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SMART CONTRACTS: A UAE Perspective

 

 

What are ‘Smart Contracts?

There is no recognized global definition for ‘Smart Contracts’. As per the website, www.blockchaintechnologies.com, a recognized internet resource for blockchain, “a smart contract is a computer protocol intended to digitally facilitate, verify or enforce the negotiation or performance of a contract using blockchain technology.” Smart Contracts are created by computer programmers through the help of smart contract development tools, are entirely digital and written using programming code languages. Theoretically, Smart Contracts may be used to create or enter into a legal contract between the parties or for performing or executing certain parts of the contract.

 

Principles for Formation of a Contract under UAE Laws

Article 125 of the UAE Civil Code defines a contract as “ the meeting of an offer issued by one of the contracting parties with the acceptance made by the other party and their concordance in such a manner as to produce their effect on the object of the contract and results in a binding obligation on each party in consideration of the obligation of the other party.”

The UAE Civil Code has, under Article 129, identified the following as the three essentials conditions for a contract to be valid:

  1. the contracting parties must agree on the main elements of the contracts;
  2. the subject matter of the contract must be something which is possible and defined or capable of being defined and permissible to be dealt in; and
  3. there must be a lawful purpose for the obligations arising out of the contract.

As per the UAE Civil Code, subject to the remaining provisions of the Law, creation of contract can be based on a confluence of an offer and acceptance (Article 130) and both offer and acceptance are considered to be an “expression of intent” (Article 131). Article 132 further clarifies that an expression of intent may be “made orally or in writing” or “by an interchange of acts demonstrating the mutual consent or by adopting any other course in respect of which the circumstances leave no doubt that they demonstrate mutual consent”.

 

In addition to the above general principles relating to formation of a contract under the UAE Civil Code, the law has also prescribed certain general rules for interpretation of the contract. When a contract is being interpreted, if the meaning of a wording is clear, UAE Civil Code will respect the meaning of those words. However, if the wording of the contract is unclear, UAE law recognizes that the intention of the parties (where possible) is a valuable tool in accurately interpreting the meaning and purpose of a contract. Further, “good faith” is one of the most important concepts in UAE contract law and both parties must observe this principle at the pre-contract stage, during negotiations, in the performance of the contract, during termination and even after the contract has come to an end. The law essentially requires both parties to treat each other fairly at all times in carrying out their obligations under the contract.

Validity of Electronic Contracts & Transactions

In general, as is evidences above, the UAE Civil Code permits the creation of a contract orally, in writing or by actions. To compliment and clarify the general principles of contracting laid down by the UAE Civil Code, the UAE regulators enacted the Federal Law No. (1) of 2006 on Electronic Commerce and Transactions (“ECTL”) wherever contracts are created on a digital or electronic platform. In the Emirate of Dubai, the Dubai Law No. 2 of 2002 Concerning Electronic Transactions and Commerce (“Dubai ETCL”) was promulgated with a similar purpose and objective.

Subject to the specific exclusions enlisted in the ECTL, Article 2(2) of the ECTL states that it shall apply to “Electronic Records, Documents and Signatures that relate to Electronic Transactions and Commerce”. The ECTL has defined ‘Electronic Transactions’ and ‘Electronic Commerce’ as stated below:

The Dubai ETCL also includes similar definitions.

In addition to the above, the Article 11 of ECTL (and similarly Article 13 of the Dubai ETCL) expressly states that for the purpose of contracting, an offer or the acceptance of an offer may be expressed, in whole or in part, by ‘Electronic Communication’. Under the both the laws, ‘Electronic Communication’ is essentially sending and receiving messages in Electronic form. It may be highlighted that the term ‘Electronic’ is wide under the ECTL and means “relating to modern technology having electrical, digital, magnetic, wireless, optical, electromagnetic, automated, photonic or similar capabilities”. In the Dubai ETCL, “whatever relates to modern technology having electrical, digital, magnetic, wireless, optical, electromagnetic, automated, photonic capabilities or similar to the aforesaid.” The wide ambit of the definitions will encompass under its scope a new technology like the blockchain technology.

Apart from the validity granted to Electronic Communication, as a form of extending offer and acceptance and thereby creating valid contracts, the law has also considered the possibility of creation of a contract by interaction of systems. Article 12 (Automated Electronic Transactions) of the ECTL reads as follows:

  1. A contract may be formed by the interaction of Automated Electronic Agents that include two or more Electronic Information Systems preset and preprogrammed to carry out these tasks. Such contract would be valid and enforceable even if no individual was directly involved in the conclusion of the contract within such systems
  2. A contract may be formed between an Automated Electronic Information System in the possession of a natural or legal person and another natural person, where the latter knows or has reason to know that the such a system will automatically conclude or perform the contract.”

A similar provision is included in Article 14 of the Dubai ETCL.

In the definitions provision of ECTL, “Automated Electronic Transactions” are defined to mean “Transactions concluded or performed, in whole or in part, by Electronic means or Electronic records, in which the acts or records are not monitored or reviewed by an individual.

Again, in the Dubai ETCL, “Automated Electronic Transactions” are defined to mean “Transactions that are concluded or performed, wholly or partly, through Electronic means or records, where these activities or records are not subject to any follow-up or revision by a natural person, as is the case in the context of the conventional establishment and performance of contracts and transactions.”

We wish to bring an important aspect relating to the admissibility of Electronic Transaction. In general, the consent and acceptance to use Electronic Records or communication may be confirmed through affirmative conduct of the parties, the same does not apply where one of the parties is the Government. As per Article 6(3) of the ETCL and Article 6(3) of the Dubai ETCL, the Government must give explicit consent to dealing electronically in transactions to which it is a party.

It may be highlighted that the ECTL has in general, attempted to be open to the international positions in law. To this end, Article 2(1) of the ECTL states that “matters for which no specific provision is laid down in this Law shall be governed by the international commercial laws affecting Electronic Transactions and Commerce and the general principles of civil and commercial practice.”

Despite its wide position here, there are certain expressed exclusions to the application of the ECTL. Article 2(2) of the ECTL states that it does not apply to:

  1. Transactions and issues relating to personal law such as marriage, divorce and wills;
  2. Deeds of title to immoveable property;
  3. Negotiable instruments;
  4. Transactions involving the sale, purchase, lease (for a term of more than 10 years) and other disposition of immoveable property and the registration of other rights relating to immoveable property;
  5. Any document legally required to be attested before a notary public; and
  6. Any other documents or transactions exempted by special provision of law.”

The Dubai law has also recognized each of the above exclusions under Article 5 of the law.

At this juncture, we wish to briefly discuss the evidentiary status of such electronic records or documents under the laws of the UAE. In an attempt to align the existing laws with the ETCL.

Pursuant to the Article 17 (Repeated) of Federal Law No. 36 of 2006 ("Law No. 36 of 2006") amending the Law of Evidence in Civil and Commercial Transactions promulgated by Federal Law No. 10 of 1992., provides as follows:

  1. Any letters, numbers, symbols, signs, pictures or sounds having unique nature allowing determination of the character of the signatory and distinguishing him from other persons in the manner stated in the Electronic Transactions and Commerce Law, shall be considered electronic signature.
  2. Any shifting, sending, receiving or storing of symbols, signs, inscriptions, pictures, voicing or information of whatever nature made through Information Technology Medium, shall be considered an electronic document.
  3. The electronic signature shall have the same authenticity defined for the signatures referred to in this Law if the provisions prescribed in the Electronic Transactions and Commerce Law are observed therein.
  4. The electronic writing as well as electronic documents, electronic records and scripts shall have the same authenticity as defined for the official and customary inscriptions and documents in the provisions of this law as long as they meet the conditions and provisions stipulated in the Electronic Transactions and Commerce Law.”

As may be noted from the above clauses, if the requirements of the ETCL are met, the electronic documents and records shall have evidentiary value in a court of law.

 

Conclusion

Based on the foregoing review of provisions, it shall be safe to state that ‘Smart Contracts’, though not defined separately, can be considered as “Automated Electronic Transactions”. To clarify further, this would apply in cases where a contract itself is being created through computer codes or a part of it is being performed through smart contract functions. Such transactions are legally valid and binding and would also have evidentiary value in accordance with Law No. 36 of 2006.

However, if the transactions are related to the specifically excluded transactions under Article 2(2) of ETCL or Article 5 of the Dubai ECTL, the validity, enforceability and evidentiary status of such contracts cannot be confirmed, even though they may fulfil the requirements of the UAE Civil Code. Nonetheless, it must be highlighted that the smart contracts must fulfil the requirements of UAE Civil Code for a valid contract. If there is any failure to meet any requirements under the UAE Civil Code, the Smart Contract wouldn’t be a valid or enforceable under UAE laws.

In this respect, it is important to highlight, since smart contracts are entirely automated and written using programming code languages, the application of concepts like “good faith” and “negligence” would have to be tested in a court of law.

 

Authored by Soumya George (Principal Associate)

 

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