Concept and Distinctive Features of the "Smart Contract" Technology

Irina Gladilina

, Svetlana Sergeeva

and Trofimovskaya Alla

Moscow Metropolitan Governance Yury Luzhkov University, Moscow, Russia

Federal State Autonomous Institution of Higher Education "Moscow State Institute of International Relations

(University) of the Ministry of Foreign Affairs Russian Federation", Moscow, Russia

Moscow Region State University, Moscow, Russia

Keywords: "Smart Contract", Blockchain, State (Municipal) Contract, SC CEP, Regional Information System, Draft

Contract, Digitalization, Contract Law.

Abstract:

The article puts forward and provides confirmation of the following hypothesis that use of "Smart Contracts"

in the management of procurement activities will increase its efficiency. To confirm the hypothesis put

forward, the article considers the Blockchain technology, which is inextricably linked with the "Smart

Contract"; the legal essence of the "Smart Contract" through the elements of economic analysis is

investigated; the problems of asymmetry of information, opportunism of participants, distribution of risk and

many other prerequisites for the behavior of participants in the procurement process are investigated. A "Smart

Contract" is one of the most optimal mechanisms for the evolution of contract law, especially for a state

(municipal) contract.

1 INTRODUCTION

Currently, more and more areas of procurement are

affected by the informatization process. Namely, it

affects more strongly its central institution – the state

(municipal) contract. More and more discussions are

being built on improving the order and form of

concluding government contracts and translating

them into "digital" form.

Use of "Smart Contracts" is one of the

procurement management tools. The specific

implementation of this tool will determine how

effective the procurement system will be, how high

the costs of using the "Smart Contract" technology

will be, and how it will affect the behavior of the

procurement process participants. One of the first

subjects of the Russian Federation, which took a

serious step in this direction, was the Moscow

Region. Through use of the regional procurement

system, the Moscow Region Government introduced

the "Smart Contract" (SC) technology of the Contract

Execution Portal (CEP) of the Unified Automated

Procurement Management System (UAPMS).

https://orcid.org/0000-0002-8076-5518

https://orcid.org/0000-0003-1387-7138

https://orcid.org/0000-0002-5740-5784

The wording “Smart Contract” of SEP of the

UAPMS is fundamental, since within the framework

of this study, the SC CEP will be compared with the

“Smart Contract” technology, which is more widely

known in the field of jurisprudence as part of the

Blockchain system. The study of the similarities and

differences of two technologies of the same name will

be one of the main tasks of this article.

Another important remark on use of the wording

of the SC CEP UAPMS is the fact of the inextricable

connection between the regional information system

of the Moscow Region and its subsystem aimed at

implementing the execution of contracts through

electronic document management. This relationship

is as clear as the connection between the "Smart

Contract" technology and the Blockchain system.

That is why the paper will also highlight and analyze

the features of the regional information system as a

whole.

The influence of the technology of the SC CEP of

the UAPMS on behavior of procurement participants

from the point of view of general economic theory

and management theory. Within the study the authors

Gladilina, I., Sergeeva, S. and Alla, T.

Concept and Distinctive Features of the "Smart Contract" Technology.

DOI: 10.5220/0011111400003439

In Proceedings of the 2nd International Scientiﬁc and Practical Conference "COVID-19: Implementation of the Sustainable Development Goals" (RTCOV 2021), pages 109-112

ISBN: 978-989-758-617-0

109

of this article did not meet of the problems of

information asymmetry, opportunism of participants,

risk distribution and many other prerequisites for the

behavior of participants in the procurement process,

which, in our opinion, is not only relevant, but also

necessary from the point of view of assessing the

effectiveness of the tool as such, but not its

consideration in isolation from practical applicability.

The first block of tasks is to determine the

economic prerequisites within which the interaction

of procurement participants takes place; a study of the

distinctive features of a state (municipal) contract

from a civil contract, as a model on which the SC CEP

is based; study of the distinctive features of the SC

CEP from the "Smart Contract" technology of the

Blockchain system. The second block of tasks is to

study the peculiarities of informatization of the

procurement system of the Moscow Region and

determine the advantages and vulnerabilities of the

SC CEP technology, as well as the subsequent

development of offers for the regulatory and

technological improvement of the SC CEP

technology and the CEP of the UAPMS system, as

indissoluble tools for managing the procurement

process. Naturally, we will not be able to consider all

the blocks of tasks in the article, but we will try to pay

special attention to all the blocks.

The relevance of this topic is due to the lack of

doctrinal research on the SC CEP technology as a

mechanism for procurement system of the Moscow

Region and, moreover, as a new instrument of

contract law in general.

The subject is the normatively established and

technologically implemented implementation of the

"Smart Contract" of CEP of the UAPMS, as well as

the dynamics and discipline of relations between the

procurement process participants in comparison

before and after the introduction of the SC CEP tool.

2 METHODS

The theoretical basis of the study is scientific research

of leading domestic authors in the field of research of

state and municipal contracts from the point of view

of civil and competition law, such as O.A. Belyaeva,

E.A. Tsaturyan. To assess the impact of new

technological tools on the behavior of market

participants from the point of view of economic

analysis of law, the papers of M.I. Odintsova were

used. As part of the technological assessment of the

"Smart Contract" tool, the papers of A.I. Savelyev

were used.

The methodological basis of the study is general

scientific and specific scientific methods of cognition.

The paper was carried out using the methods of

systems analysis and comparative analytical methods.

The degree of reliability and validity of the

scientific provisions, conclusions and

recommendations contained in the paper is confirmed

by the study and analysis of scientific publications on

the study topic, use of modern scientific research

methodology, use of a significant amount of evidence

(expert opinions and use of interdisciplinary methods

for assessing legal instruments).

Describing the concept and distinctive features of

the "Smart Contract" technology within the

framework of the article presents a certain difficulty

due to a number of reasons that need to be identified.

First of all, this is a terminological reason. The

“Smart Contract” as a concept, before it was used in

the framework of state and municipal purchases of the

Moscow Region, was quite widespread and even

established itself as a separate technical and legal

concept, not identical to the concept of “Smart

Contract” within the procurement system of a

separate constituent entity of the Russian Federation.

Secondly, one of the possible conclusions will be

that these two "Smart Contracts" are tools that are not

so far from each other. Even more than that, we

declare that it is the features and specifics of the state

contract, which we described above, that is the

distinguishing feature that brings two different

instruments with the same names closer together.

3 RESULTS

The concept of "Smart Contract" is primarily used in

jurisprudence to denote a contract technology that has

never been used before in history. It is generally

accepted that the concept of "Smart Contract" was

first formulated by Nick Szabo, who described the

"transactional computerized protocol that enforces

the terms of the contract". In modern doctrine, there

are a large number of definitions of a smart contract.

However, they all boil down to the fact that a "Smart

Contract" is a fragment of a computer program (its

code), which is implemented on a specific

information platform Blockchain and is a mechanism

for the automatic execution of code conditions, with

the corresponding entry of information about

transactions in the public register. To understand the

essence of the "Smart Contract" technology, in our

opinion, one shall pay attention to its key features.

First of all, it shall be said that a "Smart Contract"

can exist only in electronic form and cannot exist

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without use of an electronic signature, which is based

on asymmetric encryption technology. Wherein, it

does not exclude the hypothetical existence of an

additional classical "paper" agreement, where the

parties agree on the terms of the "Smart Contract".

Secondly, the "Smart Contract" provides for a

specific form of the language for presentation of its

conditions, namely, the programming language. In

this sense, the "Smart Contract" is purely a computer

program in the sense of Art. 1261 of the Civil Code

of the Russian Federation and a database in the sense

of paragraph 2 of Art. 1260 of the Civil Code of the

Russian Federation. As noted by A.I. Saveliev, in this

consideration, each "Smart Contract", in essence, is

subject to protection as a result of intellectual activity

This circumstance predetermines two other

features of the "Smart Contract". The first is that a

“Smart Contract” is a clear sequence of actions and

cannot contain ambiguous interpretations or

interpretations. If a certain action occurs, it will

always be followed by a consequence. In this regard,

reflections on the topic of the second rights of the

parties to the contract are excluded. As a result, the

second feature will be the importance of the

coincidence of the initial will of the parties to state

something in the contract and its execution in the

program code, which may entail certain practical

difficulties.

Thirdly, the feature of the “Smart Contract” is the

way it is concluded according to the model of a

connection agreement. The "Smart Contract" is

drawn up by one party, the one that makes up the

program code. As noted by A.I. Savelyev, it is a

situation when other participants join the terms of the

agreement "as is", that is, conclusion of the agreement

is carried out according to the model of accession.

Wherein, the terms of such an agreement are available

in advance to all potential participants, since they are

included in the publicly available Blockchain . It is

easy to remember that, in this respect, the model for

concluding such an agreement is extremely similar to

the form for concluding state (municipal) contracts.

Fourthly, a separate and key feature of the “Smart

Contract” is its self-fulfillment, in other words,

technical irreversibility and obligation. In order for a

certain action to be performed, the “Smart Contract”

does not require the intervention of the third party: the

digital tool independently verifies the fact of

occurrence of certain events and enters them into its

databases. Technically, this can be represented as

follows, let us suppose that the institution has entered

into a contract through a "Smart Contract" for the

purchase of real estate (for example, it can be a

contract for purchase of an apartment for orphans by

the municipality). For the system, the fulfillment of

the supplier's obligation will be an entry on the

official website of the real estate register, after which

the computer will automatically make payment

according to the specified details of the supplier

without any additional need for additional activation

by the parties to the contract.

Therefore, the originally created program

independently undertakes all actions for execution of

the contract. In other words, they happen

automatically. In such a situation, sudden

circumstances cannot affect the contract itself, which

reduces the influence of the human factor, namely,

the factor of trust or distrust, which significantly

reduces the transaction costs of searching for

information about the counterparty. In a situation

where there is no need for additional verification of

the counterparty, there is no need to provide

additional guarantees – security of any kind. In this

respect, it is curious that introduction of one

instrument makes a number of others unnecessary or

seriously transforms them. The procedure for

conducting claims work and collecting a forfeit is also

changing so dramatically, since these parameters are

also hypothetically the initial conditions of the

algorithm. The issues about whether to collect

penalties or fines, to what extent and whether to

collect them at all disappear. All these questions will

already be laid down in the structure of the algorithm

(conditions) of the Smart Contract and will be

executed without the participation of the additional

will of the customer.

As it became clear, the peculiarities of the state

(municipal) contract make it a very special, rigid legal

structure, which is subject to a number of strict rules.

Moreover, when formulating the terms of the

contract, the customer, in a certain sense, follows the

algorithm for drawing up a draft contract for a

specific purchase. Depending on what is the subject

of the procurement, what restrictions and preferences

are established (for example, for purchases among

small businesses, there are rules on a reduced

payment period), and etc. Continuing this thought, we

can say that the customer forms a contract project like

a constructor, using suitable parts. It is not surprising

that the term “contract designer” is used by the

ConsultantPlus legal reference system.

Why is it important for us to focus on just such a

property of the state contract, how to form it through

certain blocks? First of all, this is due to the reduction

in transaction costs of the parties to the relationship

for the need to familiarize themselves with the terms

of the agreement. Secondly, it significantly speeds up

Concept and Distinctive Features of the "Smart Contract" Technology

111

the procurement process. Thirdly, it minimizes the

possibility of participants contesting the provisions of

the contract that is part of the documentation, since it

is assumed that the formulation of the standard terms

of the contract, which will be constructed from

predetermined standard blocks, will undergo legal

examination before becoming part of the

corresponding designer.

These blocks are the basis for further transition to

electronic algorithms of the "Electronic Contract"

programs. This approach will significantly simplify

and accelerate the transition from one design method

to another, more perfect one. In this sense, A.I.

Savelyev, referring to the paper of Henry Maine in the

book Ancient Law gives the following gradation of

the development of society, depending on the

development of contract law:

1) the period of domination of individually agreed

(individualized contracts), characteristic of

traditional, agrarian societies and the initial stages of

the industrial revolution;

2) the period of dominance of standardized

contracts, characteristic of the era of mass industrial

production and the initial stages of the information

society;

3) the period of automated contracts, which is

currently emerging and will be characteristic of the

developed information society during the period of

widespread dissemination of the "Internet of things"

and artificial intelligence .

Using this approach to assessing the development

of contract law in Russia, we can say that the state

(municipal) contract is a more developed tool for

formalizing contractual relations, since the degree of

its standardization is significantly higher than the

usual civil law contract. In this case, the next step,

starting from the above steps, will be the use of a

digital form of the contract.

Therefore, summing up the interim results of the

study, we can say the following.

First of all, future conclusions and reflections of

this study will be based on the fact that procurement

participants are economic (rational) subjects acting in

circumstances of information asymmetry, which

subsequently leads to opportunism of participants in

legal relations.

"Smart Contract" technology will be viewed as a

mechanism that shall reduce the costs of participants

in relations, including those for information retrieval,

and lead to greater transparency and reduce incentives

for opportunistic behavior of participants in the

procurement system.

The state (municipal) contract has a number of

characteristic features that distinguish it from the

usual civil law contract. First of all, there are strict

legislative restrictions on the form and procedure for

its conclusion. Secondly, there are significant

restrictions on the freedom to formulate the terms of

the contract, as well as direct instructions to use the

approved standard forms and wording. Thirdly, the

possibility of making changes to an already

concluded contract is in the nature of exceptions to

the general prohibition.

The peculiarities of the "Smart Contract"

technology are, first of all, in its special language –

the programming language and the nature of the

computer program following the initially specified

algorithm, which together gives a complex set of

initially specified conditions, which subsequently

form an automatically executing mechanism. The

rigid structure of the contract, the impossibility of

making changes to it, as well as the strict algorithm of

actions for its execution are characteristics that

represent the "Smart Contract" as one of the most

optimal mechanisms for the evolution of contract law,

especially for a state (municipal) contract.

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