The Blockchain: the future of contracts (a short intro)

Bitcoins may or may not survive in the future, but blockchain technology is here to stay. The potential is immense, and many, many developers have begun looking at managing contracts through them. However, are they truly of any use?


In their essence, contracts are the legal means of establishing an enforceable relationship between multiple parties that intend to exchange value in the form of goods or money.[1] Beginning as informal gentlemen’s agreements, enforceability has been a major issue throughout history as the law around it has been codified and subsequently administered by courts, in cases of dispute.[2] Enforceability of a contract depends on such a contract actually being legal – which requires an agreement (in whatever form, oral or written) to follow certain criteria:[3] intent to form an agreement, between parties with the capacity to enter into such agreements, where lawful consideration is involved. As long as these criteria are fulfilled, a contract can be enforced in a court of law.

Until the 21st century, not much experimentation could be done with the form of a contract that still encompassed these core ingredients of a contract; they were restricted to implied or oral agreements, or those written on paper. However, with the advent of technology, contracts also managed to enter the digital age. Electronic contracts have reached a stage where the major issue, now, is the legality of the ‘electronic signature’ of a party that can be used to determine whether an agreement is valid.[4] Many websites carry the so-called ‘clickwrap’ agreements, for example, where a visitor to the website simply must click a button to signal their agreement with the policies outlined on the webpage they are visiting – a form of agreement that has been called into question by certain jurisdictions.[5]

Why Blockchain?

Questions of enforceability such as these are only going to gain further limelight with the growth of technologies such as the blockchain which was used by Bitcoin, the world’s first cryptocurrency.[6] Essentially, the blockchain is a distributed ledger system, and uses cryptographic algorithms such as asymmetric encryption to validate users.[7] Through the use of encryption and self-executing agreements, the possibility of auto-enforcing agreements – those that use encoded specific performance – is now increasingly moving from the realms of science fiction to reality. Bitcoin, and the blockchain technology behind it, has suddenly proven that value can be transferred between two parties without a third party having to ensure that the contracting parties uphold their ends of the bargain.

While smart contracts using blockchain technology are slowly emerging, research into the legal and contractual aspects of such technologies is still in its infancy. Code behind smart contracts is being rapidly developed, but it remains to be seen how such contracts would operate in the real world, and also whether courts would enforce such contracts. Since it is possible to transfer value from one party to the other using blockchain technology[8], and considering the immense efficiency that self-executing code offers, it is quite possible that future contracts may morph into an amalgam of written contractual clauses and smart contract code. Currently, written agreements bank on parties trusting each other to adhere to the terms of such contracts – or risk ending up in highly expensive litigation that enforces such behavior on them through remedies such as damages and specific performance.[9]


 

[1] Lorenzen, E. G.. (1919). Causa and Consideration in the Law of Contracts. The Yale Law Journal28(7), 621–646. http://doi.org/10.2307/786772

[2]  Iris Bohnet, Bruno S. Frey and Steffen Huck (2001). More Order with Less Law: On Contract Enforcement, Trust, and Crowding. American Political Science Review, 95, pp 131-144. doi:10.1017/S0003055401000211

[3] Ibid at 1

[4] InBrief, What is an Electronic Contract?, available at: http://www.inbrief.co.uk/contract-law/electronic-contracts.htm#; last visited 28/03/2016

[5] Richard Raysman, Enforceability of Clickwrap Agreement Called into Question – Checklist for Best Practices in Electronic Contracting, Holland & Knight, available at: https://www.hklaw.com/digitaltechblog/Enforceability-of-Clickwrap-Agreement-Called-into-Question—-Checklist-for-Best-Practices-in-Electronic-Contracting-11-07-2012/; last accessed: 28/03/2016

[6] Satoshi Nakamoto (2008), Bitcoin: A Peer-to-Peer Electronic Cash System, Bitcoin.org, available at: https://bitcoin.org/bitcoin.pdf; last accessed: 28/03/2016

[7] Ibid at 6

[8] Nick Szabo, “The Idea of Smart Contracts”, http://szabo.best.vwh.net/smart_contracts_idea.html; last accessed: 17/3/2016

[9] Eisenberg, T. and Miller, G. P. (2015), Damages Versus Specific Performance: Lessons from Commercial Contracts. Journal of Empirical Legal Studies, 12: 29–69. doi: 10.1111/jels.12064

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