on a blockchain1-based platform."2 In addition, it lies on a spectrum between an agreement that is entirely in code and the mere automated performance of a traditional paper contract.3 Because smart contracts are designed to reduce transaction costs by making it difficult and costly for parties to breach an agreement,4 interest in smart contracts is on the rise as more businesses seek to use smart contracts for boosting efficiency in international trade.5 In addition, an increasing number of experts are writing about the promise of smart contracts to reduce transaction costs in international trade.6 According to Ramesh Gopinath, the IBM Vice President of Blockchain Solutions, the current supply chain system is inefficient as it relies on the physical movement of a huge number of paper documents "for shipping transactions."7 This system is "very vulnerable to fraud, human error and inadvertent delays."8 Wolfgang Lehmacher, the Head of Supply chain and Transport Industries at the World Economic Forum, sees blockchain and smart contracts as the solution to these transaction costs because of the potential of the technology to make payments and collaboration between traders easier and more transparent.9 Emmanuelle Ganne, former counselor to the World Trade Organization (WTO) Director1 General, published a full report in a WTO publication on the power of blockchain and smart contracts to revolutionize international trade.10

Of course, a lot of the talk about the benefits of blockchain and cross-border smart contracts may just be hype created by an increasing number of startups in the blockchain industry. As one industry insider noted, all the promising benefits of smart contracts for international trade will take time "because the existing financial infrastructure has been in place for decades and because it is hard to get competing institutions to cooperate."11 But the legal and business industries have responded to the hype in hopes of benefitting from its promise. For example, IBM and Maersk have made joint investments to deliver blockchain to the shopping industry (although they are currently struggling to sign up carriers as the unprecedented nature of the blockchain venture leaves many businesses hesitant).12 In addition, LegalZoom has partnered with a blockchain company to use smart contracts to compose its legal documents, ranging from wills and trusts to trademarks and copyrights.13

However, the use of smart contracts for business agreements has raised important questions concerning their legal validity that currently do not have a direct answer in available case law or in relevant international legal texts. There are many different types of smart contracts, which lie on a spectrum of possibilities.14 On one end of the spectrum is a smart contract that has a code that includes all of the terms of a contract, and a "running program referring to that code is a complete contract undergoing performance."15 On the other end is a smart contract that simply digitizes simple performances such as payment and operates together with the terms of an associated traditional paper contract. Given the broad range of possibilities for what a smart contract can be, questions arise as to exactly when along the spectrum a smart contract becomes legally binding.16 This question often turns on the applicable law determining the issue and the factual circumstances of the case.

I focus on the U.S. legal context for smart contracts in international trade. Although it does not directly address the formation of smart contracts in international trade, the U.N. Convention on Contracts for the International Sale of Goods (CISG or the Convention) generally governs the formation of many international contracts for goods by international traders whose countries have also adopted the Convention.17 The Model Law on Electronic Commerce (MLEC), which governs electronic communications in international trade, also applies to smart contracts and was adopted by the U. …

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