SMART CONTRACTS FROM THE PERSPECTIVE OF TURKISH LAW

- An Assessment in Terms of Standards of Proof and Enforceability -

  • Introduction

Smart Contracts nowadays are very popular with an increasingly high importance as one of the new legal concepts of the contracts. However, many legal systems still have difficulties in following these developments in technology at the same speed.

This raises many problems, especially in terms of “proving” and “enforceability” of the Smart Contracts in legal terms, especially when any dispute arises from those contracts.

The main problem here is the questions of which smart contracts will be legally enforceable and how the contract is enforced through a legal proceeding when a party breaches the contract. In short, how those contracts will become “visible” before the legal authorities when a dispute occurs?

Within this scope, it is now an inevitable requirement for modern law systems to renovate themselves and regulate their laws to cover this new and ever-developing type of contract, which has already been widely accepted in technological life.

In this article, we will first define smart contracts in general terms and then evaluate smart contracts within the framework of Turkish law, especially in terms of “provability” and “enforceability”.

  • What is A Smart Contract?

Smart contracts are defined as the agreements wherein execution is automated, usually by computers. Such contracts are designed to ensure performance without recourse to the courts. Automation ensures performance, for better or worse, by excising human discretion from contract execution

According to another definition, a smart contract is an agreement whose execution is both automatable and enforceable. Automatable by computer, although some parts may require human input and control. Enforceable by either legal enforcement of rights and obligations or tamper-proof execution.”

However, as the technology improved, the definition of "smart contract" has also changed. Especially with the emergence of digital currency systems, which have been very popular in recent years, smart contracts have taken on another dimension.

According to the current definition; "Smart contract" is the name used to describe a computer code maintained on a blockchain-based platform that automatically fulfils all the obligations of a contract.

According to Meyer/Schuppli, smart contracts are digital programs which are “based on Blockchain, that execute themselves when certain conditions occur and self-executive and tamper-proof due to decentralized and cryptographic design of Blockchain” (Meyer and Schuppli, 2017: 208)

  • What is the Content of a Smart Contract?

Nick Szabo, law professor, computer scientist and author first theorized and described smart contracts in a series of articles he wrote in the mid-1990s. According to him; the oldest samples to this kind of contract are the contract which people made with the vending machines. Yes, that is correct!

If the machine is operating properly and money is inserted into the machine, then a contract for sale will be executed automatically, which is just a smart contract!

You may see no legal problem with making such an agreement with a vending machine since your risk is limited to the question of whether it will give you the product or not. When the machine gives the packet of the crisps you choose, the contract is completed.

However, in today’s world a smart contract usually means more than this, even it sometimes means a huge bundle of the commercial and financial risks.

So, the question rises up; what is the concept of the “Smart Contract”?

In Smart Contract platforms, like Ethereum, each user has their own account and can send transactions from account to account. If this transaction contains instructions, we call it a “smart contract”. As stated, a smart contract is actually consisting of a computer code.

According to a very well-known example, brought up by Nick Szabo, describing what can happen to someone who rents a car with a smart contract and violates their rent;

“If the car is being used to secure credit, strong security implemented in this traditional way would create a headache for the creditor - the repo man would no longer be able to confiscate a deadbeat's car. To redress this problem, we can create a smart lien protocol: if the owner fails to make payments, the smart contract invokes the lien protocol, which returns control of the car keys to the bank. This protocol might be much cheaper and more effective than a repo man. A further reification would probably remove the lien when the loan has been paid off, as well as account for hardship and operational exceptions. For example, it would be rude to revoke operation of the car while it is doing 75 down the freeway.

In this process of successive refinement, we have gone from a crude security system to a reified contract:

(1) A lock to selectively let in the owner and exclude third parties;

(2) A back door to let in the creditor;

(3a) Creditor back door switched on only upon non-payments   for a certain period of time; and

(3b) The final electronic payment permanently switches off the back door.”

Within this scope, we can actually say that Smart Contracts automatically contains two types of main “instruction” which are also found in many traditional contracts.

  • Make Payment if certain prerequisites are met
  • Impose sanctions in case of non-compliance with obligations

But unlike traditional contracts, smart contracts automatically execute these “instructions” via an electronic code, without any human intervention.

So, just like in an episode from Black Mirror, you give the instruction and the codes run the rest!

But what is the reflection of this new type of contract in the actual legal system, which is shaped by human life and various possibilities?  Actually, it is still debated in most of the legal systems whether smart contracts are contracts in legal sense or not.

 

  • Smart Contracts Under Turkish Law

Provisions on the regulation of contracts in the Turkish legal system are included in many relevant legislations, especially in the Turkish Code of Obligations No. 6098.

In order to explain the validity of smart contracts according to Turkish law, it is necessary to explain the “principle of contractual freedom” that applies to contracts in Turkish law.

In accordance with Article 26 of Turkish Code of Obligation, the parties of a contract are free to determine to conclude a contract and to determine the content of the contract as long as;

  • the contract is not contrary to public order
  • the contract does not violate any personal rights
  •  the subject of the contract is not impossible

 

Besides, in accordance with Article 48 of Turkish Constitution

“Everyone has the freedom to work and conclude contracts in the field of his/her choice. Establishment of private enterprises is free. The State shall take measures to ensure that private enterprises operate in accordance with national economic requirements and social objectives and in security and stability.”

Under the light of the foregoing, contracts structured in accordance with free will of the parties and which do not breach limitations determined under Turkish Code of Obligations are valid contracts.

However, this can be stated only for the contracts which are not subject to any form requirement according to the Law. Because, according to Turkish law, some contracts are subject to form requirements. For example, vehicle sales agreements must be in written form and issued before the notary; or a real estate sales contracts are valid only if they are made in in written form and before the land registry.

Within this scope, in case we put aside the problems in terms of “enforceability” of smart contracts under Turkish Law, we can say that there are no legal obstacles to make a smart contract in case the type of the contract is not subject to the form requirement.

However, this is a rough inference made only according to the wording of the law.  In Turkish law practice, there is no actual implementation of a smart contract –made on the basis of a blockchain and/or other means of crypto currency- , since crypto currency is not accepted as one of the means of payment regulated in Turkish law.


- Evaluation of The Smart Contracts in Terms of Standards of Proof Under Turkish Law
 

The “principle of circumstantial proof” is preferred under the Turkish law. In cases where the Law does not require proving by means of a certain evidence, it is possible to prove any matter by means of any other proofs which are not prescribed under the Law.

Proofs are divided into two groups, namely formal proofs, and discretionary proofs, depending on the manner of consideration thereof by the judges.

In accordance with the Turkish Code of Civil Procedure, in general terms, we define the proofs as “Conclusive Proof” and “Discretionary Proof”. The Conclusive Proofs are DEEDS (sec. 200 et seq. of the Code of Civil Procedure), oaths (sec. 225 et seq. of the Code of Civil Procedure) and final judgments (sec. 303 of the Code of Civil Procedure).

The discretionary proofs are namely; witnesses (sec. 240-265 of the Code of Civil Procedure), experts (sec. 266-287 of the Code of Civil Procedure) and views (sec. 288-292 of the Code of Civil Procedure).


From the point of view of standards of proof under Turkish Law, the type of the “smart contract” is important.  In this context, the definitions and applications of “Deed” and “documents” under Turkish law should be evaluated carefully.

First, the definition of “Document” shall be introduced. The TCCP defines what constitutes a “Document” under the sec.199 as follows:

Written or printed texts or documents, certificates, drawings, plans, sketches, photographs, films, visual or audio data and electronic data and other means of collection of information, which are convenient for proving the facts related to the dispute, are records under this Act.”

Section 205 Conclusive force of ordinary deeds

- (1) The ordinary deeds from those who have been admitted before the court or who have denied it by the court ordinary promissory notes that are considered SAD are considered conclusive proof unless proven otherwise.

(2) Electronic data created duly with secure electronic signature shall serve as the deed.

(3) The judge examines ex officio that whether the electronic signed document, presented to the court as proof, has been created with secure electronic signature, or not

Within this scope, the smart contract which exist in digital platform and can be seen through the electronic data that creates itself, can be deemed as “document” in accordance with Article 199 of Turkish Code od Civil Procedure.

Besides, in accordance with Article 205 in case a smart contract is created duly with secure electronic signature, it can be served as the deed, which means a conclusive proof.

 

  • Are Smart Contracts Really Enforceable Under Turkish Law?

Unlike traditional contracts, smart contracts, are pre-conditioned digital contracts that depend on the realization of some kind of conditions. In smart contracts, the result of the contract depends on the realization of the obligation. In this sense, payment occurs automatically if a condition is met.

So, when the debtor does not pay on time he incurs in breach -non-performance- and the procedure of the smart contract ends.

Therefore, to the content of the contract in accordance with the codes of that smarts contract and the debt and liability of smart contracts cannot arise unless alternative situations are written.

 In other words, all possibilities including all terms, penalties, debts and liabilities and any conditional routing need to be included in the digital content of the codes of the smart contracts.

In this sense, in technical terms, a breach of the smart contract means termination of the contract. So, a breach of contract imposes its own sanction.

However, termination of a contract of course is not the only result of the breach of the contract.

In Turkish law; in case one of the parties breaches the contract, the other party can bring a claim for his “positive/negative losses " and/or can apply the "rights of choice" etc.

In our opinion, if the existence of a smart contract is proven in accordance with the rules of proof damages arising from that contract should be claimed. Besides, the party who does not breach the contract should be able to use the rights of choice regulated under Turkish Code of Obligations

However, the problem here is that; in smart contracts, where the subject matter of the contract is usually decided as based on digital money (especially as a “crypto currency”), the economic equivalent of these losses is unclear.

This is exactly why, although there is no legal obstacle to make smart contracts under Turkish Law, it is not easy to say that those types of contract are fully enforceable under Turkish Law.

 

  • Is it possible to amend a Smart Contract?
     

In traditional contracts, contracts can be amended upon the mutual agreement of parties. In addition, in the case of hardship or excessive difficulty in performance, there is a possibility to request the adaptation of the contract. Well is this possible in a smart contract?

It can be said that in smart contracts, the code of the contract is written at the beginning and it is not possible to change it.

This change can only be resolved by creating a separate legal contract between the parties. However, in this case, the contract between the parties turns into a mixed type contract and it is not only a smart contract anymore.

  • Is it possible to terminate a Smart Contract?

In traditional contracts in the event of justified reasons or force majeure, one of the parties may terminate the contract. So, is this possible in smart contracts?

As mentioned, smart contracts are a set of code software. In this sense, it is quite difficult to determine the “termination conditions” for smart contracts.

Because the justifiable conditions for termination can be interpreted by human mind and the question of how the codes under the smart contracts can evaluate those “justifiable conditions” is an important problem.

In this sense, there is no legal certainty as to whether unilateral termination of smart contracts due to justified reasons and/or force majeure is possible or not.

 

  • Conclusion

In conclusion, a smart contract, with its own computer code can well be considered as a kind of sui generis regulation which has its own existence in the legal field.

It is clear that smart contracts will provide many convenience and practicality in both commercial and social life. However, because of its automatic structure, which does not accept any human intervention, those contracts do not tolerate any error either.  

Therefore, the lawyers and legislators should begin to develop an understanding of the specific problems brought by these technologies and produce legally compatible solutions.

 Last but not least, it is impossible to separate this development from developments related to digital money. Therefore, it is an inevitable requirement for Turkish law, to renovate itself and regulate laws to cover this ever-developing means of money and the new types of contracts.

 

Att. Semra GURCAL

 

References:

1. THE LAW AND LEGALITY OF SMART CONTRACTS, MAX RASKIN https://georgetownlawtechreview.org/wp-content/uploads/2017/04/raskin-1-geo.-l.-tech.-rev.-305-.pdf

2. 10 Use Cases of Smart Contracts https://www.devteam.space/blog/10-uses-for-smart-contracts/

3. The Idea of Smart Contracts Nick Szabo Originally published in 1997https://nakamotoinstitute.org/the-idea-of-smart-contracts/

4. Prof. Dr. Fatih Bilgili , Medeni Usul Hukukunda İspat Aracı Olarak Blockchaın Teknolojisi Blockchaın https://www.academia.edu/40090748/meden%c4%b0_usul_hukukunda_%c4%b0spat_aracı_olarak_blockchaın_teknoloj%c4%b0s%c4%b0_prof_dr_iur_fatih_b%c4%b0lg%c4%b0l%c4%b0_blockchaın_technology_as_a_proof_ın_cıvıl_procedure_law

5. Asst. Prof. Dr., Argun Karamanlıoğlu, Concept Of Smart Contracts – A Legal Perspective https://dergipark.org.tr/tr/download/article-file/645756

6. Tanash Utamchandani Tulsidas https://rua.ua.es/dspace/bitstream/10045/78007/1/smart_contracts_from_a_legal_perspective_utamchandani_tulsidas_tanash.pdf