Smart Contracts Under the Scope of Law of Contracts
Smart contracts are contractual software that users connected to decentralized networks that embody distributed databases, known as Blockchain, conclude by arranging them among themselves. Smart contracts organized as digital algorithmic rules and stored on the Blockchain platform. From the moment they are established and recorded on the Blockchain, if the contractual conditions previously agreed by the parties are fulfilled, without the need for any external intervention, it automatically fulfills all or a part of the debts that the parties have determined beforehand. In addition, the data, which are connected to each other in blocks and secured by cryptographic algorithms, cannot be changed after they are recorded in the system.
Today, the usage of smart contracts is quite narrow. The biggest application area of smart contracts is that one of the parties to the smart contract transfers crypto money from the wallet application on the phone to the other party of the contract, if certain conditions are met. This transfer process happens automatically with algorithmic codes, usually if something happens / does not happen. Especially with the widespread use of cryptocurrencies, it is expected that smart contracts will find more application areas in the future.
Parties wishing to enter into a smart contract may need to enter into an additional traditional contract in order to ensure compliance with the terms of the form required by law, according to the type of contract. In this case, smart contracts may be more of an execution instrument.
Another situation is that an additional external data provider (e.g. Oracle system) may be needed in the Blockchain system, where the smart contract does not enable automatic fulfilment. The external data provider acts as an intermediary here, helping to integrate data into the smart contract, which enables the automatic fulfilment of the contract.
At the stage of establishing smart contracts, an offer statement can often be directed to the general public, or sometimes it can be made directly to a person. The important thing is that the offeror signs the offer in an encrypted form with its private key, and remains committed to it from the moment it is uploaded to the Blockchain database and after the offer reaches the offeree, the offeree approves this contract with their private key and makes the acceptance.
Pursuant to Article 11 of the Turkish Code of Obligations (TCO) “Contracts between those who are not present take effect from the moment the acceptance is sent.”
In Turkish Law, contracts have retroactive effect and result from the moment the acceptance is sent. Within this scope, it is controversial that how the inability to make retroactive changes to the smart contract, stored in the Blockchain system, should be interpreted together with this article.
In smart contracts, it is thought that the competence of the parties, which is one of the validity conditions of traditional contracts, may cause problems due to the privacy brought by the Blockchain system to the data. Because of the automatic fulfilment capacity of smart contracts, even if a smart contract concluded with a non-competence person is invalid, it will remain and continue to execute itself automatically. This is because in the Blockchain system, it is not possible to change the data stored in blocks, retrospectively. Since the blockchain system provides anonymity to its users, it will also make it difficult to detect the natural person on the other side during the establishment of smart contracts.
Pursuant to the TCO, the condition that the parties must be competent in order to conclude a valid contract may cause problems in such contracts and in case of disability of will. For such cases, adding performance-stopping algorithms to smart contracts can prevent invalid contracts from remaining in effect. However, due to the nature of smart contracts and the Blockchain system, mentioned additional provisions must be made during the establishment of the contract.
In smart contracts that contain a general terms and conditions against one of the parties by codes, these provisions should be considered as not written according to Turkish Code of Obligations. As a result of the features of Blockchain system mentioned above, it would be correct to take the aforementioned measures during the establishment of the contract and pay special attention to these issues, especially in subscription contracts that can be made through smart contracts.
Apart from all of these, if contracts that the law seeks a special form requirement are made with a smart contract in violation of the form requirements ordered by the law, smart contracts will also be invalid, and losses of rights may occur as a result of the automatic performance of these contracts.
Adaptation and termination of smart contracts are also not available in the current practice. For this reason, especially merchants need to be prudent during the establishment of the contract. If the circumstances that may require adaptation or termination of contract can be foreseen during the establishment of contract, it will be useful to put an option for adaptation or termination with algorithmic codes during the writing of the smart contract. However, as we mentioned above, these provisions are not included in the ready-made smart contract texts.