THE LEGAL REGIME OF SMART CONTRACTS IN PUBLIC PROCUREMENT.

• Author: Sava, Nadia-Ariadna

1. Introduction

   This research attempts to critically review the possible use of smart contracts in public procurement. The literature praises such technologies to be fit for public procurement processes, without showing exactly how could this be implemented in practice. Based on a review of the existing literature we have tried to imagine applications where said technologies may find usability and bring about important benefits.

   Smart contracts are an emerging technology, based on blockchain, a decentralized and distributed ledger. The specificity of the smart contract stems from the automatic execution of its clauses, based on IF+THEN formulas (Casallas et al., 2020, p. 64). These contracts are secure and immutable, as, in principle, no one can forge or modify them.

   The literature on smart contracts in public procurement is rather homogenous in praising the use of this technology in public procurement. The articles focus on discussing the advantages of smart contracts and their potential application in public procurement. Smart contracts are commended as having the potential to positively impact public procurement, in aspects of cost, duration, efficiency, transparency, competition, opportunities for SMEs, as well as sustainability (for more on this topic, see: Agustin, 2019; Bienhaus and Haddud, 2018; Davtyan-Davydova et al., 2020; Debono, 2019; Glavanits, 2019; Myeong and Jung, 2019; Nin Sanchez, 2019; Ozkan et al., 2021; Weingartner et al., 2021).

   However, only a few writings discuss the real effectiveness of this technology and whether smart contracts may be more efficient than the instruments already used in EU public procurement (Sanchez-Graells, 2019a, 2019b).

   Despite the high interest for the topic, we believe that the actual application of smart contracts in public procurement is not yet very well explained by the literature (Carvalho, 2019). Therefore, this article wishes to shed light on a simple, yet essential, issue, that of the use of the smart contracts in public procurement.

   In the following sections, we will establish a conceptual framework for our analysis (2), we will explain the legal regime of public smart contracts (3), and we will analyze the possible use of blockchain in the public procurement at the two stages: contract award (4) and contract execution (5), and we will draw some conclusions (6).

2. A conceptual framework

   It is important to note the fact that multiple concepts are used and intertwined in the technical and legal literature: 'smart contract' and 'blockchain'. We need to make some conceptual clarifications before discussing the application of smart contracts and blockchain in public procurement.

   Simply put, a blockchain is a digital ledger database, stored across computers that are part of the network. First of all, smart contracts are based on blockchain. A smart contract uses blockchain as its technical infrastructure. Smart contracts are a set of promises that are automatically executed when predetermined conditions are met. From a technical point of view, smart contracts could automate any process that can be presented as an IF+THEN formula. However, in this paper having a legal perspective, we would look at the smart contract as a technology that automatizes legal promises.

   The literature that refers to smart contracts and procurement does not make this distinction. They use 'smart contracts' as being both the procedure for concluding a contract and the execution of the contract in practice. However, in public procurement, the meeting of the wills of public authorities and the private operators is subjected to specific conditions. The award procedure is conducted unilaterally by the public authority, and only the contract concluded afterwards is bilateral. Therefore, we propose a needed conceptual distinction that would fit the public contracts theory: before a contract is signed, it is logical to refer to blockchain technology when discussing digital means of awarding the procurement contract. As a result of this award, the concluded contract could be a 'smart contract'.

3. The 'hype' of smart contracts and their legal regime

   One of the most cited and well-recognized definitions of a smart contract, coined two decades ago by the computer scientist Nick Szabo, states that 'a smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on this promise' (Szabo, 1996). Therefore, a smart contract relies on promise, the fundamental element of contractual law. In the context of smart contracts used in public procurement, it is important to note first its contractual, bilateral nature.

   A smart contract is permanent and immutable. No one can forge this operation once a transaction is concluded via a smart contract. The technological explanation behind this characteristic is that 'smart contracts are copied to each node of the blockchain network' (Naheed Khan et al., 2021) and that 'any attempt to interfere with an entry after it has been recorded will leave a trace' (Allena, 2020, p. 1058). In principle, this makes it impossible to make modifications or changes to any node, all of them being connected. However, 'a number of authors point to the possibility and the importance of including code within the smart contract that enables modifications to the smart contract' (Debono, 2019, p. 22), mainly when the law or the obligations of the parties are not respected (Debono, 2019, p. 22).

   Another characteristic of smart contracts that confers more immutability than a regular contract is its 'automatic and independent execution of those terms of a contract that are programmable in relation to their functions through mathematical logic (IF + Then) and that make its clauses binding, unstoppable and automatic, and can be executed by external conditions' (Casallas et al., 2020, p. 64). Legally, this impacts the respect of the obligations and the risk of non-compliance with the contractual obligations. Moreover, this impacts dispute resolution, as the clauses should be automatically executed and the sanction or compensation in case of non-compliance could also be automatic, this way avoiding a forced execution of the contract. The immutability trait could also reduce human error and avoid disputes (Naheed Khan et al., 2021), as well as diminish corruption, an important matter in public procurement procedures that is closely related to sustainability issues. As blockchain allows a perfect trace of all operations and transactions, the acts of corruption could be reduced and easily identified (Casallas et al., 2020, p. 68). Besides this, the automatic execution of the clauses 'generates an impossibility or, at least, an increase in the difficulty of executing acts of corruption' (Casallas et al., 2020, p. 68). Smart contracts offer trust and transparency between parties, as all of the participants to a transaction operated via a smart contract possess the same degree of access to the network and no central authority can modify the data.

   Thus, smart contracts present several particularities, granted by their technological dimension. The doctrine notes that, while 'there is no doubt that public contracts form part of the contractual realm, (...) doubt has been cast as to whether smart contracts can be considered as a contract' (Debono, 2019, p. 18). Even though they represent a disruptive technology, that reforms the status quo of the legal practice, smart contracts should fulfill the main elements of a contract. The constitutive elements of a contract could vary across different legal systems; however, some necessary common conditions would be: 'agreement, consideration, competence and capacity, legal object and purpose' (Governatori et al., 2018, pp. 379-380), with certain variations. A smart contract comprises the main elements of a contract, but digitally, inside a blockchain--this being the main difference from standard contracts:

   'Blockchain technology overlaps traditional contracts by including the terms of agreements between two or more parties, but surpasses them thanks to smart contracts by automating the execution of agreements in a distributed environment when conditions are met' (Naheed Khan et al., 2021).

   Therefore, smart contracts have a contractual nature but, as a disruptive technology, present several characteristics that distinguish them from this juridical standard. Public contracts, for their part, may present particularities from the private contract. Therefore, before designing the possible applications of smart contracts in public procurement, we should explore the legal regime of a smart public contract.

   The smart contract presents a double dimension: on one hand, its technical structure and, on the other hand, its legal regime. As presented above, the legal regime of the smart contract corresponds to a private law contract, with slight adaptations. The idea of the blockchain resides in eliminating intermediaries: 'Central to this revolution is...