SMART CONTRACTS AND CONTRACTUAL LIABILITY UNDER ITALIAN CIVIL LAW.

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I. Smart Contracts in the Light of Article 1321 of the Italian Civil Code. Substantive Differences from Contracts in the Strict Sense.

The implementation of economic transactions entirely managed through blockchain systems has made increasingly urgent the need to “institutionalize” the tool of the smart contract, namely to provide it with a precise allocation within the more structured framework of the Italian Civil Code.

Such a need necessarily requires a comparison between smart contracts and the traditional concept of contract as regulated by the Italian Civil Code.

A smart contract may be defined as a set of computer instructions, automatically executed on a blockchain, which implement predetermined contractual obligations.

From this definition, an important assumption may be drawn: a smart contract is not a new type of contract, but rather a technological instrument for the execution of an underlying legal agreement.

In simpler terms, smart contracts always presuppose the prior existence of a contract between two or more parties, who choose this instrument to automate its performance.

Having made these necessary premises, it is worth considering whether and how the essential requirements of a contract (Article 1321 of the Italian Civil Code) may be identified within the distinct category of smart contracts.

First, smart contracts lack the requirement of an “agreement between the parties”: they are not an expression of a meeting of wills, but rather a purely technological instrument aimed at executing a pre-existing contract.

As to their cause, it lies in the predominantly instrumental nature of smart contracts, which is functional to the performance of the contract.

The object, instead, coincides exactly with that provided for in the contract in the strict sense, since the smart contract is also aimed at ensuring its correct performance.

A substantial difference finally lies in the requirement of form, since in the case of smart contracts this is always expressed in the form of computer code, which may be written directly by one of the parties or commissioned by them to a third party.

Therefore, precisely because an incorrect drafting of the code would lead to malfunctioning (bugs) of the smart contract, “form” becomes, for this specific instrument, the most essential requirement among those provided for in Article 1321 of the Italian Civil Code.

II. Brief Overview: Operation of a Smart Contract within a Blockchain.

Subject to what has been said above, a smart contract could not function unless it is recorded within a blockchain system.

For the sake of completeness, it should be specified that a blockchain is a digital ledger shared among multiple participants, in which information is collected in blocks securely linked to one another. Each transaction performed on this ledger—also by means of smart contracts—is decentralized and verified through a common validation system that confirms operations, ensuring the reliability, transparency and immutability of recorded data.

Indeed, blockchain may be understood as a large ledger, in which a series of cryptographically secured transactions are immutably recorded. Each block (or page of the ledger, to continue the metaphor) contains a set of transactions, a timestamp, and a reference to the previous block (or page), thus forming a continuous and reliable chronological structure.

Once validated and entered into the blockchain, the smart contract becomes immutable and self-executing upon the occurrence of predetermined conditions, according to an if/then logic.

For this reason, as anticipated above, the reliability of a smart contract depends on the correct drafting of its code and on the decentralized structure of the blockchain, rather than on the discretion of the parties or the intermediation of third parties.

III. Profiles of Contractual Liability in Smart Contracts. Contractual Remedies for Limiting the Liability of the Parties.

Although automation is the defining feature of smart contracts, the improper performance of the obligations embedded in them cannot escape the application of Article 1218 of the Italian Civil Code on contractual liability.

Automation, therefore, does not exclude liability, but rather requires a renewed analysis of the concept of imputability.

This analysis necessarily passes through one of the considerations already addressed in the previous sections: the correct configuration of the smart contract, and therefore the correct drafting of the computer code that enables automatic execution, is essential.

Incorrectly programmed code may in fact prevent the proper performance of the obligations undertaken by the parties or even result in an execution wholly divergent from their actual contractual intent.

In this sense, a first profile of contractual liability may be identified in the “bug” or malfunction of the computer code due to incomplete or inaccurate drafting.

Indeed, considering that once recorded on the blockchain a smart contract performs the parties’ obligations automatically and irreversibly, it must be concluded that a bug in the code may lead to an erroneous performance of contractual obligations, resulting in a misalignment between the effects produced by the smart contract and the parties’ actual contractual intent.

In such cases, liability for erroneous or non-conforming performance of the contract may lie:

In the former case, the (qualified) liability of the developer may arise directly from Article 1176(2) of the Italian Civil Code, since the technical nature of coding activities requires a higher standard of diligence and skill.

In the latter case, the liability of the principal—namely the party to the smart contract who commissioned the developer—may arise from the application of Article 2049 of the Italian Civil Code and be based on culpa in eligendo, i.e. objective liability in the selection of the agent.

In both cases, however, the contracting parties may protect themselves ex ante by mutually agreeing on limitation or exclusion clauses of liability, subject to separate approval where such clauses are considered unfair (Articles 1341 of the Italian Civil Code and Article 33 of the Consumer Code).

Further protective instruments for the parties may also include:

The “Kill Switch”: a clause (or a function of the smart contract code) that allows the definitive deactivation of the smart contract or prevents its further automated execution. This clause immediately (but not retroactively) neutralizes the effects of the smart contract between the parties and is functionally comparable to contractual termination, as it definitively halts automatic execution. It operates, however, at a technical level and generally with ex nunc effects, without affecting the legal regime of relationships already performed.
The “Pause Function”: also a clause (or function of the smart contract code) that allows for the temporary suspension of automation where the effects produced do not correspond to the parties’ initial intent. In this sense, it operates as a suspensive condition of contractual validity, whereby the contract remains in force and resumes operation once the condition is removed.

IV. Final Considerations.

Although there are numerous points of convergence between contracts in the strict sense and the instrument of smart contracts, the full integration of this tool into the current codified legal framework remains particularly complex.

This may be due to the anthropocentric nature of Italian law, which tends to emphasize the parties’ agreement and diligence in the performance of obligations rather than automation and irreversibility in contractual relationships.

From this perspective, the Italian civil law system perhaps represents one of the last strongholds in a context in which technology is assuming an increasingly incisive role in the regulation of legal and economic relationships.