Abstract: Ethereum Smart Contracts will ensure that contracts can easily be reduced to a signed writing that will satisfy the statute of frauds and reduce unnecessary litigation.
The statute of frauds (the “SOF”) is a rule of law enacted by each state requiring certain types of contracts to be in writing and signed by all parties to the agreement in order to be legally binding. Non-compliance with the SOF can make an otherwise enforceable oral contract unenforceable. The SOF was created to combat the opportunity for wrongdoing that exists by virtue of the inherent uncertainty of oral agreements. In the absence of a signed, written to agreement, it is much too easy for a party to make fraudulent or false claims about the terms of a supposed oral agreement. The SOF reduces the opportunities for fraud and unnecessary litigation, because written agreements provide greater assurances and evidence of the actual terms to which the parties when they made their agreement. By requiring a formal, signed written agreement, the SOF also insures that the parties to a contract are comfortable with the agreement that they are making.
While not all agreements are subject to the SOF, the two primary bodies of law that govern contracts – the Uniform Commercial Code (UCC) for sales of goods and common (or judge made) law for other types of sales, the provision of services and other agreements – cover most agreements. The UCC identifies the following classes of contracts for the sale of goods that are subject to the SOF:
- A contract for the sale of goods for the price of $500 or more (UCC §2-201).
- A contract for the sale of securities (UCC §8-319).
- A contract for the sale of personal property not otherwise covered, to the extent of enforcement by way of action or defense beyond $5,000 in amount or value of remedy (UCC §1-206).
Section 110 of the Restatement 2d of Contracts (a treatise that summarizes common law rules for contracts) describes the following classes of contracts that are typically subject to a state’s SOF:
- The executor administrator provision – a contract of an executor or administrator to answer for a duty of his decedent.
- The suretyship provision – a contract to answer for the duty of another.
- The land contract provision – a contract for the sale of an interest in land.
- The marriage provision – a contract made upon consideration of marriage.
- The one-year provision – a contract that is not to be performed within one year from the making thereof.
A smart contract is computer code which automates the “if this happens then do that” part of traditional contracts and which is capable, without human intervention, of monitoring, enforcing and executing an agreement. Computer code behaves in expected ways and doesn’t have the linguistic nuances of human languages. Computer code constitutes a writing under the UCC and common law. UCC 1-201(43) defines a “writing” to include, ‘printing, typewriting, or any other intentional reduction to tangible form.’” A smart contract falls well within this definition because writing computer code to execute the conditions of a contract is an intentional reduction to tangible form since the contract’s terms will be live on the blockchain or possibly a user interface. At common law, a memorandum of agreement that satisfies the SOF may be any document or writing, formal or informal, signed by the party to be charged or by his agent. Restatement 2d §207. This broad definition should readily encompass computer code. Consistent with the foregoing sources, the U.S. Securities and Exchange Commission interprets the word “written” to include “magnetic impulses or other forms of computer data compilation” 17 C.F.R. 230.405, as amended by 58 Fed. Reg 14,628 at 14,670 (March 18, 1993). Smart contracts represent a form of computer data compilation, and thus, fall within this definition
The SOF’s requirement that the contract be signed by the party against whom enforcement is sought is also easily met since smart contracts will run on a crypto-currency. A public key is technically a signature and transferring funds to “fuel” a smart contract could also demonstrate the necessary “signature” to meet this requirement. UCC 1-201(46) defines “signed” to mean ‘”the use of any symbol executed or adopted by a party with present intention to authenticate a writing.” UCC 2-210 provides guidance as to the form of a signature by stating also that “record or authentication may not be denied legal effect or enforceability solely because it is in electronic form.” Therefore, the intentional inputting of a public key for the purpose of implementing a smart contract falls with the UCC’s definition of “signed.” In addition, the Uniform Electronic Transactions Act validates the use of electronic records and electronic signatures. The UETA establishes the legal equivalence of electronic records and signatures with paper writings and manually-signed signatures, removing barriers to electronic commerce.
While smart contracts are in their infancy, the future widespread adoption of them would allow parties to make binding, self-executing agreements without the need to exchange paper or computer files that are representations of paper. For example, an Ethereum-based smart contract platform with a user friendly interface could be game changing by allowing lay persons to easily create legally binding contracts for any type of agreement that would be permanently memorialized in writing on the Ethereum blockchain making enforceability easier.