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{{Paper
|id=Vol-3282/icaiw_aiesd_9
|storemode=property
|title=Smart Contracts: An Opportunity for Company Modernization in a Post-COVID-19 World
|pdfUrl=https://ceur-ws.org/Vol-3282/icaiw_aiesd_9.pdf
|volume=Vol-3282
|authors=Joe A. Parrales,María G. Cornejo,Hector Florez
|dblpUrl=https://dblp.org/rec/conf/icai2/ParralesCF22
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==Smart Contracts: An Opportunity for Company Modernization in a Post-COVID-19 World==
https://ceur-ws.org/Vol-3282/icaiw_aiesd_9.pdf
Smart Contracts: An Opportunity for Company
Modernization in a Post-COVID-19 World
Joe A. Parrales1,* , María G. Cornejo1 and Hector Florez2
1
Universidad Ecotec, Samborondón, Ecuador
2
Universidad Distrital Francisco Jose de Caldas, Bogota, Colombia
Abstract
Although smart contracts already existed before COVID-19, some Ecuadorian companies still show
delays in the modernization of their contractual processes, which goes in the opposite direction to the
needs that a digital society demands. The need to promote the implementation of technologies that
minimize physical contact of people and optimize resources has been evidenced. In addition, based
on the effects of the pandemic, the contractual dynamics of Ecuadorian companies force us to make
the definitive digital step in this field that still is not present at all, even though there is national and
international legislation that allows it. In the national and international context, it becomes imperative
to consider the use of smart contracts. This paper presents a descriptive methodology to use smart
contracts as an alternative for improvement in digitization processes as a vision to eliminate distance
barriers between the parties, automatic execution of the clauses and conditions, elimination of paper,
optimization of resources, and improvements over time.
Keywords
Smart contracts, COVID-19, Optimization
1. Introduction
We live in a society where technology increasingly affects the way we relate and connect with
others [1]. In addition, after the arrival of COVID-19, technology plays an important role in the
world, and the case of Ecuador, is not exception, since many business practices had to change
such as working at home, digitization of processes, communication, etc.
Now, in the post-COVID-19 era, the aforementioned business practices have come to stay
and in the contractual dynamics, there have also been substantial changes in some Ecuadorian
companies; however, certain relevant technologies to this issue still need to be consolidated.
The influence that technology has had overtime on acts of commerce is very big, indeed it is
currently, in most cases, unnecessary to physically approach some entities like banks, markets,
etc, since there are applications that allow most procedures [2, 3].
Another example to highlight is the delivery service since some years ago, it was imperative
to have a conventional telephone in which people had to wait for hours until the company
ICAIW 2022: Workshops at the 5th International Conference on Applied Informatics 2022, October 27–29, 2022, Arequipa,
Peru
*
Corresponding author
$ jparralesv@ecotec.edu.ec (J. A. Parrales); mcornejoc@ecotec.edu.ec (M. G. Cornejo); haflorezf@udistrital.edu.co
(H. Florez)
0000-0001-9072-7729 (J. A. Parrales); 0000-0002-2655-0153 (M. G. Cornejo); 0000-0002-5339-4459 (H. Florez)
© 2022 Copyright for this paper by its authors. Use permitted under Creative Commons License Attribution 4.0 International (CC BY 4.0).
CEUR
Workshop
Proceedings
http://ceur-ws.org
ISSN 1613-0073
CEUR Workshop Proceedings (CEUR-WS.org)
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managed to assist the customers. Currently, there are applications such as Pedidos Ya, Uber Eats,
Rappi among others that allows customers to request food from the desired restaurant through
their application.
However, in the world of contracts, technology has also played a fundamental role. For
example, before the COVID-19 era, electronic contracts already existed. They are defined as
a contract that is carried out through the use of some electronic element, when this has, or
may have, a real and direct incidence on the formation of the will or the future development
and interpretation of the contract i.e., it would be those contracts that, regardless of their legal
nature –purchase, lease, commission, etc.– and irrelevance of their object –assets or rights–,
are celebrated substituting the oral and written language, which presides over the contracting
traditional private, due to the essential electronic language to implement the declarations of
contractual will [4]
In this definition we can realize that the technology in the world of contracts already existed
some years ago; however, these practices have evolved. They are going from simple digitization
of contracts to the help of technology for the execution of these contracts automatically.
This automation of contract execution is thanks to the blockchain whose operation consists
of the storage and collection of data called DLT or Distributed Ledger Technology, which has
a similar operation to that of an accounting ledger, since it saves and details a record of all
transactions that are carried out, disabling any modification of the contained data.
Technology in the world of law is already a reality and in the post-COVID-19 era, it has forced
some Ecuadorian companies to change their contractual dynamics, leaving aside traditional
contracts in which signatures are taken by hand in a physical way, paper spending is high,
executions of the contracts are carried out by human teams, the legal cost is high both in terms
of time and money, etc.
In this context, this paper has the general objective of analyzing the benefits that smart
contracts provide to companies in the contractual dynamics, in order to reduce physical contact,
optimize resources, and digitize processes as well as compile the different provisions related to
smart contracts in the different contractual activities in Ecuador, determine the methodology to
be used for the study of smart contracts, compare the conventional contractual dynamics in
companies versus smart contracts to know the benefits of this new tool.
2. Background
2.1. Smart Contracts
In the 1990s, the expression smart contract began to sound through the lawyer and cryptographer
Nick Szabo, who launched this term to the world to try to explain the evolution of common
contracts with particularities such as automatic self-executing clauses through a programming
code [5]. However, Szabo’s idea was not as easy to implement at that time when technology
had not advanced as it is today; therefore, it was still pending to build its operation mechanics.
Years later, the emergence of the fourth industrial revolution, which brought with it the
blockchain, contributed significantly to crystallizing the idea of Nick Szabo.
According to Padilla Sánchez [1], a smart contract is a software that allows the automatic
execution of codes that incorporate obligations between previously agreed-upon parties and
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that are stored in a decentralized registry, upon verification of the codified conditions. Given
this idea, technologies such as blockchain become essential for smart contracts to be able to
carry out day-to-day operations.
To be more illustrative, we can compare smart contracts with a coffee vending machine,
since this machine throws the requested product as long as the buyer meets the transaction
requirements. Smart contracts work in the same way since they only come into legal life if the
parties comply with all the enabling requirements [6].
Thus, smart contracts and blockchain technology are two different elements that complement
each other, since although it is true that the smart contract comprises a self-executing computer
program through the agreements previously established by the parties, all of this is possible
thanks to the technology used in the blockchain [7, 8].
In the case of Ecuador, the smart contract is recognized as an intelligent contract and its
definition can be found in the reformed Commercial Code published on May 29, 2019, states in
article 77:
Smart contracts are those produced by computer programs used by two or more parties,
who agree to clauses and sign electronically. The smart contract program facilitates the
signing or expression of the will of the parties, as well as ensures compliance through
provisions instructed by the parties, which can even be fulfilled automatically, either
by the program itself, by a financial institution, or by another party, if at the signing
of the contract the parties establish that provision. When a pre-programmed condition
is triggered by the parties that are not subject to any human evaluation, the smart
contract executes the corresponding contractual clause. In the absence of a contractual
stipulation, the administrators of said program or those who have their control will
be responsible for the contractual and non-contractual obligations that arise from the
signed contracts and in any case, the provisions that protect the rights of the consumers
will be applicable.
We can clearly see that Ecuador has taken a big step in Commercial Law by including this
type of contract in its legislation. In this way, legal security is generated for companies with
revolutionary practices in contractual matters.
2.2. Evolution of contracts
The Ecuadorian Civil Code in its article 1454 defines the contract as an act by which one party
is obliged to another to give, do or not do something. Each party can be one or many people. In
order to briefly understand how the contracts have evolved, we must take a starting point of
reference. Analyzing the origin of the word contract, etymologically it comes from the Latin
contractus which according to Ramirez Hernadez [9] means pact or agreement, oral or written,
between parties that are bound on a specific matter or thing, and whose compliance can be
complied. Thus, the concept of contract dates back to the early days of Rome, where it was not
properly considered an agreement of wills; however, it was considered a bond or subjection of
two or more parties. For classical law, contracts are those agreements that have a specific name
and a particular regime. Justinian law considered contracts as an agreement of wills aimed at
creating or transmitting rights and obligations [10].
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Then, the concept of a contract is very old, and over time it has gone from being a simple
agreement to being in modern times an act in which the parties agree to give, do or not do.
According to Hart et al., [11], in their work The Theory of Contracts, modern economies are
held together by countless contracts. Hart, in his work on the theory of contracts, also says [11]
In order for a relationship be it labor with the state or between partners to be successful,
it is necessary to eliminate asymmetries in information since these play against the
good performance of society. As a result of this, contracts are created with the aim of
eliminating these asymmetries and helping the proper functioning of both productive
and institutional relationships.
Thus, we can realize that contracts in the economy are fundamental; as a result, there are
no businesses in which contracts do not intervene, either to agree on transcendental points
of the negotiation or to prevent certain details that become important at the time of a breach.
Thanks to well-crafted contracts, resources are allocated more efficiently, higher production can
be achieved, and trade barriers can be eliminated [11]. Thanks to globalization and technology,
contracts have had to evolve and go from taking signatures between the parties using pen and
paper to being able to use electronic contracts.
According to Davara Rodríguez et al. [4], an electronic contract is a contract that is carried
out through the use of some electronic element when it has or may have a real and direct impact
on the formation of the will or the future development or interpretation of the agreement.
With this definition, we can understand that an electronic contract is fundamentally a distance
contract with particularities such as the electronic medium used for the formation of the will,
and an electronic means of consent is used.
Electronic contracts are used mostly by companies engaged in electronic commerce. It is
very common to see an agreement and conditions clause before performing the purchase of
any product or service. As an example, Amazon before creating a new account notifies users of
accepting its conditions of use and the privacy notice; that is, it is no longer necessary for the
company to send each user the documents to their address in order to take the corresponding
signatures; however, with just one click, users accept all conditions that the company considers
pertinent. This, without a doubt, saves money on logistics and paper issues, since the transfer
of contracts, or paper impressions increases the company’s expenses and, in the framework of a
pandemic such as COVID-19, change is forced.
Nevertheless; in such a modern world, smart contracts needed to evolve, since accepting
policies and conditions or signing electronically helps a lot, but an issue as relevant as the
execution of contracts was still left out. In the past, the execution of contracts was a job in which
an intermediary was necessarily needed; thus, resorting to ordinary justice was imperative to
enforce agreements that were not respected, and this caused additional expense for lawyers and
delays in the nature of a trial. As a result of that, the smart contract was born as an alternative
for companies that need their clauses to be executed automatically and instantly.
According to Raskin [12], the great advantage of smart contracts is that they are very difficult
to be altered or revoked once they have been put into operation and even more when their
automatic execution has occurred. This irreversibility and immutability guarantee the fulfillment
and effectiveness of the obligations.
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The functionality of smart contracts occurs due to conditional propositions that can be
entrusted to software thanks to the possibility of entering into programming code some of the
clauses or provisions of a contract, which the parties previously had to consent to.
This is why any agreement between the parties can be automated thanks to the existence of
blockchain technology since this chain constitutes an ideal technological platform to program
and register this type of smart contract whose self-execution depends on the verification of
previously established conditions. between the parties and without the need for the intervention
of any of them or an intermediary
Blockchain technology enters to solve possible difficulties in the execution of contracts,
thanks to the fact that the generation and maintenance of information are carried out through
an encrypted and decentralized registry that is supervised by each and every one of the members
of the network. Therefore, since there is no central repository of the information with which
the smart contract will operate, it would be necessary to violate the entire network to modify
the terms of the contract or seize the assets that it may have, which is practically impossible.
This provides a very high level of security and transparency that is in line with the objectives
of operations carried out with smart contracts [13].
For this reason, the philosophy of smart contracts fits perfectly with the blockchain ecosystem.
Once they are programmed by the will of the parties, the execution of the smart contract does
not need a central authority or intermediary to carry them out. With this, many commercial
exchanges are potentially more efficient by reducing the transaction costs associated with both
the default of the counterparty and those derived from going to court to claim compensation
[13].
The process of smart contracts has the following activities:
1. Negotiation: First approach in order to reach a future agreement.
2. Consent: Manifestation of the will of making a contract and authorization of the execu-
tion of the contract.
3. Convention: The arrangements from the parties are embodied in an agreement that is
transformed into a source code.
4. Blockchain: The agreement is possible thanks to the inalterability of data, security by
encryption, and reductions in costs.
5. Autoexcecution: Through a platform that executes the agreements of the contract.
6. Result: Benefits satisfied.
3. Methodology
The methodology used in this work is descriptive methodology since it implies observing and
describing the behavior of a subject without influencing it in any way. This methodology allows
measuring the information collected in order to systematically describe, analyze, and interpret
the characteristics of the studied phenomenon based on the reality of the proposed scenario.
This methodology is responsible for specifying the characteristics of the population under
study. This methodology focuses more on the what, rather than the why of the research subject.
In other words, its objective is to describe the nature of a demographic segment, without
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focusing on the reasons why a certain phenomenon occurs. That is, it describes the research
topic, without covering why it occurs [14].
There are some of the most important characteristics of descriptive methodology [15]:
• It is necessary to know in advance the variables that will be analyzed since this type of
research is not dedicated to the search for variables, but to their study.
• It is possible to make forecasts, but these are not entirely reliable, since they are considered
premature.
• It is possible to use descriptive research to classify the data collected in the study that is
being carried out, separating them into different categories of description.
• There is no control over any of the variables that affect the event or problem under study.
• In most cases, descriptive research collects data on quantities.
• The data provided by descriptive research must be both accurate and reliable.
This method is used to obtain a general vision of the subject under study and to analyze the
different literature and contractual practices that are carried out in several countries. In addition,
this method allows for identifying updated content in different sources such as scientific articles
with characteristics very similar to the objective of the proposed topic and relevant from a
research perspective.
Since there is not much quantitative information, the descriptive methodology is useful for
this work. This study describes and allows identifying the benefits of using technology in a
traditional contract drafting process in the context of a post-COVID-19 world.
4. Contractual dynamics in a Post-COVID era: Ecuador as case
study
Before the COVID-19 pandemic, each organization carried out digital transformation at its
own pace; however, there is new normality with the arrival of the COVID-19 pandemic and
this transformation has ceased to be a process or future objective to become a prevailing and
unavoidable reality that will define how companies will survive in the current post-COVID-19
era.
This new normality in the post-COVID-19 era has made contract management tools essential
for operational continuity, a trend that will surely endure over time. Ecuador is one of the
countries hardest hit by the COVID-19 pandemic as reported by the WHO in 2020 [16]. It has
had to stop seeing the virtual and electronic as something desirable or very distant in most
companies and institutions, as a new reality, as something that has to be executed now to stay
connected with the new challenges that the business world brings us.
Unfortunately, there is no data from institutions that collect information on how many
companies still use the typical contractual process, in which the parties intervene, contracts are
printed, contracts are gathered or sent through courier companies, signatures and files in an
office with many folders.
For instance, in Ecuador, several companies request users to print, sign, scan, and send
the contract as well as send a picture with an image of the acceptance of the service. As a
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Table 1
Comparison between conventional and smart contracts
Conventional Contract Smart Contract
Use of paper is essential Remove use of paper
People are needed to execute a contract Software is needed for the automatic exe-
cution of a contract
Inefficient storage Optimized storage
High physic contact Minimum physic contact
High operational cost Low operational cost
consequence of the pandemic, companies had to improvise a new way of contracting in order
to continue offering their services, since the restrictions of COVID-19 were very tough. As
a result, contracting processes in Ecuadorian companies have been using pen and paper and
technology has been wasted.
Nevertheless, there is a group of Ecuadorian companies that have been venturing into
electronic commerce and have opened this channel as a source of important income. These
companies are promoted in an event organized by the Guayaquil Chamber of Commerce called
Cyber Monday. This event consists of Ecuadorian companies that have an electronic channel
available to make sales, participate in a kind of electronic fair and offer potential customers
discounts that they will not find in physical stores. This virtual modality generated more than 2
trillion USD. Asia captured 44%, Europe 26%, North America 26%, and South America 2%. Based
on this, electronic commerce exists in Ecuador, but at the regional level, the country does not
reach a desirable level in this modality, as developed countries do.
Table 1 presents a comparison of the most relevant features between conventional and smart
contracts.
4.1. Ecuadorian regulations
When applying for smart contracts in Ecuador, we must take into account what its legislation
says about the validity of the current commercial code, since smart contracts are briefly concep-
tualized. In this sense, the Ecuadorian regulations are mentioned as follows in article 77 of the
Commercial Code, which states [17]:
Smart contracts are those produced by computer programs used by two or more
parties, who agree on clauses and subscribe electronically. The smart contract software
facilitates the signing or expression of the will of the parties, as well as ensures
compliance, through provisions instructed by the parties, which can even be fulfilled
automatically, either by the program itself, by a financial institution, or by others, if at
the signing of the contract the parties establish that provision. When a pre-programmed
condition is triggered by the parties, not subject to any human evaluation, the smart
contract executes the corresponding contractual clause. In the absence of a contractual
stipulation, the administrators of said program or those who have their control will
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be responsible for the contractual and non-contractual obligations that arise from the
contracts entered into in this way, and in any case, the provisions that protect the
rights of the users will be applicable.
In addition, the law of Electronic Commerce, Signatures, and Data Messages also regulates
the computer or electronic contract in article 45 which says [18]:
Validity of electronic contracts. Contracts may be implemented through data messages.
The validity or binding force of a contract will not be denied for the reason that one or
more data messages have been used in its composition.
Article 45 of the Law on Electronic Commerce, Electronic Signatures, and Data Messages
mentions something interesting about data messages. It gives the same legal validity as a
contract. As an example of data messages, we can find emails, documents transmitted by fax,
messages transmitted by telegraph, texts transmitted by a cell phone, etc.
Regarding this important characteristic, article 2 of the aforementioned law says [18]:
Legal recognition of data messages. Data messages will have the same legal value
as written documents. Its effectiveness, assessment, and effects will be subject to
compliance with the provisions of this law and its regulations
Everything mentioned about the Law on Electronic Commerce, Signatures, and Data Messages
is in accordance with article 75 of the Commercial Code, which states [17]:
Regarding the provision of electronic services, requirements, and formalities for the
validity of data messages, electronic and telematic contracting, the rights of users
and consumers of electronic services and proofs will be regulated in accordance with
the provisions of the Law on Electronic Commerce, Signatures, and Data Messages
and other laws that regulate these matters. The formulation of the consent will be
regulated in accordance with the provisions of the general rules contained in this Code.
The activities regulated will be subject in their interpretation and application to the
principles of technological neutrality, the autonomy of will, international compati-
bility, and functional equivalence of the data message in relation to the information
documented in non-electronic means and of the electronic signature in relation to the
autograph signing.
In addition to all the indicated legislation on the application of smart or electronic contracts,
the following principles must be considered:
• Technological neutrality
• Autonomy of the will
• International compatibility
• Functional equivalence
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5. Conclusions
The pandemic has been a key factor for companies to stop seeing transactions through electronic
commerce as an ideal scenario and become a fact. In the context of a post-COVID-19 era, the
contractual dynamics of companies have evolved significantly and smart contracts are clear
evidence of this since their application requires a coordinated operation involving legal sciences
and technology.
Smart contracts are legal tools with great application expectations, since they offer security in
transactions and contracts, being capable of being executed automatically thanks to technologies
such as blockchain.
In Ecuador, companies can take advantage of the use of these technologies since they are per-
fectly legal; that is, the validity of the contract cannot be discussed because the new Commerce
Code and Law of Electronic Commerce, Signatures, and Data Messages accredit the use of these
tools.
In the Ecuadorian context, the implementation of smart contracts dates from May 2019 when
the new Commercial Code comes into force; therefore, information on the subject is still limited.
However, thanks to globalization and technology, this is applied worldwide and there are more
and more peculiarities in this regard in which the advantages of using these contracts are
evident such as self-execution, reduction of costs in the use of paper and logistics, data security,
less physical exposure, etc.
It is necessary to use smart contracts as a tool to improve contractual practices among
Ecuadorian companies. Consequently, it is important to promote professional training in these
issues since smart contracts are very useful for public and private institutions. In addition, it is
necessary to promote the implementation of changes in the academic subjects of the Universities
and Faculties of Law, in order to teach with a technological vision so that future professionals
develop these very necessary skills for today’s world.
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