// Copyright (c) 2014, Bitquant Research Laboratories (Asia) Ltd. // Licensed under the Simplified BSD License // NO WARRANTIES AND REPRESENTATIONS
JURISDICTION Why Hong Kong?
Hong Kong contract law is basically English contract law with a few small differences, so the reason that this is done under HK law is so that it can be used as a template for a contract in any other common law jurisidiction (i.e. Australia, Canada, UK, and US). This advantage of common law over continental civil law systems is that in continental civil law systems (Germany, France, Mainland China, Taiwan), the power of the contract comes from a legislative enactment. This means that the format and the details of the contract have to be written specifically according to the national law.
As far as why Hong Kong and not English law. HK is a small jurisdiction, and so the courts are very fast and efficient. The US, UK, or Australia is so large that it can take years for a case to reach the supreme courts, and the supreme courts are so busy with other things that ruling on these issues is not a high priority.
Because Hong Kong is smaller, cases move through the courts much more quickly. Instead taking over a decade for a case to move all the way to the top, in HK, even huge cases can reach the CfA in a matter of months. Any contract disputes can be quickly resolved, and it is hoped that as Hong Kong courts rule on smart contracts, there will be a set of case law which originates in Hong Kong which other jurisdictions can use. One of the goals of this project is for Hong Kong to be to smart contracts what Delaware is to corporate law.
CHOICE OF LANGUAGE
We ended up using javascript for the language. Originally, we were going to use python because that is the standard language in banks. However, the lenders stated that they prefered javascript, which makes sense because javascript is very well known in web development, and allowed us to create a web app.
One problem with javascript is that all numbers are floats, and you don't have operator overloading. In Python, you can create a money class which makes multicurrency easy. Also in javascript, all dates have time zone associated with them which is something a bad thing.
For libraries what wanted to remove any libraries from the term sheet itself. Also we used requirejs to make it work with both nodejs and with a web browser. I considered having a javascript compiled language like coffeescript, but the extra overhead in the compiler was problematic.
WORDS TO AVOID THE WORD
Default - has completely different meanings in law and in computer programming. This meant that I needed to avoid using that word. Default parameters can mean "the parameters used when someone doesn't fill in the form" or "the parameters used when someone doesn't perform the terms of the contract."
Penalty or bonus - Contract drafter want to avoid the word bonus and really, really want to avoid the word penalty. The trouble is that if you describe something as a bonus or penalty, you may run into legal limits as to what you can put as a bonus or penalty. In particular, English contract law prohibits penalty clauses. There are clauses that you can provide a penalty without a penalty clause. Liquidated damages. In this contract, the extra money is terms an accelerated payment.
STANDARD TERMS IN ENGLISH CONTRACT LAW
Much of the agreement are designed to change certain standard provisions of English contract law. English contract law has evolved over the last several hundred years, and there are some areas in which English contract law causes things that are unexpected unless the parties agree otherwise. This include:
The meaning of the term "including" - The word include is ambigious. If you say "X include Y and Z", that can be interpreted as meaning only Y and Z or things like Y and Z, and this is the way that "including" is usually interpreted by lawyers. However, including can also mean "X, for example Y and Z." Defining "including" or "includes" is important because that fixes the definition. Note that the definition in this contract says "X including Y and Z" means X, however, if I say "including Y and Z" then anything that is not in Y and Z is listed.
Postbox rule - The rule in English contract law is that if you give notice of something, the notice is valid when you put the letter in the post office. What does that mean of e-mail? There isn't a clear rule, so rather than have the court guess, you want to put the rule into the contract.
Severability - If one part of the contract becomes impossible to execute, do you want the whole contract to be invalid, or to you want to try to work around the issue? You can do both ways, but English courts tend to assume that if you can't perform part of a contract, that the whole thing becomes invalid. This changes that assumption.
Is e-mail writing? - If a contract requires "written notice" does that include e-mail, and fax. You don't want to have a court guess, and English contract law provides no rule. In this contract we have defined e-mail and fax was constituting "writing." Note here that chat and SMS is NOT included as "writing".
ANNOYANCES
Markdown uses two spaces to separate paragraphs.
COMMENTS
One of the legal issues was to carefully divide what is commentary and what is legally enforceable. In particular, the TermSheet.js file does not contain any comments, because this would create confusion over whether the code is the contract or the comments are in the contract.
To deal with this issue, all of the comments are in a side notes. The side note contains representations from from the borrower to the lender regarding the content of the code. However this agreement is separate from the contract itself.
What we expect to happen is that if there is a substantive conflict between the terms of the contract and the notes, that this would be handled under the law of mistake or misrepresentation. However, this would only cover the original borrower and lender. If the loan is resold, any representations would not cover that situation.
It's also important that the contract analyzer is not part of the contract itself.
IP OF CONTRACT
One conflict was between software conventions for IP rights and lawyer conventions. In software, the IP rights are always very clear. Either there is an open source license or the license is proprietary. Also software developers are very careful about IP issues and there is invariably an agreement as to who owns IP rights to the work.
With lawyers the question of who owns the IP to the contract text is usually not explicitly stated, and the practice seems to be that lawyers allow a text to circulate, but never renounce ownership of copyright, and reserve the right to assert IP at a later time. Lawyers will also rarely explicitly define IP rights for contract text, as the contract is often not reusable anyway, and you end up with "meta"-problems (i.e. who do you consult to negotiate a contract with a lawyer).
This practice will not work for software products, as it create a situation in which IP is unclear. This creates an problem with "clean title."
Unfortunately, the statuory law is unclear about what happens in this situation. The issue is that different jurisdictions have different legal systems. In Hong Kong, this is covered under section ?? of the Copyright Ordinance and is clearly a commissioned work in which the lawyer retains copyright ownership, whereas the person that commissioned the work retains an exclusive license to use the work. There are two issues here. The first is that this is an HK only situation, this would clearly not be a commissioned work under US or UK law and the Berne Convention is silent on this issue.
It's also unclear how moral rights play into this. Under HK law, software is not subject to moral rights. However, is this software?
The solution in this case was that the lender paid the legal firm that drafted the contract a large sum of money in exchange for an assignment of copyright, which allows for a template contract to be published under a BSD license. It's worth noting that the executed contract will not be BSD licensed, because you explicitly don't want to disclaim liability.
PRIVACY ISSUES
One problem is what is public and what is private. The fact that a company is getting a loan is sensitive information that you won't want to spread around. So what we did was to pus t the public template contract on github. The exact amounts and the identities of the borrower and lender are not included.
BUGS
It's worth noting that writing the contract in javascript allowed for removing some ambiguity in the contract. For example, in calculating the accelerated payment, you run into the question of what happens if you hit two targets on the same day. Also, when writing up the contract, you have the question of what happens if someone pays off the contract, can they keep the credit limit? If someone has a late interest rate, does this apply to only the late balance or the whole balance?
If you make an early payment which causes the balance to fall to zero does this terminate the agreement. If the accelerated payment happens does this terminate the agreement.
WHY BUCKAROO BANZAI?
His rock band is the Hong Kong Caviliers.
Also BB is very interesting from an IP point of view. Because the rights to the character are a mess, it will be impossible for anyone to finance or use the intellectual property. This is an illustration with the problem of "clouded title."
GOTCHAS
One thing that lawyers will tell you is that there are a lot of gotchas in contracts and you have to be careful about cutting and pasting contracts that you find on the internet. This is correct, but I would like to list here the gotchas that are in this particular contract.
The XBT/HKD exchange rate is set at ANX and bitcashout. This is mainly for the convinience of the borrower, in that the difficulties in calculating an exact exchange rate outweigh the actual different. However, in contracts with larger sums of money, it will be necessary to more carefully specify the exchange rate.
The documentation requirements for verifying revenue is likewise somewhat informal.
LITIGATING A SMART CONTRACT IN A PAPER WORLD
One of the issues that we ran into was the process of litigating a smart contract in HK courts, and the issue was the legality of a Hong Kong money lending contract under the Money Lending Ordinance. What we did was to print out on paper a representation of the contract and also do a paper printout of the source code. We then also printed out several screenshots showing the behaviour of the contract under relevant situations. These documents were provided to the opposing counsel in the pre-trial document bundle.
If there was any dispute over the behaviour and contents of the contract, then this could have been challenged by opposing counsel (and that that point we could have brought in expert witnesses), but since this was not the issue that was being litigated, using paper printouts of the smart contract was sufficient for the litigation. Also note that had the meaning of the contract been under dispute, because it is all written in javascript, getting programmers to testify as to the proper behaviour of the contract would have been fast and cheap.