- S. Williams-Elegbe began a preliminary legal inquiry on public procurement, corruption and blockchain technology in South Africa.
- In the study she asserts that smart contracts are currently incompatible with public procurement governance, specifically in relation to dispute resolution.
- From her findings, Elegbe establishes transparency and auditability of blockchain technology as potential solutions to corruption in public procurement.
Core research questions:
Do the mechanisms of blockchain technology serve to limit the potential for fraud and corruption in government contracts?
Under certain circumstances, do tender procedures and contracts prove to be a barrier to the adoption of blockchain platforms in South Africa?
Will a legal system that relies on documents and testimony to understand complex technical transactions be flexible enough to interpret contracts written in code?
Williams-Elegbe, S. (2019) Public Procurement, Corruption and Blockchain Technology in South Africa: A Preliminary Legal Inquiry.
- Elegbe considers whether blockchain technology could be a viable solution to the intractable issue of corruption in public procurement in South Africa (SA).
- The meaning of and applicability of blockchain-based smart contracts in public procurement is considered as a method of limiting procurement corruption.
- According to Elegbe, the annual procurement expenditure in A is approximately R800 billion (USD $52.7 billion). It is estimated that about 50% may be lost to corruption.
- Corruption in public procurement is enabled by reliance on intermediaries (public officials) in the procurement process, often referred to as the agency problem.
- A typical public procurement process in SA comprises several phases. The pre-procurement phase consists of project identification and design, the procurement and project delivery phase, which involves project execution, and the completion phase, during which project objectives are evaluated.
- Elegbe explains that procurement in SA is regulated by several pieces of legislation as well as institutional oversight. The laws provide direction on the procurement process, prohibited practices, and accountability and governance.
- The author presents the transparency and auditability of blockchain technology as a solution to public procurement corruption.
- Smart Contracts are contractual terms that are converted into computer code. This code is uploaded to the blockchain, and the system executes accordingly.
- Traditionally, contract parties have to trust that the other contracting party will act according to the terms of the contract. Various provisions are included in a contract to mitigate the risk of default or breach of contract and provide penalties when this occurs.
- Smart contracts work in the same way as traditional contracts; however, smart contracts create other problems for contract law.
- The author explains that a smart contract is a contract formed and performed via blockchain terms and are converted into a computer code, and this code is uploaded to the blockchain and the system then acts in accordance with the code to execute the contract.
- All jurisdictions contain specific requirements for the validity of a contract. This includes contractual capacity, legality, certainty, consideration (in common law jurisdictions), and the absence of vitiating circumstances such as duress, undue influence, and unconscionability.
- Procurement lawyers are often concerned with whether the procurement regulatory framework is fit for its purpose. The shortcomings of extant procurement regulations ensure consistency in public procurement and can fulfill policy objectives if adequately implemented.
- The research design uses the mechanics and definitions of Blockchain Technology and smart contracts to consider the applicability of Blockchain-based smart contracts and how they might limit procurement corruption and the challenges that the legal system may face in regulating smart contracts.
- The author considers challenges the South African legal system may face in regulating smart contracts.
- The author describes blockchain technology and its non-technical functionality.
- The researcher describes the procurement phases in South Africa as well as the considerations in common law jurisdictions.
- The author suggests that, by definition, smart contracts could be used to generate contractual effects between parties. She states that such contracts reduce fraud and enforcement costs and guarantee the execution of the contract. Though prohibitively expensive.
- The author highlights the component of trust and finds that contracts are digitally verified and authenticated by a blockchain, with no requirement from the other contracting party to be known or trusted.
- The researcher argues that the intersection of contract law and code creates new areas of potential dispute.
- She further states that: With a smart contract, the aggrieved party will essentially be seeking a remedy for a contract that has already been executed by the time the court hears the case.
Discussion and Key Takeaways:
- The author suggests that while smart contracts reduce the scope of disputes, the intersection between contract law and code creates new areas of potential dispute.
- The research argues that smart contracts can be terminated or modified for performance based on inaccurate data, discrepancies between computer code and the natural language of the contract.
- The researcher states a few suggestions on the resolution of smart contract disputes, which may take the form of resolution in a traditional forum (courts or by arbitration) or online dispute resolution, being blockchain itself.
- Conducting public procurement via a blockchain may make procurement more efficient, transparent and less likely to result in disputes. This is partly because the terms of the contract and the state of facts relating to the performance of the contract cannot be amended or overridden by any individual, whether maliciously or mistakenly.
- A common way of addressing the agency problem in public procurement is to limit the discretion available to public officials in decision-making, provide multiple approval levels, and develop an enforcement framework to sanitize the procurement process.
Implications & follow-ups:
A blockchain-based platform may provide contract surveillance teams or civil society with up-to-date information on contract award and performance information, thus providing the information required to halt and limit poor performance through community participation.
Blockchain may provide a less burdensome means for ensuring compliance that also eliminates the risk of fraud. A blockchain-based platform could potentially be used to verify the identity of a contractor and authenticate the accuracy of contractor histories in the submitted procurement documentation.
Elegbe concludes that Blockchain technology is still in its infancy. Its embryonic nature has meant that there has been limited government regulation and scant legal academic exposition on the topic.
Elegbe concludes that until blockchain technology is trialed in South Africa, according to the researcher, we cannot confirm whether smart contracts may be integrated into the current procurement system models; or whether wholesale reform of procurement approaches may be required to take advantage of the benefits of blockchain technology to public procurement.
The researcher states that there is an inability to confirm whether smart contracts may be integrated into current procurement system models.
- Elegbe suggests that a government-wide procurement platform could thus be used to onboard contractors and ensure transparency on contractor relationships with all public-sector agencies.
- She further states that a government procurement platform would reduce the risk of doing business with new contractors, opening the door to increased competition and participation in public tenders while reducing the barriers to entry for smaller suppliers who do not currently participate in public tenders due to the high costs involved.
- Similarly, in other industries such as film, where there are copyright and intellectual property disputes, a film archiving blockchain platform can possibly transform the fragmented nature of film archiving and knowledge management by providing access to film content, information and metadata on copyright contracts.