Chinese Court Becomes World’s First To Embrace Smart Contracts

The Hangzhou Internet Court in China appears to have become the first court in the world to embrace smart contracts. The move follows the roll-out of a blockchain capability last year that helps the court keep track of evidence – itself another groundbreaking move for a court.

The Hangzhou Internet Court is something of a pioneer in China, and was set up specifically to deal with disputes related to digital commerce matters, such as online shopping, network service contract disputes, internet-based loan disputes, and internet-based copyrights issues.

After setting up a blockchain database within the court, the next logical step for its organisers appears to be to find a way to integrate smart contracts – i.e. legal agreements with computable elements, which can be self-executing – into the judicial process.

On the 24 October, Wang Jiangqiao, deputy director of the Hangzhou Internet Court, said: ‘In the case of contract performance, after a traditional contract is signed, if one party defaults, the other party will spend a lot of time and effort to collect evidence and safeguard rights, and the rights protection cycle is long and costly. A smart contract can compile the terms of a contract into a set of computer code that runs automatically after the parties to the transaction sign.’

It was reported in the Chinese press that the court already ‘has applied smart contracts in both online shopping and internet finance’.

The court’s site does not yet appear to have a dedicated area for smart contracts, which suggests this is at present a pilot stage project. Even so, as noted, they have already broken significant new ground with their blockchain evidence record system. They also provide what they call online ‘Intelligent Trials’, which are based on electronic filing of documents, and video hearings that use voice recognition software to verify a person’s identity.

In short, this is a very innovative court, and as such it does not seem too far a stretch for them to put their interest in smart contracts into action and at scale.

That said, the project would not be without some challenges. For such a system to work those transacting via a smart contract would presumably have to log key contractual elements with the Hangzhou Internet Court‘s blockchain. This would presumably have to be a voluntary decision on the part of a business and consumers. How any financial transactions would be part of this system and if there would be ‘automatic redress’ is also unclear. And what level of human input would be needed to address any disputes is also uncertain.

The project therefore produces a lot of questions, however experts on Chinese legal tech see this as a logical next step for the court.

Some of the capabilities this Chinese court has on offer, (via the English version of the site).

Brian Tang, a Hong Kong-based legal tech expert and founder of the University of Hong Kong’s LITE Lab innovation project, told Artificial Lawyer: ‘In many ways, it does not surprise me. Hangzhou is the hometown of Alibaba and Ant Financial (which controls Alipay) and Ali is reported to be one of most active filers of blockchain patents in the world. Like Amazon, they have been doing online dispute resolution for a while, and this seems a logical extension.’

Ant Financial is also the company behind Hangzhou Internet Court’s blockchain. While not so well-known in the West, Ant Financial is a huge investor and developer of new technology, especially in relation to ‘Big Data’ collection and analysis.

Tang added: ‘After China’s Supreme People’s Court recognised that blockchain evidence was acceptable last September, the Hangzhou, Beijing and Guangzhou Internet courts launched their own blockchain evidence platforms.

‘In a broader context, President Xi Jinping has recently spoken at the Political Bureau of the Central Committee and emphasised that ‘the integrated application of blockchain technology plays an important role in new technological innovation and industrial transformation’. This demonstrates that blockchain as a core technology is now being recognised as a national priority in China that applies to many aspects of life, including law tech.’

While Tianyu Yuan, at the Heidelberg University Faculty of Law, told this site: ‘It seems that the Hangzhou Internet Court has already applied some form of smart contracting features [to] their blockchain contract data… Generally in China, the understanding of a contractual obligation is not the same as in Europe. Sometimes contracts are still not considered as binding promises but as some sort of non-binding Letter of Intent, which often results in the buyer not paying for no legally relevant reason.’

‘Smart contracts can definitely help with this rather prevalent problem,’ he added, but also noted that he believed smart contracts were limited in how useful they would be for a court once more than just objective matters such as payment terms were involved. For example, how would the court decide issues related to intent?

Aaron Wright, co-founder of smart contract pioneer, OpenLaw, also noted that if disputes were using blockchain-based smart contracts – presumably with some form of digital currency in the transaction – then this digital asset would need to be part of the solution, and it was not clear how this was happening in the Hangzhou court.

And, Peter Hunn, co-founder of fellow smart contract pioneer, Clause, told Artificial Lawyer: ‘In my view it’s the application of the basic value proposition that by creating contracts that are machine-readable, we can extract data and automate processes including those pertaining to dispute resolution far more efficiently than we do today.’

‘I’m not sure we would want to automate a filing in all circumstances; often this is a business decision, of course. Many court systems have a fair backlog! In simple cases I can see this being valuable. It does, however, demonstrate that aforementioned principle that contracts and other documents, e.g. procedural court docs, have immensely more value as computational entities,’ he added.

In conclusion, this would appear to be early days for the court’s smart contract ambitions. That said, it has already broken new ground when it comes to introducing technology into the court process, so we should not assume this will only get as far as an initial experiment.

One factor that needs to be taken into account is that the Chinese Government is developing what it calls the Social Credit System. The idea is that each citizen will generate a unique profile that will be shaped by their actions, especially in matters such as maintaining agreements, or for example paying fines. Those with positive profiles gain privileges, those with negative profiles can find it harder to access some services.

The allure to the Chinese courts of smart contracts linked to judicial databases may in part be that it will enable them to digitally gather evidence of which citizens are ‘acting correctly’ in business dealings – and this goes back to the point of Tianyu Yuan, where he notes that ‘sometimes contracts are still not considered as binding promises but as some sort of non-binding Letter of Intent, which often results in the buyer not paying for no legally relevant reason’.

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