Smart contract: opportunities for consumer protection

Blockchain Technology and Smart Contracts

The “blockchain” technology and its various applications are among the most intriguing and relevant topics in legal doctrine and jurisprudence.

This article delves into the use of blockchain in contract formation, specifically “smart contracts,” their legal nature, and the protection they can potentially offer to consumers if their use becomes prevalent in B2C relationships.

Blockchain ¹, translated as a “chain of blocks,” ensures a chain of verifiable blocks that, once recorded in the system, cannot be modified, changed, or tampered with.

In the context of this discussion, the introduction of the concept of “distributed ledger” is crucial. This technology is comparable to a ledger that can be distributed in multiple copies to an indefinite number of people (read “consumers” in this case). It ensures a high level of security, significantly reducing the cyber risks associated with the technology, as it minimizes human interventions, only allowing them in rare and essential cases.

The aforementioned technologies are considered technological tools capable of ensuring the traceability of all steps leading to the consolidation of the contractual will of the parties, making that will irrevocable and ensuring the certainty of the performance of contractual obligations.

Smart contracts and “Distributed Ledger Technology” are mentioned in Italian law, specifically in Law 12/2019 converting D.L. 135/2018. Article 8-ter defines “technologies based on distributed ledgers” and “smart contracts” as follows:

“Technologies based on distributed ledgers” are defined as computer technologies and protocols that use a shared, distributed, replicable, simultaneously accessible register, architecturally decentralized on cryptographic bases. This allows the recording, validation, updating, and storage of data in clear and further protected by cryptography, verifiable by each participant, unalterable, and non-modifiable.
“Smart contract” is defined as a computer program operating on technologies based on distributed ledgers, automatically binding two or more parties based on predefined effects. Smart contracts satisfy the written form requirement after the electronic identification of the parties, following a process outlined by the Agency for Digital Italy within ninety days of the law’s conversion.
Storing an electronic document through technologies based on distributed ledgers produces the legal effects of electronic time validation as per Article 41 of EU Regulation No. 910/2014 of the European Parliament and the Council, dated July 23, 2014.
Within ninety days of the law’s conversion, the Agency for Digital Italy identifies the technical standards that technologies based on distributed ledgers must possess for the effects described in point 3. ²

Going into more detail on the subject of this analysis, it can be stated that there is no uniform definition of “smart contract” ³ since the term, first adopted in the ’90s, has been applied to increasingly advanced yet diverse technologies.

According to recent legal doctrine, smart contracts are types of legal transactions composed of a purely computerized part, i.e., the “smart contract code,” and a legal part defined as a smart legal contract—a binding legal transaction between contracting parties ⁴.

The fundamental characteristic of smart contracts is that parties meet their contractual intentions according to the logic of “if this… then that…,” meaning that, upon the occurrence of the condition “this,” the consequence “that” must follow to fulfill the obligation stipulated by the smart contract. This is achieved through the execution of contractual clauses specified by the smart contract without the need for a third party ⁵.

For a smart contract to be considered a contract under the Civil Code, it must consist of three essential elements: the account (clear and immutable identification of the involved parties), the assets subject to the transaction (the involved assets), and the contract itself.

Regarding the contract requirements stated in Article 1325 of the Civil Code ⁶, it is evident that these are present in the smart contract, making it a fully binding contract deserving legal protection between the parties.

The meeting of the parties’ will is perfected through the scheme provided by the Civil Code—proposal and acceptance—although this agreement is instantly realized to create the blockchain on which the smart contract will operate.

The assets mentioned above, like typical formations, are the subject of the contract. Similar to traditional contracts, the absence of the asset will result in the impossibility of executing the smart contract following the logic of “if this… then that…” and consequently, the nullity of the contract.

The requirement of written form will not be further elaborated upon, as it deserves a separate discussion. This topic has been the subject of a dispute dating back to 1985 when UNCITRAL, for the first time on December 11 of that year, adopted its initial recommendation on the matter. However, it will be emphasized that the Italian (and European in another context) legislator has acknowledged the legal value of smart contracts with the Simplification Decree No. 135/2018, converted with amendments by Law No. 12 of February 11, 2019. The legislation explicitly attributes to smart contracts the same evidentiary effectiveness as written form, provided there has been electronic identification of the parties involved.

In light of the above, it can be affirmed that smart contracts executed through DLT technology are agreements between two or more parties aimed at establishing a legal relationship with a specified or specifiable object, in written form, fully falling within the definition of contracts under Article 1321 of the Civil Code.

Smart Contracts and Consumer Protection

Given what has been discussed in the previous paragraph, it can be confidently stated from a legal standpoint that the regulations concerning Smart Contracts can also find application in the realm of consumer protection. Indeed, it is precisely in the field of law that these tools could play a fundamental role in enhancing the typical protection afforded to consumers under Italian and European law, from which the former derives.

The increased protection that Smart Contracts provide to consumers stems from the automation of contractual obligations by both parties. Consumers, more than other interested parties, would benefit significantly from automatic execution, offering an effective remedy to their difficulty in asserting their remedies judicially in the event of a breach by the counterparty. Additionally, the traceability guaranteed by blockchain technology eliminates potential situations of informational asymmetry and reduces the risks of fraud and manipulation.

As a preamble to this analysis, it is important to note that, although the technology adopted for such contracts involves a system of pseudonymity, it is easy to identify the contracting party. Thus, the identification of contracting parties is a requirement stipulated by Italian law, forming the basis for the effectiveness of the contractual relationship based on blockchain technology.

Regarding the typical institutions adopted by Italian law to protect the consumer as a vulnerable party, it can be affirmed that the adoption of Smart Contracts aligns well with these forms of guarantee, as will be seen below.

Firstly, it is worth reiterating a point already made in the previous paragraph. Just as in B2B relationships, in B2C contracts, Smart Contracts allow both acceptance by adherence and negotiation on the entire contract or specific clauses in full compliance with Article 34 of the Consumer Code regarding abusive clauses.

Concerning informative obligations to protect recipients of consumer services, especially those prescribed by Article 13 of Legislative Decree No. 70/2003 7, requiring the proposer to provide confirmation of the received order containing a summary of the general and specific conditions applicable to the established relationship and information regarding the main characteristics of the contracted goods (including price, payment methods, withdrawal methods, delivery costs, and tax regulations of the goods), Smart Contracts would facilitate the more straightforward application of these informative obligations through automatic, certain, and transparent compliance.

Even the right of withdrawal is easily guaranteed through the application of Smart Contracts. In the process of creating such contracts, a withdrawal period during which the consumer is free to terminate the distance contract can be included, triggering the automatic execution of this right through the technology underlying Smart Contracts, as with any other typical contractual performance.

After the failure of the CESL ⁸, the European Commission has focused on consumer protection in the digital environment, concluding that digital technologies need to be accessible to consumers and not restricted to a limited and qualified user base, such as that pertaining to cryptocurrency exchanges.

In this sense, the Smart Contract is legally positioned, which, when executed on blockchain technology, is qualified as a natural digital evolution of General Terms and Conditions that are currently shared with consumers often in ways that do not facilitate their understanding, acceptance, and possible enforcement if necessary.

In light of the above and in line with the evolution of doctrine, as indicated by the European Commission, the adoption of Smart Contracts as the main model for administering General Terms and Conditions to consumers would allow for a high degree of standardization of the presented text and the guarantee of compliance with the typical protections provided by European and national regulations to consumers.

To conclude this brief discussion on the legal effectiveness of Smart Contracts and their applicability to B2C relationships, it is unnecessary to dwell on the legal validity of these instruments, which is unquestionable in the opinion of the writer. Instead, it is worthwhile to focus on the beneficial effects that this tool could have when applied to consumer contracting.

As mentioned several times in this discussion, the Smart Contract is executed on the blockchain network, allowing the automatic fulfillment of contractual obligations assumed by both parties through the typical automatism of this instrument. Consequently, the enforcement of contract provisions by the consumer would see significantly reduced, if not completely eliminated, both the time and costs associated with legal proceedings (e.g., automatic reimbursement for a flight delay exceeding 3 hours, cross-referencing the departure and landing times of the aircraft). Conversely, with traditional contracts, consumers often find themselves having to forgo exercising their rights due to the high cost of legal actions aimed at ensuring consumer protection.

In light of this, the introduction of such automatism could radically change relationships and approaches with consumers by companies. Bound by the typical functionality of Smart Contracts operating on the blockchain network, companies are unlikely to engage in behaviors that qualify as unfair or aggressive commercial practices, thereby safeguarding the effectiveness of consumer rights.

¹ The text discusses the concept of “smart contracts” and provides various definitions and perspectives on the subject. Mauro Bellini defines it as “a technology that allows the creation and management of a large distributed database for handling shareable transactions among multiple nodes in a network.”

² For insights into the European and international regulatory framework, refer to https://www.legaltech-smartcontract.it/quadro-normativo/ .

³ According to the ESIC (Higher School of Commercial Engineers), a Spanish institute, the notion of “smart contracts” was first coined by American computer scientist, cryptographer, and legal expert Nick Szabo in 1994. He described it as “a computer protocol capable of executing the clauses of a contract.”

⁴ Mateja DUROVIC, Andrè JASSEN, The formation of blockchain-based smart contracts in the light of contract law, in European Review of Private Law, (6-2019), pagg. 753-772, pag. 756.

⁵ Regarding the formation of smart contracts, “Next generation currency, ‘Are smart contracts a home?'” outlines the six key steps as follows:

Two or more parties identify a common interest.
They collaboratively draft a smart contract, specifying the desired conditions and effects.
They insert the smart contract into the chosen Blockchain.
The same Blockchain becomes the guarantor of the contract.
Once consensus is reached in the network, the contract “executes” its conditions.
After the conditions are fulfilled, the Blockchain is updated by modifying the system’s state.

⁶ Article 1325 of the Italian Civil Code states, “The requirements of the contract are:

the agreement of the parties [1326];
the cause [1343];
the object [1346];
the form, when it appears that it is prescribed by law under penalty of nullity [1350, 1352].”

⁷ https://www.normattiva.it/uri-res/N2Ls?urn:nir:stato:decreto.legislativo:2003-04-09;70

⁸ Proposal for a Regulation of the European Parliament and the Council on a Common European Sales Law, COM/2011/0635.