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Smart contracts to legal contracts – Different approaches

March 12, 2017

If you are a coder and you want a tl:dr.  Swiss law works like Java, and Hong Kong law works like Javascript.

One analogy that I use is that law is like food.  You need food to survive, and from a nutrition point of view, there are certain basic requirements for human food, and there are things that are just bad food (i.e. you don’t want to be serving cyanide).  At the same time, different places have different types of food, and while Swiss food and Hong Kong food will both keep you from starving, they are just different, and sometimes its hard to describe exactly how they are different.

The same happens to be true with law.  Swiss law is just different than Hong Kong law.  They solve the same problems, but they just work in a different way, and that goes to the heart of why DAO’s set up in Switzerland, and how smart contracts that are written in Switzerland are likely to take a very different approach than a smart contract that is written in Hong Kong, which is mostly English law.

The big difference is that contract law in Switzerland is based on civil law, and so contract law in Switzerland comes from the Code of Obligations which is one part of the  Swiss Civil Code.  The Swiss Federal Council passed a law in 1911 and contracts in Switzerland get their authority from that law.  There is an English translation here –  One way of thinking about the civil code is that it’s something a a legal machine was manufactured like a Swiss watch.

Commercial law in Hong Kong is based on English common law, and for contracts, there isn’t one code that you can point to.  It turns out that over hundreds of years of practice and court decisions, and random bits of legal history.  Sometime in the 12th century, you had an English knight give his farm to a friend to run while he went off to fight in the Crusades.  After a few years he came back, and the friend said “thanks for giving me all your stuff, and wouldn’t give it back.”  So our knight went to the King and asked if the King could do something, and the King told the Chancellor to do something about it, and the Chancellor came up with rules that allowed someone to entrust property to someone else and get it back, and after a few hundred years of development, we have some rules for trusts.  But all of this evolved, most of it wasn’t designed, and you end up that is really really messy and doesn’t look at all like a nice Swiss watch.  So when you look at English contract law, the first reaction is

And it is.  If you want to get a flavor of what English law looks like, google for the “rule of perpetuities”, and imagine what a Swiss watch maker would say about that.

So what does all of this mean for smart contracts?  Let’s look at how Swiss law and English/HK/Singapore law look at contracts.  Swiss law starts with “persons”.  I’m a person.  You are a person.  We can create a company that is a person.  In Swiss law (which uses the same approach as German and French law), you start with persons.  Persons have will.  I decide to do something.  You decide to do something.  A company or an association has an internal process for making decisions.  We all have intent and we are all sentient beings.  A contract describes the relationship between persons, but the person is the central element.  The rules then go through how persons can make relationships.  Marriage is a type of legal relationship.  Citizenship is another.  Guardianship over children is another type of legal relationship, and the contracts are yet another relationship.  You see the “Swiss engineering” here.  Basically you start with persons and every possible legal relationship is described in a single set of laws, which are very readable.

OK, lets look at the English/HK/Singapore approach.  This approach is pragmatic, and you start with contracts by focusing on the contract.  The English approach is “why bother with all this theory, we just have contracts, and we’ll make up random rules so that we can just do business.”  One consequence, is that Swiss law has pretty well defined rules for “persons”.  In order to have a contract in Switzerland you have to have “persons” and the Swiss want very clear rules for what a person is.  With English law, they are not quite as concerned with elegance, so you can be pragmatic.  For example, rather than creating a framework of “persons” what you do is you track down who got what money and if the situation is unfair, you sort of just make up something.  Since people have been making stuff up for hundreds of years, you end up with weird and random rules for contracts that just basically work.

OK so what does this mean for smart contracts.  Let’s take a look at how a Swiss judge and a Hong Kong judge would look at a smart contract system.

The Swiss judge would start by asking “who are the persons?”.  And the answer is “there aren’t any.”  Once there are no legal persons there are no legal contracts.  And that’s exactly what you want for the DAO.  The whole point of the DAO is that you want the *code* to move the money, and if it turns out that you have some external process that moves the money, you defeat the whole purpose.  So what you want to do is to create a “legal bubble” in which everything is determined by code.  At that point, you set up a Swiss company.  The Swiss company “plants the flag” so that you know you are dealing with Swiss law.  Once you are dealing with Swiss law, then you tell the judges that there are no legal persons and no legal contracts.  At which point you have a blank sheet of paper.  Now you can create legal contracts on that blank sheet of paper, but even here having the ability for a Swiss judge to say “I don’t see any contracts here” is useful, because you can use the DAO to create systems that work with say Hong Kong or South African or any other type of law, and if the DAO itself had to interact with Swiss law, then you’d have a very big mess.  There are a lot of lawyers that are familiar with South African law, but if it turned out that you had a system that was embedded in Swiss law, then you’d need someone that was an expert in South African and Swiss law and there aren’t that many people in the world who can do that and those people are expensive.  So for DAO’s in Switzerland, you just need a Swiss lawyer to say “here is a blank sheet of paper” do what you want.

This is really, really good if you want to create your own rules.  You use Swiss law to create a “legal bubble” and then you fill in the rest with code.  The trouble that you run into is that you’ve created a legal bubble, and it’s really hard to figure out how to connect that bubble with the rest of the world.  So suppose you create this thing in the DAO that makes a ton of money.  You then want to do an IPO or get a bank loan.  At that point it gets really, really hard, because the DAO exists in this “Swiss legal bubble” and it’s hard to figure out how to connect what you are doing in that bubble with something outside of the bubble.

Hong Kong/England/Singapore has different rules.  Common law is “pragmatic”.  A Hong Kong judge would look at this and say “hey, there is stuff changing hands, agreements are being made, so there must be something like a contract here somewhere.”  If this stuff ended up in court, then they analysis would be “hey, this looks like a contract, so we’ll apply contract rules.”  The thing about common law is that you really can’t create a “legal bubble” like you do in Switzerland.  Once the judge looks at the DAO, they see agreements being made, money-like things changing hands, and the judge will try to make it fit into what they know about contracts.  You really can’t move something outside of the legal system.  The only thing that you can do is to argue jurisdiction.  If a Hong Kong judge sees that someone has planted a Swiss flag, at that point the judge will say “this is a Swiss problem” and walk away.  If the HK judge sees any HK flags or if they don’t see any flags, they will apply contract rules, at that point you can end up in court, and you no longer have your legal bubble.

This also explains why I’m taking a different approach than the DAO.  The DAO has a legal bubble in which they can make up anything.  Since I’m not in the legal bubble, anything that I do is going to subject to court and legal proceedings in HK, and so what I do is to make stuff that doesn’t confuse the judge.  The judge is going to *try* to fit what he sees in contracts, trusts, and rules of equity, and what I’m trying to do is to make it easy for him.

The thing is that sometimes, you *don’t* want to be in the bubble.  If you can raise enough money in the Swiss legal bubble and the crypto-parallel economy to run your business, they great!!!!  However, if you want to connect that with the world of loans, banks, venture capitalists, you need some way of doing that, and Hong Kong (and Singapore) are good places to do that.  The nice thing about common law is that because people don’t care about “elegance” you can make up rules.  So if you need to make up a rule on how to handle a particular situation with smart contracts, you just do it.  If there is a dispute about the rule then you go to court, explain the rule to a judge.  If they judge likes the rule, the judge will issue a ruling with the rule, and that becomes part of precedent.

Also common law provides some common standards.  If you want investment from Kenya and you have to be worried about Swiss law, then you have a problem because there aren’t that many experts on Swiss law in Kenya.  So what the Swiss lawyers have to do is to say “all you have to know about Swiss law is that you don’t have to worry about Swiss law.”  With stuff from Hong Kong, you take a different approach.  You *do* have to worry about applying Hong Kong law to stuff that happens in Hong Kong, but you tell the Kenyans, thanks to British colonialists and imperialists, it turns out that for contracts Hong Kong law is 99% the same as Kenyan law, and so you can find a Kenyan lawyer to work through the rules.  Also because the systems are compatible, if someone comes up with a set of new rules regarding smart contracts, and a HK judge likes it, then it’s very easy for a Kenyan judge to take those same rules.  Or they can come up with different rules.  Yes, its a mess, but it’s a glorious mess.

Note that you can make systems work with each other.  You have the Swiss create a blank sheet of paper, and then you use Hong Kong rules to make the sheet less blank.  It also turns out that you can bring the Swiss judges in if that’s what you want to do.  The first reaction of a Swiss judge looking at the DAO is “I don’t see any persons, and because I don’t see any persons, I don’t see any contracts.”  If you tap a Swiss judge on the shoulder, and say “I’m a person.  This other person is a person.  We made a contract and we want you do deal with that” the Swiss judge wills say “Great.  Now that I see persons, I can do something.”  So it’s a matter of mixing various things, and there are some very settled rules for which judges you use.

So let me close this article, by putting out the tin cup.  I don’t have a license to practice law in Hong Kong.  It turns out that I have asked the lawyers in Hong Kong whether I should get one, and every single lawyer I’ve talked to has told me that it would be a waste of my time and effort to get licensed, and that it’s going to be near impossible for me to get a law license in Hong Kong.  The problem isn’t passing the bar exam or taking the courses.  The problem is that after you spend about three years doing all of the courses and taking the bar exam, you need a one year professional internship, and I’m just too old and opinionated to be hired as an intern, so realistically no one will hire me.

Now I could spend a lot of time and effort trying to get an internship, or I could spend the same amount of time and effort developing my own business.  Now it turns out that I’m really useful for lawyers.  The thing about a lawyer is that they often have a “magic pen” so sometimes I just need a lawyer to sign something, and that’s a lot of income for them for not much work.

Also there is this funny status thing.  It turns out that if you want to eat, a food truck will fill you up as much as a three Michellin star restaurant in Central, but when people do big expensive deals, they don’t want to have lunch at a food truck.  I don’t want to run a restaurant in Central, so if someone takes the recipes from a food truck, they are welcome to it. I don’t want to run a restaurant in Central.  I want to run a food truck.   Turns out to be hard to run a food truck in Hong Kong, but that’s another article.

Law works the same way.

It turns out that lawyers run restaurants.  I need a hamburger or pizza or fillet mignon prepared, so you have different restaurants.  What I’m doing is going into the wilds.  Looking at new stuff and new foods, and coming up with weird dishes and food technologies.  What happens if you take a Hong Kong tart and add Swiss chocolates?

So if any of this sounds useful, just give me a ring and we can figure out what we can do for consulting.


From → hong kong, law

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