A couple weeks ago, I was pointed to this whitepaper (h/t @squarelyrooted) by law firm Norton Rose Fulbright that asks, Can smart contracts be legally binding contracts? I was totally gonna read it and post a summary, except that I couldn’t manage to get past the first page without vomiting.
Turns out I had norovirus (the KFC on El Camino, I bet), but I’m all better now so let’s get to it.
I’ll skip straight to the whitepaper’s conclusion: Can smart contracts be legally binding? It depends! Okay, done.
But being written by lawyers, the key findings are summarized using a lot more words:
Legally binding contractual effect depends on a number of variables. It is tempting to conclude that, just because the moniker “smart contract” includes the word contract, it is a legally binding contract as a matter of law. This is not necessarily correct. Whether it is so in a given situation may turn in part on the type of smart contract at issue, the factual matrix within which it operates, and the applicable law determining the issue.
Huh. The conclusion is nonsensical because the entire question is nonsensical. Asking whether smart contracts can be legally binding is like asking whether submarines have gills or blowholes. You’re thinking of the wrong animal! Except you’ve not only got the wrong animal, you’ve got the entirely wrong thing.
A smart contract isn’t a legally binding contract. It makes no attempt to be a legally binding contract. It’s only called a “contract” because it mimics the effect of a legal contract.
Legal contracts exist to provide incentives for certain actions. One really big incentive that legal contracts provide is “Do the things you promised or else I will take you to court.”
You could also call that a threat, but that’s just the other side of the same token. “Do things or I will take you to court” is a really shitty and expensive incentive that most people only turn to as a last resort.
Smart contracts incentivize performance too, but they do it using software instead of the threat of litigation. The incentives tend to look more like “Make your car payments on time or else your ignition won’t start,” or “Deposit a quarter or else you don’t get a candy bar.”
The whitepaper isn’t just 52 pages of ambivalence; it explores nuances like the elements needed to form a legally binding contract. Under English common law, that means there needs to be an offer, acceptance, an exchange of value (consideration), intent, and certainty.
Like, does a stationary vending machine constitute an offer? The paper says Yes, as demonstrated in the case of Thornton v Shoe Lane Parking.
And if you put money into the vending machine, does that constitute acceptance?
In the case of Thornton v Shoe Lane, some guy named Francis Thornton bought a parking lot ticket from a vending machine, parked his car, and later got hit by another car. He sued the parking lot company for his injuries, and there was a lot of arguing because the vending machine had printed a ticket that said: “This ticket is issued subject to the conditions of issue as displayed on the premises.”
There were signs on the parking lot pillars that said the management shall not be held liable for damage or injury, but Thornton was not aware that those signs applied to him until the ticket told him so. Really, those signs could have been for anybody. So the acceptance didn’t count cuz the terms were uncertain.
The Norton Rose Fulbright paper also draws comparisons to clickwrap agreements. When you download an iPhone update and click “I Agree” on the Terms & Conditions, is that legally binding??
It doesn’t matter! None of this is a smart contract!
Smart contracts make it so lawyers don’t get to argue over nonsense and write 52-page papers discussing clickwrap case law. The whole point of a smart contract is to NOT go to court.
If you need to ask whether your smart contract is legally enforceable, you’re doing it wrong. Smart contracts make it so people don’t have to litigate over details like “Did this guy pay for parking or not?” Sure, smart contracts should be designed to model the common-law process of contract formation – not because that makes them legally binding, but because it’s a highly-evolved process that has been used for hundreds of years.
And in higher-value cases, smart contracts can be used with traditional contracts to control the burden of lawsuit. But if you’re worried about how the courts might interpret the terms of your smart contract, you should probably try using words.
Nick Szabo, Formalizing and Securing Relationships on Public Networks. 1997.