Soft Legal Code: Tools for Blockchain Smart Contracts

The question of law in blockchain-based systems is important and sometimes controversial. Many participants in the virtual currency and blockchain marketplace, from individuals to large banks, agree that top-down regulation would be a crippling mistake. Individuals, decentralized autonomous organizations and large corporations all want to use blockchain technology in ways that help sustain themselves financially, which means reliability in the relationships made in virtual space. The guiding principles of soft legal code and freedom of contract provide reference tools to help shape these relationships.

     Issue: How can entities create reliable, enforceable deals while minimally infringing contracting parties’ liberty?

     Rule: When faced with doing business in new or lawless territory, modern commerce and governments turn to soft legal code and relationship by contract to provide a minimally restrictive, reliable framework.

     Analysis: The blockchain is analogous to new territory for doing business that has no existing law. The law has encountered such situations in recent history.

     The Restatements. Common law develops at the trial level, through the recording of individual cases built into an ever-growing body of permanent jurisprudence. Common law works like a blockchain, an immutable, flexible authority machine. Over time, the rules of common law transactions grew so complex that it became important to write them down in order to use them. The Restatements of Law, especially the comments to it, try to give a consensus of the current state of common law and act as guiding principles. They are a secondary source of law, persuasive but not mandatory authority for judges and lawyers who might face a novel situation in their own jurisdictions.

The Restatements did not remain without primary authority function. Restatements gave territories that needed law a place to start. In the twentieth century, the U.S. Virgin Islands and Northern Mariana Islands territories had no legal system. They both needed a nonrestrictive framework from which to start, a flexible common law system that allowed commerce to flow rather than a regulatory civil code. The islands’ answer was to adopt the Restatements as common law and evolve it, case-by-case, to suit the individual territory’s needs.

     The UCC. The United States faced expansion of commerce issues in the mid-twentieth century.  The varying state of contract law across the country made commerce cumbersome and limited the ability of large companies to plan and utilize resources across jurisdictions. At the same time, contract law was growing more complex by the day and the human lawyer’s job of anticipating and planning contingencies became difficult. The Uniform Commercial Code was the solution: a code that provided for predictability in transacting business.

The UCC itself is not law and does not operate at the federal level. It is a model that states copied and enacted in their own legislatures, tweaking the code where necessary. It gave judges and lawyers a reasonable, predictable decision-making rubric to apply to complex business processes.

The UCC was an improvement over the Restatements of Contracts because the UCC added functionality. The UCC and contract law emphasize that contracting parties are free to make any agreement they want, but complying with the UCC makes agreements more functional. The UCC acts as a gap-filler and a best practices guide. For example, if a creditor goes through the steps outlined in UCC Article 9 (Secured Transactions) when repossessing and reselling collateral, the creditor is entitled to a judicial presumption of a commercially reasonable sale. The UCC continues to function and change to support U.S. business needs in commercial contracts.

     UNIDROIT and UNCITRAL. As global commerce grew in volume, complexity and diversity, businesses and governments struggled with issues not unlike those faced by blockchain commerce today. One organization that developed out of the early League of Nations was International Institute for the Unification of Private Law (UNIDROIT). Authority is a complicated issue in international commerce, and when making contracts, parties wanted to avoid the “home field” advantage of having one jurisdiction’s law control a contract. International business law is ideally voluntary, private law created by contract. It is important for the parties to set their relationships up carefully, in a way that models known best practices and fairness, especially if the contract fails. The UNIDROIT idea was soft legal code, an evolution of secondary sources like the Restatements and functional model code like the UCC into a more flexible, less intrusive tool that provided an alternative to territorial legal systems.

“The UNIDROIT Principles are a useful alternative to the choice of both the domestic law of one of the parties and the law of a third country. The UNIDROIT Principles provide a balanced set of rules covering virtually all the most important topics of general contract law, such as formation, interpretation, validity including illegality, performance, non-performance and remedies, assignment, set-off, plurality of obligors and of obligees, as well as the authority of agents and limitation periods. Moreover, and even more important, the UNIDROIT Principles, prepared by a group of experts representing all the major legal systems of the world and available in virtually all the major international languages, are designed for use throughout the world irrespective of the legal traditions and the economic and political conditions of the countries in which they are to be applied.”

UNIDROIT and other model laws like UNCITRAL provide code-like principles of law and interpretation as well as model contract clauses. UNIDROIT model clauses are modular and allow parties to craft an agreement that reflects their wishes and provides for as much risk management as practicable. Soft legal tools are about providing voluntary, reasonable, stable, predictable relationships in an otherwise chaotic marketplace. This predictability is desirable enough for many international parties to choose to utilize UNIDROIT contract language. UNIDROIT is available in fifteen languages.

     Conclusion: Tools, Not Rules

The answer for smart blockchain contracts is not a wholesale adoption of private international law or soft legal code. When creating legal tools for doing business in new territory, lawyers, programmers and contractors should use existing tools for issue spotting, incorporating law when and where appropriate, making a smoother, less intrusive iteration of law in smart contracts.


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