Could Smart Contracts Potentially Be Treated as Legally Enforceable Contracts?

It’s important that I preface this discussion by saying I am not a lawyer and absolutely nothing in this opinion piece should be treated as legal advice. It’s important because I don’t want this article to alter anyone’s behavior in a way that could cause damages to themselves or others without consulting a real attorney first. This is a modest opinion derived from modest discussions, using modest research, and applies a modest amount of rational thinking. The jury is still very much out on the topics presented.

What’s in a contract, anyway?

In my previous article, “What are smart contracts, and what can they do,” I defined a smart contract as a set of executable protocols through which two or more parties may engage in agreements and value will be exchanged automatically by the terms outlined in said protocols. Ethereum stands out as a platform because it is exclusively built for executing complex, Turing complete (programmable), smart contracts. In that same article, I also provided an abridged version of a definition for a contract:

1) n. an agreement with specific terms between two or more persons or entities in which there is a promise to do something in return for a valuable benefit known as consideration.

The variations are almost limitless. Contracts for illegal purposes are not enforceable at law. 2) v. to enter into an agreement.

The overall gist is captured in that quote, but there’s a quite a bit more to contracts than just entering into an accord. For a contract to be legally binding, it must be enforceable, and for a contract to be enforceable, it must meet a set of criteria. This criteria varies from country to country and even region to region, but more often enforceable contracts, at minimum, contain the following:

  1. An offer that specifically details exactly what will be provided
  2. Acceptance, which is the agreement by the other party to the offer presented
  3. Consideration, money or something of interest being exchanged between the parties
  4. Capacity of the parties in terms of age and mental ability
  5. The intent of both parties to carry out their promise
  6. Legally enforceable terms and conditions

The striking thing to note about these criteria is that smart contracts accomplish almost all of these criteria, inherently. They present an offer which specifies details of the agreement, a user engages with this offer via the contract’s ABI, value is exchanged in the form of Ether (if using the Ethereum network), both parties show intent by either posting the contract and then a second party directly choosing to engage with the contract, and each of the terms in the smart contract can potentially be legally enforceable. So long as both parties are in capacity in terms of age and mental ability, a smart contract can easily check off the requirements for a legally enforceable agreement.

Does it matter who you enter into an agreement with?

Tying an identity to a wallet address on the blockchain isn’t very straightforward. Short of the owner volunteering this information, there’s not much guarantee you, as a smart contract owner, will be able to find out who used your agreement. That said, this is not as much of an issue as one might think.

When asking about whether smart contracts are legally enforceable, we must recognize that a suit must be filed against an individual. If you do not know who the other party is, then there is no case to be made. From a pragmatic standpoint, the identity question is almost reducible to a non-issue as you cannot bring “nobody” to trial. Furthermore, if someone were to bring suit against another party in the contract, they must recognize that the smart contract was an agreement and an exchange of value. At best, the other person would have to argue that it is not, which would undermine their own posted agreement.

But can’t we treat them as automation code?

This is a good question, and to that I say, “Why not both?” When having this discussion with a friend, he tried to liken a smart contract to a robot, such as a Roomba. It zips around, it does its work, it has its code, you pay for it and get use out of it. While I think there is some truth to this statement, Roombas don’t exchange value.

When you install software… even something free and open source, such as Linux… the value is in the software itself. When you engage with a smart contract, the value is in the exchange produced by the smart contract. It’s a very different situation, though not the same every single time, either. There are different types of smart contracts. Not all revolve around the exchange of value from the user to the contract owner or even another user engaging on the contract. That said, all smart contracts perform a task at the cost of fees in the form of gas on the Ethereum network. These fees, while not going directly to the contract owner, could represent damages in the event the contract does not operate as advertised. As such, any smart contract which uses cryptocurrency such as Ether as its main transaction cost is doing an exchange of some quantifiable value.

So what’s the verdict?

The jury is still out, for sure. This has not been thoroughly tested in court, to my knowledge. However, it does appear to me that the courts may find it in their best interest to treat smart contracts the same as they would any other contractual agreement. So perhaps, and again this is not legal advice and I am not a lawyer, but perhaps it’s safer to err on the notion that they will be, eventually, legally-enforceable before posting contracts or interacting with them.

Avalanche is pretty cool.