Disclaimer: This is a shortened and updated version of Section 2 of my article Liable and Sustainable by Design: A Toolbox for a Regulatory Compliant and Sustainable Tech
You can read article in full (in open-access) here:
#digitaleconomy #Web3 #Web4 #websustainability #digitalecosystem #techlaw #innovation #innovationlaw #startups #corporatelaw #corporategovernance #DAO #contract
#contractlaw #crypto #digital #digitaltrade #digitalservices #ConsumerRightsDirective #EUConsumerProtectionAcquis #eCommerceDirective #DigitalServicesAct #cybersecurity
Now that I have your attention (food is good, old but gold, right?), let us delve into some contemporary additions to ‘traditional’ recipes—capitalistic constructs of corporate and contract law:
‘This court readily acknowledges that a [‘thumbs-up’] emoji is a non-traditional means to ‘sign’ a document but nevertheless under these circumstances this was a valid way to convey the two purposes of a ‘signature‘ ’ – Justice Timothy Keene, the Court of King’s Bench, the province of Saskatchewan, June 2023
(A necessary introduction that you will see in every recipe :)
The pandemic has exacerbated the effects of the digital transformation: the extractive economy is steadily giving way to the new economic space—the digital economy. This transformation shakes the very foundations of the existence and purpose of law, i.e., the regulation of social relations. However, today, the consequences of developing tech in an unsustainable manner are becoming obvious. Unsustainable tech development contributes to trust erosion, misinformation, and polarization, leading to such legal/ethical issues as irresponsible practices of all sorts, unsafe and insecure digital market, inequality, lack of transparency, breach of privacy, etc.
These developments occur partly because the algorithms that shape our economies, society, and even public discourse were developed with few legal restrictions or commonly held ethical standards. Consequently, ensuring that technologies align with our shared values and existing legal frameworks is crucial.
This series of blog posts explores existing and prospective legal and regulatory frameworks that make tech not only legal by design but also, and especially, liable and sustainable by design. The key questions include whether new laws are necessary or if existing legal, regulatory, and ethical concepts can be adapted (or both!).
It is argued here rather in favour of the adaptation of pre-existing legal concepts, ethical standards, and policy tools to regulate the digital economy effectively, while paying attention to possible gaps and possibilities to fill those gaps. The objective is to synthesize these concepts, analyse their applicability to Web 3.0 and Web 4.0 regulation, and provide a toolkit (see below) for a regulatory compliant and sustainable tech. The blog series focuses on organizations involved in tech and innovation, particularly Web 3-4 actors, using systems analysis to examine regulatory constructions both functionally and institutionally.)
Figure 1: Toolbox. Source: Anna Aseeva (2023), 'Liable and Sustainable by Design: A Toolbox for a Regulatory Compliant and Sustainable Tech', in Sustainability, Vol.16, https://doi.org/10.3390/su16010228
In Episode 1 of this post series, I analyse the existing concepts, most recent practices, and avenues in corporate and contract law, governance, and regulation applicable to tech organizations.
Recipe #1: Corporate & Contract Law
Corporate law (or company law in civil law jurisdictions) regulates an organization's registration, structure, legal personality, status, ownership, control, and governance. Over time, two predominant models of corporate ownership, namely the shareholder and stakeholder models, have emerged. The shareholder model considers the business organization as the private property of shareholders—that is, the owners of the shares of that corporation, thus focusing on maximizing financial returns of the stock holders. In contrast, the stakeholder model sees the company as a social institution serving a broader group of the holders of the stakes, including creditors, investors, employees, and customers.
While both models are 'internal' in their governance and accountability focus, the stakeholder model considers the general social welfare and companies’ social usefulness. Yet, despite being more inclusive, the stakeholder view still primarily considers participants in a firm. However, the global and borderless nature of the digital economy easily implicates remote actors and environments, as well as our planet as a whole (through its considerable contribution to the climate change, for example, which is comparable to that of the aviation industry’s impact) which, despite not dealing with Web 3-4 companies in any meaningful way, are still directly and adversely affected by their activities.
Therefore, in the today’s digital economy, businesses, especially in the tech sector, need to adopt a more 'external' approach to their purposes, governance, and accountability, considering the impact on local communities, environments, society, and the planet. Tech companies, startups and Big Tech alike, should broaden their accountability to include all parties affected by their activities.
Aside this very general suggestion, there are more nuances to this part of the Toolbox: for example, if the tech firms are subject to securities regulations, those companies are likely facing additional regulatory requirements. The emergence of Web 3-4 entities, such as decentralized autonomous organizations (DAOs), equally presents new challenges to the conservative fields of corporate & contract law. I discuss those and other challenges and opportunities below.
2. Shades of corporate & contract law of decentralized online organizations
This point concerns the new organizational forms taken by Web 3-4 entities that exist mostly—or even purely—online. It is divided below into three analytical sub-points: (i) corporate status, (ii) contracting, and (iii) liability.
(i) Corporate status
A DAO is an organization with no central governing body whose members share a common goal of acting in the best interest of the entity. The classical example of an early DAO is the Ethereum community. One of the most typical forms of incorporation of DAOs is the LLC (Limited Liability Company), which is especially used for capital management, investment, and other such typical (crypto)financial activities.
The idea behind DAOs as organizations is to promote oversight and management of a business entity that is similar to a corporation. It could be fairly said that a DAO is like and unlike a corporation, especially the above shareholder corporate model. It is like a stockholder-favouring company because a key preoccupation of the holders of its ‘shares’ (tokens) is to maximize their financial returns. Unlike a corporation or any kind of business enterprise based on the shareholder framework, however, a DAO’s structure allows the tokenholders to participate in its management and decision-making in a bottom-up manner. This de-centralized management is an essential difference, but it is far from the only difference between DAOs and all previous forms of business organizations.
Popularized by cryptocurrency enthusiasts and blockchain technology, DAOs are primarily (but not exclusively) used to automate decisions in a blockchain and facilitate blockchain (especially, cryptocurrency) transactions. DAOs have no central authority because their decision-making is distributed among tokenholders who cast votes in a collective manner. After casting, all votes and any other DAO activity are posted on a blockchain, making all actions of its users completely transparent.
DAOs operate online, mostly on smart contracts, and their legal recognition varies across jurisdictions. For DAOs, legal personality is today granted in many jurisdictions, including Bahamas, the British Virgin Islands, and certain U.S. states. In Europe, Switzerland and Liechtenstein are to date the most popular destinations recognizing DAOs. Within the EU, at the time of writing, Estonia and Malta grant them legal personality.
(ii) Contracting
Contracting poses challenges for DAOs without legal personality, affecting their ability to enter agreements, own assets, or hire staff. Indeed, in those countries where DAOs cannot have legal personality, they naturally cannot act independently in contract proceedings. That is, since they cannot themselves enter into agreements, they are unable to sign a commercial contract, employ people, open a bank account, own assets, or even sign a lease agreement as an entity.
Creating a fully decentralized structure without any registered legal entity is also possible: it is chiefly done through decentralized finance (DeFi) ecosystems. In most jurisdictions, such DAOs are treated as general partnerships, which, in case of damage, will likely result in the personal liability of every participant. Some argue that such DAOs could legally own assets and hire staff because the participants create a fully recognized legal entity that can sue and be sued in court. This point is debatable, and I address it below.
(iii) Liability
Here, the issue of liability stems from tort law in those jurisdictions where DAOs have no recognized legal personality. Namely, corporate liability generally covers the extent to which a company as a legal person can be held liable for the actions of its managers and employees, including personal injury claims, corporate manslaughter, and corporate homicide. This means that an employer is responsible for whatever its employees do, typically by negligence.
The tort of negligence and the tort of breach of statutory duty are the typical venues for such liability, however, DAOs with no legal personality cannot be held liable in these venues on account of the above reasons. It is not obvious how such a DAO would be liable for damage, for instance, as, most probably, only the personal liability of the persons operating the DAO—its tokenholders—can theoretically be invoked. More research and practice are needed in that regard.
3. Web 3-4 consumer contract law
Another issue extends beyond DAOs to virtually any type of today’s digital business and stems from the interface of consumer protection rules with contract law (also referred to as ‘consumer contract law’). It relates to a difference between agreements at the professional (industry, that is) level (business-to-business (B2B)), and those directed at final consumers (business-to-consumer (B2C) agreements)—especially when we speak about natural persons, basically, you and I. Consumer contract law becomes crucial for digital businesses, particularly those engaging in these B2C agreements.
In the EU, for example, the Consumer Rights Directive, which consolidated pre-existing EU consumer directives, takes up these consumer contract law disciplines. The Directive constitutes part of a broader set of EU Consumer Protection Acquis which tech companies should know and respect regarding matters relevant for B2C relationships. Otherwise, in this and connected matters, digital firms operating in the EU (or in any way directly related to the single market), should also be mindful of the e-Commerce Directive, adopted in 2000, as well as the Digital Services Act, which was adopted 22 years after the e-Commerce Directive and updates and complements it.
Hence, consumer protection rules and related consumer contract law are all the more stringent and require permanent follow-up in the constantly changing context of the digital economy and the regulation thereof. Indeed, since the COVID-19 pandemic, an ever-increasing number of goods and services are purchased online. Such purchases constitute the consumer’s tacit consent to a sales contract. Especially relevant here are so-called contracts of adhesion. Such a contract involves tacit, and often unwanted, consent on behalf of the consumer, particularly for ‘beginners’ in online purchasing. Indeed, the simple click of a mouse allows the buyer to consent to the proposed contract on a website.
The legal principles governing the enforceability of unsigned B2C agreements vary across jurisdictions and over time. In the US, for instance, the Seventh Circuit Court considered that distance B2C agreements, such as, for example, ‘shrink-wrap’ agreements, are enforceable only if: (i) the packaging clearly indicates to the buyer that the good (a software, in that case) is licenced; (ii) the buyer is, or can easily become, fully aware of the conditions of the licence; and (iii) the buyer has the option to reject the contract by returning the software and obtain a refund (see, e.g., here and here).
Interestingly enough, in June 2023, a Canadian judge ruled that a ‘thumbs-up’ emoji represented B2C contract agreement. Justice Timothy Keene of the Court of King’s Bench in the province of Saskatchewan, who at one point used a dictionary.com definition of the symbol, concluded that the case ‘led the parties to a far flung search [...] to unearth what a
emoji means. [...] (para 30)’. ‘This court readily acknowledges that a
emoji is a non-traditional means to ‘sign’ a document but nevertheless under these circumstances this was a valid way to convey the two purposes of a ‘signature’ (para 63)’.
It would probably have been more accurate to say that the ‘thumbs-up’ was actually an acknowledgement of receipt of a signed contract, rather than a signature to the contract. The conventional method of expressing consent to be bound by a legal agreement remains the signature of a duly authorized person. Be that as it may, with the Web 3–4, we have to adapt the existing rules to the new realities of the digital economy (and that is also exactly what Judge Keene said in paragraph 40 of the ruling).
Summing up
I identified two key developments brought about by the digital transformation. Firstly, this new rather decentralized and increasingly self-regulating digital economic space creates so-called governance and regulatory gaps. Secondly, and consequently, some of these gaps are filled rapidly (at times, successfully, at times less so) by a burgeoning newest legal framework (national and supranational targeted regulation, legislation, and case law alike) that has been booming since the second decade of the twenty-first century, and especially since the global digital ‘leap’ caused by the COVID-19 pandemic in the beginning of its third decade.
Regarding the first general finding—the governance and regulatory gaps—those gaps are quite present in the currently applicable corporate and contract law and explain how such online organizations as DAOs may at present not only have a fully de-centralized corporate structure without a central board and/or management, but also exist and do relatively well without any registered legal personality. There are, of course downsides to such a development: civil and contractual liability bears most of the adverse impact of such entities’ existence and operations. Both research, and legislative and adjudicatory developments regarding this issue are only nascent. There is thus a large avenue for future research and practice on the subject-matter.
In terms of the second general discovery—the proliferating newest legal framework responsible for a ‘spotted targeting’ of those gaps—another set of tech highlights considered in this blog post concerned consumer contract law.
For example, recall that in Summer 2023, a Canadian court ruled that a ‘thumbs-up’ emoji represented a contract agreement. This and other similar findings of the analysis that addressed the conservative fields of corporate and contract law demonstrate that, while we have to adapt the existing rules to the new realities of the digital economy, we also have to thoughtfully create new ones.
For those on the receiving end—the tech enterprises—the main message of this blog post is that, in order to stay sustainable and compliant, a rigorous approach to the correct drafting and application of B2C contracts, as well as close attention to the legal peculiarities of the related points such as the general terms and conditions of sale, the consumer protection rules, as well as the digital trade in goods and services regulation in force in a given jurisdiction, and other constructs analysed above are crucial.
To sum up, the analysis in this post shows that, beyond more ‘traditional’—capitalistic—constructs of corporate and contract law, consumer contract law, for instance, raises questions about how to create a sustainable—i.e., safe, transparent, and trustworthy—digital market ecosystem.
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