Legal Systems and Smart Contracts – June 3, 2022

WHAT IS A CIVIL LAW SYSTEM

– Civil law systems, also called continental or Romano-Germanic legal systems, are found on all continents and cover about 60% of the world. They are based on concepts, categories, and rules derived from Roman law, with some influence of canon law, sometimes largely supplemented or modified by local custom or culture. The civil law tradition, though secularized over the centuries and placing more focus on individual freedom, promotes cooperation between human beings. While common law traces its origins to the combination of writs of the english kings in combination with courts of equity that went on to establish a collection of legal precedents to apply over the law, the civil code came out of the Byzantine emperor Justinian’s legal and administrative reforms from around 600AD onwards. Napoleon later reformed many of these during his reign as well, leaving the civil codes in France largely the same as they currently are when it comes to various basic legal concepts like property, estates, etc.

In their technical, narrow sense, the words civil law describe the law that pertains to persons, things, and relationships that develop among them, excluding not only criminal law but also commercial law, labor law, etc. Codification took place in most civil law countries, with the French Code civil and the German BGB being the most influential civil codes.

– Unlike an Administrative Code, Criminal Code or Code of Civil Procedure, a Civil Code expounds only on matters of private law; eg, the legal attributes of the human person (name, domicile, age of majority), the key elements to an individual’s relationship with others (marriage, filiation, parental authority, support obligations) and with property (ownership, possession, accession, prescription), and the main legal institutions within which these relationships must, or may, be pursued (successions, gifts, wills, contracts, delicts, sales, leases, mandates, partnerships, hypothecs). 

A Civil Code sets out the organizing concepts, transcendant principles, directory rules and animating ideals of a legal tradition in a nontechnical style and vocabulary. It has a central symbolic role in a society and for this reason is often described as a “social constitution.” In codified legal systems, ordinary statutes covering private law matters are to be avoided. Further, by contrast with uncodified systems, judicial decisions are not conceived as setting down the law. Where the law is quiet on something, i.e. no code or law speaking to it, you tend to be able to do it, legally speaking. 

KEY DIFFERENCES FROM COMMON LAW SYSTEM

1. Clear expression of rights and duties, so that remedies are self-evident vs. common law blurrier in terms of remedies (remedies discovered through case and actionable harms)

2. Simplicity and accessibility to the citizen, at least in those jurisdictions where it is codified vs. more room for interpretation between courts, precedents and more general regulatory legislative statements

3. Published judicial opinion does not matter (in most civil law jurisdictions) vs. common law where judicial opinion itself is strong enough to change codified statutes in many cases

BEHAVIOUR OF LAWYERS AND JUDGES IN EACH SYSTEM

Judges in Civil –> In civil law countries, judges are often described as “investigators.” They generally take the lead in the proceedings by bringing charges, establishing facts through witness examination and applying remedies found in legal codes. This is the inquisitorial system where the judge themselves deals wiuth the facts and findings of a case, and there can be multiple judges on a particular panel given the complexity or seriousness of the case. There is space though for jurists who do not recognize the dichotomy and see the procedures taken in civil courts and substantive legal relationships are being connectred and part of a greater theory of justice…

Lawyers in Civil –> In civil law countries, judges are often described as “investigators.” They generally take the lead in the proceedings by bringing charges, establishing facts through witness examination and applying remedies found in legal codes. The importance of oral argument, in-court presentations and active lawyering in court are diminished when compared to a common law system. As in common law systems, however, their tasks commonly include advising clients on points of law and preparing legal pleadings for filing with the court. In addition, non-litigation legal tasks, such as will preparation and contract drafting, may be left to quasi-legal professionals who serve businesses and private individuals, and who may not have a post-university legal education or be licensed to practice before courts. (No barrister/solicitor distinction, all lawyers are just lawyers and can argue before the courts).

Judges in Common –> Judges are part of the ‘adversarial’ as opposed to ‘inquisatorial’ model. They are not directly involved in the matter in the same way (except for some summary motions) and they have greater flexibility than a civil judge to fashion remedies for parties depending on the situation, precedent, and their legal arguments.

Lawyers in Common –> Make representation to the judge(s) and/or jury as well as directly examine and cross-examine witnesses themselves. The lawyer’s job in court is to pursuade judges and juries on points of law and fact, and as such have a much more active and ‘adversarial’ role against each other within the context of a legal matter.  

– Civil law and common law are very much overlapping for the time being in latin america and civil law systems in majority of the commercial realms. Most latin american countries do not have specific crypto regulations, with some exceptions like Mexico or El Salvador, and even then, these countries have only seen blockchain applications in light of cryptocurrencies, like BTC, and as such tend to treat tokens writ large like securities. LLC-like structures in latin america do not speak on every governance matter, and there are gaps that are not specifically addressed and therefore leave legal gaps that we can apply.

Source of Law- CODE v CASE LAW

Common law is generally uncodified. This means that there is no comprehensive compilation of legal rules and statutes. While common law does rely on some scattered statutes, which are legislative decisions, it is largely based on precedent, meaning the judicial decisions that have already been made in similar cases. These precedents are maintained over time through the records of the courts as well as historically documented in collections of case law known as yearbooks and reports. The precedents to be applied in the decision of each new case are determined by the presiding judge. As a result, judges have an enormous role in shaping American and British law. Common law functions as an adversarial system, a contest between two opposing parties before a judge who moderates. A jury of ordinary people without legal training decides on the facts of the case. The judge then determines the  appropriate sentence based on the jury’s verdict.

Civil Law, in contrast, is codified. Countries with civil law systems have comprehensive, continuously updated legal codes that specify all matters capable of being brought before a court, the applicable procedure, and the appropriate punishment for each offense. In a civil law system, the judge’s role is to establish the facts of the case and to apply the provisions of the applicable code. Though the judge often brings the formal charges, investigates the matter, and decides on the case, he or she works within a framework established by a comprehensive, codified set of laws. The judge’s decision is consequently less crucial in shaping civil law than the decisions of legislators and legal scholars who draft and interpret the codes

CONTRACT IN CIVIL LAW, COMMON LAW AND Web3

The principle of ‘freedom of contract’ is found all over the world, even if we see different approaches to it. While in common law jurisdictions a high degree of freedom is the norm, civil law typically applies certain overarching principles (like ‘good faith’). With the increase in global trade, harmonization of contract law has been and further will be sought . In 1980, the United Nations Convention on Contracts for the International Sale of Goods (CISG) was signed in Vienna, and has been ratified by 89 states to date. These comprise most of the states with a civil or common law system. Furthermore, UNIDROIT started publishing its Principles of International Commercial Contracts in 1995. There is sufficient common ground for commercial contracts across different legal systems. 

Formation of contracts under Civil Code systems (like Austria, Germany, or Italy) is quite similar. There is always the necessity for offer, acceptance, and the ‘meeting of the minds.’ The German Civil Code requires to agree on its essential content: parties, subject, place of performance, and any other rights and obligations. Similarly, the Italian Civil Code requires for the agreement to specify the so-called causa (i.e. essence that must be legal) and object (which must be possible, legal, determined, or determinable). In common law systems, there is the additional requirement of consideration for a contract to be enforceable. Consideration is anything of value promised by one party to another when making a contract. Consideration does not need to be fair (or may even be lacking in case of a deed). Also, there is the necessity for the will to enter into a legally binding relationship for a contract to be enforceable

CODE IS LAW: SMART CONTRACTS IN CIVIL LAW

The content of a classical civil contract is determined verbally (written or orally). This is called the ‘classical track’ . When using smart contracts, there is a second contract track in the form of software or computer code. This expresses the intention of the contracting parties as well. In case of a divergence between the two tracks, the priority among the tracks has to be specified. A divergence may be caused, for example, by the computer executing an operation that is not in line with or supported by the classical track. The expression ‘code is law’ seems to suggest that the code of a smart contract has priority by being the only relevant aspect. The ‘classical track’ would then serve as a generally understandable textual representation of the authoritative software. However, according to the applicable law, the declared intent and oral consent is regarded superior. Code becomes legally irrelevant when it opposes the contracting parties’ intent. The evidence of contractual clauses is solely or at least primarily based on the classical track. The digital track rather has importance in determining whether contract-relevant incidents were fulfilled or plausible . The situation is different when both parties are knowledgeable about the code of smart contracts. In this case, a smart contact can be regarded as superior . The same applies if it is the explicit intent of both knowledgeable parties to blindly trust the software . Still, applicable law has to be observed

The code of smart contracts may represent (part of) a written or oral civil contract. In the event that the code contradicts the civil contract and does not represent the intent of a contracting party, the civil contract takes precedence. If two skilled programmers conclude a smart contract, and if the parties explicitly agree to trust blindly the code of this smart contract, the code takes precedence. If a contracting party is not a skilled programmer and thus does not sufficiently understand the code of the smart contract, its essential points should be put into writing. 

file:///C:/Users/healt/Desktop/Smart_Contracts_in_View_of_the_Civil_Code(1).pdf

WHY INTERNATIONAL COMMERCIAL ARBITRATION

There are some cases in Latin America where judges based their decision in the commerce code, which some legislatures have modified to include blockchain. In other instances, judges are basically transferring jurisdiction to arbitration courts like the ICC or other arbitration forums.

“There is sufficient common ground for commercial contracts across different legal systems.”

“The IBA Rules main goal was to bridge the gap between different legal systems, which is “particularly useful when the parties come from different legal cultures” 

Arbitration has certain characteristics, particularly its transnationality, that make it the conflict resolution method that most closely matches the structure of smart contracts.

One of the primary benefits of using arbitration in international disputes is that the forum is neutral and, thus, none of the parties feels that the others have a home-court advantage. This is particularly helpful when the parties involved come from different legal systems, such as common law and civil law systems.Blockchain transactions are often cross-border. In addition, there can be real questions about which court, or courts, will have personal jurisdiction over a dispute. Choosing arbitration can address these issues.

Confidentiality is another feature of arbitration.often cited by in-house lawyers as one of its chief advantages over litigation. That is becoming even more important as courts, at least in the U.S., are making it more and more difficult for filings to be made under seal. It should be expected that there will be situations where parties to blockchain and smart contract disputes will want to maintain the confidentiality of their source code. Arbitration provides the possibility to do so

CASES IN LATINAMERICA (Need more)

Smart Contracts in Equatorian Legislation

The Ecuadorian Commercial Code allows the use of smart contracts for several purposes. For instance shareholders of an Ecuadorian company may deploy smart contracts to execute shareholders’ agreements automatically. In the corporate context, implementing shareholder agreements through smart contracts will reduce contractual opportunism. For example, shareholders will not breach a smart voting agreement in a general meeting because blockchain technology will automatically execute it.  the Corporate Modernization Act allows for the tokenization of shares, which entails their representation in an electronic format, as long as the share-related information is organized in blockchain. The allocation of non-publicly traded tokenized shares in Ecuador does not require any authorization by the regulator. Therefore, in line with the regulatory  approach of the United States, Singapore and Switzerland, the Ecuadorian regulator (ie, the Superintendence of Companies, Securities and Insurances) is only required to approve the issuance of publicly traded tokenized shares. The intention of the Ecuadorian legislator has been to anticipate a lack of regulation when possible conflicts arising from these transactions arise. Thus, what has been sought is to establish a “regulatory framework for the subsequent regulatory development”.  In addition to this, the Assembly has regulated the contractual and non-contractual liability derived from these contracts. 

Maybe for future study group discussions 

Immutability of smart contracts and traditional law