Smart Contracts & Legal Enforceability

Thousands of years ago, written contracts first appeared in Mesopotamia, with small cuneiform triangles hammered into clay tablets. These contracts were fairly sophisticated, memorializing basic credit agreements, partnership arrangements, as well as labor, sales, and rental agreements.1 Since these first recorded contracts, the tools used to create written contracts have undergone considerable change. We no longer enter into agreements memorialized in clay; paper and more recently electronic agreements serve as the primary medium for the expression of commercial arrangements. Many argue that blockchains could foster an evolution in how legal agreements are created and executed, supporting a new generation of electronic contracts. Blockchain networks and computer programs called “smart contracts” could enable parties to memorialize all or parts of legal agreements. By using this technology, contracting parties would gain the ability to create arrangements that are hard to modify, dynamic, and potentially less ambiguous than traditional legal contracts. This report assumes such a future comes to pass and examines how blockchain technology fits within the current common law and U.S. electronic contracting statutes, analyzing whether smart contracts can be used to create enforceable legal agreements. As outlined below, we explain why current U.S. law largely accommodates the use of smart contracts to create binding and enforceable agreements. We conclude the report by analyzing whether additional state and federal legislation is necessary to support this new emerging technology, finding that current iterations of state law, designed to accommodate blockchain technology, may not be necessary, with limited exceptions. The report unfolds in three parts. Part I provides a brief overview of blockchain technology and smart contracts, with an assumption that the reader has limited familiarity with the underlying technology. Part II explores whether legal agreements relying on blockchain technology will be deemed enforceable. Finally, Part III evaluates whether additional legislation is necessary to accommodate electronic contracting involving blockchain-based smart contracts