THIS COLUMN HAS PREVIOUSLY discussed smart contracts (see China Business Law Journal, volume 7, issue 8: Fintech and smart contracts). As the use of smart contracts becomes more prevalent, a fundamental question arises: will Chinese contract law evolve and adapt to accommodate smart contracts?
This column commences by outlining smart contracts and smart legal contracts. It then discusses the use of smart contracts in China and the views of Chinese legal writers. Finally, it examines the current treatment of smart contracts under Chinese contract law.
Smart contracts and smart legal contracts
The Law Commission of England and Wales has defined a “smart contract” as “computer code that, upon the occurrence of a specified condition or conditions, is capable of running automatically according to pre-specified functions”. It defines a “smart legal contract” as “a legally binding contract in which some or all of the contractual terms are defined in and/or performed automatically by a computer program”. The Law Commission states that there are essentially three forms a smart legal contract can take, depending on the role played by the code:
- Natural language contract with automated performance (Form 1);
- Hybrid contract (Form 2); and
- Solely code contract (Form 3).
According to the Law Commission, Form 1 is “a contract in which all of the terms are recorded in natural language, either orally or in writing”. Form 2 is defined as: “a smart legal contract, some terms of which are defined in natural language and other terms of which are defined in the code of a computer program. Some or all of the contractual obligations are performed automatically by the code. In addition, the same contractual terms can be written in both natural language and in code.”
Form 3 is “a smart legal contract in which all of the contractual terms are defined in, and performed automatically by, the code of a computer program”.
Accordingly, smart legal contracts can be classified by reference to a sliding scale that changes depending on the extent to which the contractual terms are written in, and performed automatically by, a computer code.
Smart contracts in China
Chinese contract law accommodates the use of digital technology to support traditional contracts. This can be seen in the provisions of various laws: the Electronic Signature Law, which came into effect in 2005; the E-Commerce Law, which came into effect in 2019; and the Civil Code, which came into effect in 2020. Article 469 of the Civil Code, for example, provides that “writing” includes “a data message in any form, such as electronic data interchange and e-mails, that renders the content contained therein capable of being represented in a tangible form and accessible for reference and use at any time”.
In recent times, the regulation of artificial intelligence and smart contracts has attracted attention in China’s academic and professional circles. China is following the example set by the EU in drafting its own AI regulations. In 2022, the Supreme People’s Court issued the Opinions on Strengthening the Judicial Application of Blockchain. The opinions propose the establishment of a judicial blockchain alliance by 2025 to improve basic support capabilities, including smart contracts. In particular, the opinions propose the establishment of business rules and smart contract procedures to support automatic filing and execution in circumstances involving the non-performance of mediation agreements, and to support diversified dispute resolution.
A recent statistical analysis of the PKULaw Database revealed a total of 72 relevant normative documents or guidance opinions containing the keyword “smart contract” [智能合约]. Further, although there were no direct disputes relating to smart contracts, 128 cases (22 criminal cases and 106 civil cases) involved the use of smart contracts in contract design, product design, and transaction design. These basic statistics suggest that smart contract technology is being used in a broad range of contexts.
The views of Chinese legal writers
The Chinese literature reveals a range of views on the part of Chinese legal writers in respect of smart contracts and their impact on Chinese contract law. Many writers have identified challenges that smart contracts will present for Chinese contract law, particularly potential inconsistencies with contract law in areas such as expression of intention, validity of contract, the defence of unsafe performance, rescission, and remedies for breach of contract.
Some writers have expressed the view that the inherent limitations of smart contracts mean that they are most suitable for small-sum, standardised digital transactions, and that their impact on contract law will be limited as a result. Some writers argue there is no need to adapt contract law to smart contracts; the focus instead should be on adapting smart contracts to comply with contract law.
In addition, writers have identified the costs and risks associated with two features of blockchain technology and smart contracts: anonymity and immutability. Anonymity, they suggest, will interfere with the trust between the contracting parties, limit judicial involvement, and circumvent supervision by the state. Immutability will result in the inability of the contracting parties to deal with unforeseeable changes in a timely manner.
Treatment of smart contracts under Chinese contract law
It is possible that current Chinese contract law already accommodates a Form 1 smart contract; namely, a natural language contract with automated performance. It is uncertain, however, to what extent (if any) Chinese contract law accommodates Forms 2 and 3.
One factor that is relevant in this regard is the inconsistency between smart legal contracts and Chinese contract law principles, such as the principle of “public order and good morals”. This principle underpins the validity of contracts, as provided in article 153 of the Civil Code:
A civil juristic act in violation of the mandatory provisions of laws or administrative regulations is invalid, unless such mandatory provisions do not lead to invalidity of such a civil juristic act.
A civil juristic act that offends the public order or good morals is invalid.
In the minutes of the National Court Civil and Commercial Trial Work Conference (2019), the Supreme People’s Court clarified the circumstances in which a contract will be invalid pursuant to article 153 of the Civil Code:
In general, violation of the rules does not affect the validity of the contract, but if the content of the rules involves public order and good customs such as financial security, market order, and national macro policies, the contract shall be deemed invalid. When determining whether the rules involve public order and good customs, the people’s court should carefully consider the regulatory intensity, transaction security protection and social impact on the basis of examining the object of regulation, and fully reason in the judgment documents.
For the purposes of this discussion, two key concepts referred to in the above extract are “transaction security protection” and “regulatory intensity” or “regulatory strictness”. The former suggests that a smart legal contract will be invalid if, and to the extent that, it is deemed to undermine “transaction security protection”. The latter could be treated as a reference to the extent to which an activity or transaction in question is subject to, or governed by, regulation.
It appears that Chinese contract law in its current form does not accommodate smart legal contracts, at least as they arise in the context of Forms 2 and 3. It might be said that Form 1 smart contracts (namely, traditional contracts with automated performance) are supported by contract law principles. Even here, however, it is possible that smart contracts will be considered invalid if they do not comply with regulation or the principle of “public order and good morals”.
This column is based on a chapter, co-written by the columnist and Dr Zhang Yang of Wuhan University School of Law under the title Chinese Contract Law – Doctrinal and Existential Challenges in the Age of Smart Contracts, which will be published in a forthcoming book on Asia-Pacific contract law.
Andrew Godwin previously practised as a foreign lawyer in Shanghai (1996 – 2006) before returning to his alma mater, Melbourne Law School in Australia, to teach and research law. Andrew is currently Joint Associate Director of the Corporate Law and Financial Regulation Research Programme at the Melbourne Centre for Commercial Law and Honorary Associate Director (Commercial law) of the Asian Law Centre. Andrew has acted as a consultant to a broad range of organisations, regulators and governments in Australia and abroad. He served as Special Counsel and Acting General Counsel of the Australian Law Reform Commission between 2020 and 2024.
