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We already discussed in 2019 and 2020 the concept, functioning, advantages and disadvantages of Smart Contracts (read our articles again by clicking these links). Following the publication and entry into force, today 20th October, of the Law on digital representation of assets through the use of cryptography and distributed ledger and Blockchain technology we return to talk about Smart Legal Contracts, their legal validity and the new challenges that arise.

• What is a Smart Legal Contract (SC)?

Let's remember what a SC is. The Law defines it as a computational protocol, algorithm or code, written in programming language, where the terms of the contract represent an agreement of wills between different parties within the same network, all of them with full capacity to act and in relation to a cause that protects them, and that allows them to articulate, verify, execute, enforce or control compliance with their instructions, actions or data, in an automatable or automated way, through a decentralised distributed ledger protocol or as part of an application that runs on a distributed ledger.

With these defining elements we can specify that today SC means the set of promises programmed in a module formed by a contiguous set of virtual lines of code that form an autonomous unit, with a timestamp, which once implemented in the blockchain is able to process information, relate to its environment (Oracle), respond to instructions received from inside or outside the system and automatically execute actions or tasks previously entered for which it has been programmed.
Among the main platforms used to create SCs, the most popular is still Ethereum, which is used to execute peer to peer (P2P) SCs on Ethereum Virtual Machine (EVM), which is a decentralised virtual machine.

• Are Smart Legal Contracts valid within our legal system and where are they regulated?

Smart Legal Contracts are regulated in the Andorran legal system in the ninth chapter of the Law on the digital representation of assets through the use of cryptography and distributed ledger and Blockchain technology. Article 27 indicates the conditions that SCs must meet in order to be legally valid in Andorra and between the intervening parties:

• a) It must be autonomous from the software developer, insofar as it does not actively require the software developer to maintain, monitor or be in contact with it while it is operational.
• b) It must carry a durable timestamp and execution of the conditions of the scheduled transaction once they have been fulfilled.
• c) It shall ensure the integrity and execution of the conditions of the scheduled transaction once they have been fulfilled.
• d) It must be signed in some digital form as provided for in the Electronic Trust and Certification Actwhich guarantees that the signature is valid, that the signature corresponds to a specific person and that this person actually has the authority to sign it. Requests for accreditation or certification are made through the National Accreditation Commission (CNAC), and currently the only form of electronic signature with legal effect is the one used by the Government of Andorra certified by law by the Spanish company CIA.
• e) That the, object of the transaction must be articulated, verified, executed, controlled or fulfilled in the Principality of Andorra..
• f) That the object of the transaction has been articulated, verified, executed, controlled or must be fulfilled between nationals or foreigners of the Principality of Andorra. One of the parties to the transaction must be a national or resident. g) It clearly identifies the signatures on which the confirmation of the transaction is based.
• g) It clearly identifies the signatures on which the confirmation of the transaction is based.
• h) That the nodes that serve to articulate, verify, execute, control or on which the fulfilment of the legal smart contract depends are located and registered in the Principality of Andorra or that the entity that manages or administers them is an entity registered in the Principality of Andorra. The nodes are the set of all the computers that are interconnected to the blockchain network, running the software that is in charge of all its operation, make the Blockchain network work.
  Therefore, if these requirements are met, it will be valid in the Andorran legal system and will deploy all its effects.

• New legal challenges

Where do Smart Legal Contracts have legal effects?
SCs face a number of challenges in the legal field due to the different legal realities that coexist in each country, so both national and international legislation must be taken into account.
Let us note, according to Andorran law, where SCs will have legal effects:

• SCs that have been articulated, verified, executed or controlled by nodes based in Andorra and that are to have effects in the Andorran jurisdiction will be governed by Andorran law.
• SC which have been articulated, verified, executed or controlled by nodes located in Andorra and which are to have effects outside Andorran jurisdiction shall be governed by the applicable law chosen by the parties. In the absence of choice, they shall be governed by the law of the place where the main damage caused by the non-performance occurs, by the law of the registered office or personal domicile of the provider of the service of performance of the SC or by the applicable law of the tax residence of the party who has suffered the damage, at the choice of the injured party.
• If the SCs cannot be executed and perfected because there is no node in Andorra, they will have no legal validity and effectiveness in Andorra.

Conclusions
SCs are fully valid in the Andorran legal system as long as they meet the requirements set out in Article 27 of the Law on the digital representation of assets through the use of cryptography and distributed ledger and Blockchain technology.
We will follow developments in these areas closely in order to advise our clients in this exciting area.

Read more

• Contractus, econtract i smart contract, de com les noves tecnolofies ofereixen noves possibilitats de contractació (Desembre 2020)
• Revolució de les relacions contractuals o smart contracts (Abril 2019)