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Criteria for Smart Contracts in Public Procurement

Blockchain provides a decentralized storage system, and its distributed ledger is the potential fundamental technology to mitigate procurement risk and improve procurement aspects such as transparency, impartiality, and control of bidding processes. The smart contract is a component of a blockchain program that empowers public procurement by providing self-enforcement, self-verification, and tamper-proof data, resulting in a secure, transparent, and cost-effective way to bind contracts. With less involvement of human interference, smart contracts reduce the chance of corruption and fraudulence. There is, however, a degree of uncertainty about the legality of smart contracts in the public sector. This article discusses the various views and criteria for smart contracts.

Interpretation for Smart Contracts

Currently, what is important is that a smart contract, as programmed, will only be performed if a given condition is met. It does not involve a medium to interpret the formation of an agreement. By exchanging smart contracts, parties are deemed as exchanging promises. Most conventional contract claims are related to performance, thus there is a considerable difference in the adjudication requirements of each type of contract. Smart contracts are seen as conduct and performative utterances which have an effect in the real world. Parties who use smart contracts are more likely to have their expectations frustrated if the wrong thing occurs than if nothing does.  Therefore, when smart contracts are deemed enforceable, it is less about whether the performance can be enforced and more about whether the result is just.

The spectrum of Smart Contract

The conception of a smart contract between a lawyer and a coder may be different. Smart contracts are designed to satisfy common contractual conditions like payment terms, liens, confidentially, and enforcement. However, the coded contract may not necessarily satisfy a lawyer. Blockchain smart contracts are essentially written in code and run on three different spectral bands. First, the contract is fully written in code on the blockchain without natural languages such as English or words. Parties rely solely on Distributed Ledger Technology (DLT). Next is a mixed contract. Contractual terms are written in natural language and agreed upon by parties. Operative terms are to be written as a smart contract for the execution of the transaction. Also known as a Ricardian contract, a digital agreement is signed and encoded in the blockchain. Lastly, a natural language contract may execute as a single clause using code. Contracts may allow clauses to be executed as smart contracts on the blockchain in this spectrum.

Conditions of Smart Contracts

A smart contract is a program written in computer code that executes the contract in accordance with the terms and inputs stipulated. How conditions can be set depends greatly on the nature of the industry and the purpose of using smart contracts. The smart contract provides autonomous, security, interruption-free, trustless, cost-effective, fast performance, and, accurate and error-free. With such characteristics, an organization can predetermine how conditions can be set by coding according to the operative terms of the industry. There is a range of use case applications for smart contracts and in the public sector, a smart contract is mainly used for record-keeping purposes. In Singapore, a binding contract requires offer and acceptance of the offer, made with the intent of creating legal relations, as well as provisional consideration. Hence, it is important for parties to be aware that there are potential legal ramifications when using smart contracts.

Cryptography and Blockchain Technology

The encryption process provides secure authentication and verification of messages relating to the smart contract between the parties. A form of internet security, cryptography, encrypts information into codes that can only be read by those who are intended to see it. The encryption prevents potential hackers to hack into the information. There are three types of cryptographies: Symmetric, Asymmetric, and Hash. In Symmetric cryptography, information is translated into encrypted code (ciphertext), and to encrypt and decrypt data, both the sender and recipient will need to use the same key. Asymmetries in cryptography occur when the sender and receiver use different keys to encrypt and decrypt data. Lastly is the cryptographic hash. The hash algorithm converts plaintext information into a unique string of text. A key advantage of public-key encryption infrastructure for smart contract transactions is its security since it is extremely difficult if not impossible to reverse engineer a public key into a private one, making it very resilient to failures or hacks.

Coding Logic

Smart contracts require technical experts, such as programmers, to code the essence of parties’ agreements or verify the accuracy of the code written. It will then be recorded on a blockchain-based platform. The Solidity programming language is an object-oriented, high-level language that is used to implement smart contracts. Among its many features, Solidity is constantly typed and supports inheritance, libraries, and complex user-defined types. The transactions are then secured by cryptography and are accessible only by cryptographic signatures or “keys”. Transactions will become immutable when they are permanently written to the blockchain. Typically, in permission-less blockchain deployment, when other participants or nodes with sufficient quality reach the same conclusion, a consensus protocol on the blockchain will determine whether the smart contract message should be added to the blockchain.

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Crystal Chin Li Ting
Crystal Chin Li Ting
Crystal Chin Li Ting has substantive years of experience in the healthcare and last-mile logistics industry. She holds the RMIT Bachelor’s degree in Business Management, and she is a member of the Singapore Institute of Purchasing and Materials Management (SIPMM). Crystal Chin completed the Specialist Diploma in Public Procurement (SDPP) in March 2022 at SIPMM Institute.

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