currency-3077532_640

LEGALITY OF SMART CONTRACTS BASED ON ETHEREUM BLOCKCHAIN

What is a smart contract generally?

A smart contract is a prewritten software program that automatically performs each party's obligation in an “if-then” format while taking advantage of blockchain's decentralized verification system and in most cases without recourse to the courts for performance. A simple example is this: If Party A pays a certain amount and the payment is verified, then the title to Party B's property is automatically released to Party A and can be automatically updated with correct ownership information.[1]

Max Raskin further breaks down smart contracts into strong and weak smart contracts. According to him “Strong smart contracts have prohibitive costs of revocation and modification, while weak smart contracts do not. This means that if a court is able to alter a contract after it has been executed with relative ease, then it will be defined as a weak smart contract. If there is some large cost to altering the contract in a way that it would not make sense for a court to do so, then the contract will be defined as strong’’.[2]

Smart contracts on ethereum

Ethereum is a platform that is built specifically for creating smart contracts. While a standard contract outlines the terms of a relationship (usually one enforceable by law), a smart contract on ethereum enforces a relationship with cryptographic code. Smart contracts execute programmes exactly as they are set up to by their creators. For example, where an ethereum user wants to send 10 ether (currency) to a friend on a certain date using a smart contract, the user would create a contract, and push the data to that contract so that it could execute the desired command.[3]

Legality of smart contracts and  legal issues it raises

A discourse on the legality of smart contracts raises issues as to whether such contracts are binding. To this end, it is worth examining smart contracts on the grounds of validity as established under common law.

  • Is there offer and acceptance.

For the smart contract to operate two parties must agree to some set of terms that initiate the program. Smart contract code is posted to a ledger as an offer and once an action is taken to initiate acceptance, such as by ceding control over a certain amount of money to the code, a contract is formed.[4]

  • Is there consideration?

In a smart contract, the terms are explicitly laid out and each side’s obligations and benefits are immediately apparent. Val D. Ricks points out that “Courts have held a promise traded for another promise to be enforceable for well over 400 years, since the early to mid-1500s. Courts currently say that a mutual (or reciprocal, or bargained-for) promise constitutes consideration for a promise, causing it to be enforceable.”[5]

  • Jurisdiction of suit problem

Due to the decentralized nature of blockchain technology, there arises an issue as to where the contract becomes final and binding. Commentators have proposed that courts should find that the jurisdiction of a smart contract is where the validation of the transaction took place. Others are of the opinion that a forum selection clause would solve this issue as the parties would agree beforehand to resolve any disputes in a particular jurisdiction.[6]

In conclusion, smart contracts may be the future of transactions. However, the technology is in its infancy and its legality or otherwise has not been thoroughly examined by courts.

[1] Gregg Jacobson, ‘Three Legal Pitfalls to avoid in Blockchain Smart Contracts’,

[2] Max Raskin, ‘The Law and Legality of Smart Contracts’, 1 GEO.L.TECH.REV.305(2017), available at < https://perma.cc/673G-3ANE> accessed February 16,2018,309.

[3] Alyssa Hertig, ‘How Ethereum Works’, available at < https://www.coindesk.com/information/how-ethereum-works/> accessed on 16 February 2018.

[4] Max Raskin, ‘The Law and Legality of Smart Contracts’,322

[5] Val D. Ricks, In Defense of Mutuality of Obligation: Why "Both Should Be Bound, or Neither", 78 NEB. L. REV. 491, 494 (1999)

[6] Gregg Jacobson, ‘Three Legal Pitfalls to avoid in Blockchain Smart Contracts’