Federal Level

There has been no U.S. Federal Law or guidance explicitly defining the status of smart contracts, as of December 18. 2017. However, the 2000 federal Electronic Signatures in Global and National Commerce Act (“E-Sign Act”) may already provide sufficient legal weight for smart contracts to be enforced under the existing law.

E-Sign Act (Signed into Law, 2000)

• Provides that electronic signatures, contracts, and records shall have the same legal effect as signatures on paper, stating that ‘a signature, contract, or other record relating to such transaction may not be denied legal effect, validity, or enforceability solely because it is in electronic form’, and that ‘a contract relating to such transaction may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation.’
• Enforcement of blockchain smart contracts may fall under the jurisdiction of the E-Sign Act as any other ‘electronic contract’. However, there has been no explicit guidance on this matter yet at the federal level, and we await the federal clarification of the legal status of smart contracts.

Within the American legal system, a contract is “an agreement between two or more parties creating obligations that are enforceable or otherwise recognizable at law.” For an agreement to be enforceable or otherwise recognizable at law, three particular elements must be present:

• An offer (basically, expression of a willingness to enter into a binding agreement subject to the offeree’s acceptance of the proposed terms);
• An acceptance of those terms
• A mutual exchange of value – so-called “consideration.” The legal system offers remedies for the breach of a legally binding agreement, such as a requirement to pay damages or, in certain circumstances, a court order mandating performance under penalty of law.

According to David M. Adlerstein, a counsel at New York City law firm Wachtell, Lipton Rosen & Katz, smart contracts can be, but are not necessarily, legally binding contracts. A smart contract may represent only a component of, or means of performing a component of, a legally binding contract, rather than an entire contract. In the context of blockchain technology, it is possible to record an agreement – or a cryptographic hash of an agreement – as metadata within a blockchain. While this may in and of itself offer distinct advantages, particularly in establishing for posterity what the definitive terms of an agreement are, recording a legally binding agreement within a blockchain does not, without more, create a smart contract. Only to the extent that performance of that agreement is automated through code based on satisfaction or non-satisfaction of an objective precondition is there a smart contract.

Sophisticated commercial contracts are rife with “if/then” provisions, dependent on the state of objectively verifiable facts, often requiring manual administration and susceptible to misapplication or inadvertent non-application. Thus, smart contracts can be said to be “smart” to the extent they offer the efficiency of automated contractual performance and reduce the risk of human error and prospects of a dispute. many aspects of sophisticated commercial agreements are not susceptible to automation, including matters requiring subjective human judgment, the rendition of sophisticated or human-intensive services or the resolution of disputes. Accordingly, while some relatively simple agreements could have essentially all of their performance automated (including by blockchain), for more sophisticated agreements only discrete elements are likely to be automated in the foreseeable future; thus, “smart contractual provisions” might be a more appropriate term.

Even without state legislative initiative, there are existing common law and statutory bases for a court to enforce a legally binding agreement – or component of a legally binding agreement – existing in electronic or code form, as long as that form is reducible to writing:

• Under longstanding common law contractual principles, extrinsic writings may be specifically incorporated into a legally binding agreement. Accordingly, insofar as smart contracts represent components of legally binding agreements, they are binding if specifically incorporated by reference into a written agreement.
• Under the Federal Electronic Signatures in Global and National Commerce Act (2000), a contract, signature or record is not considered unenforceable merely on the basis of being in an electronic format (but the record must remain capable of being reproduced for later reference). While the author is aware of no case specifically considering the question, there is no reason to conclude that an electronic contract in code and not prose would be unenforceable, so long as the parties, subject matter and terms are clearly articulated in a manner essentially translatable to English, like a foreign language, and there is evidence of mutual consent in deploying the code in question, with each party giving consideration.
• Under the Uniform Electronic Transactions Act (adopted by 47 states), transactions may be conducted by electronic means, such that the act gives legal recognition to electronic signatures, records and contracts.
• Under Article 9-105 of the Uniform Commercial Code (the law adopted by all 50 states governing secured transactions) a secured party has control of “electronic chattel paper” if a system for evidencing the transfer of interests reliably establishes the secured party as assignee (among other things, a single authoritative copy of the record must exist which is unique, identifiable and generally unalterable).

State Level

At the state level, the Uniform Law Commission (a legal association in America which researches and drafts model legislation which states can choose to modify or adopt on their own, promoting the uniformity of laws across state borders) issued a Uniform Electronic Transaction Act (“UETA”) in 1999, which has been since adopted by 47 states. Note that the states who didn’t approve UETA still maintain the legal validity of electronic contracts under ESIGN requirements.

Uniform Electronic Transaction Act (Published 1999, Adopted in large part by 47 states) States that “A record or signature may not be denied legal effect or enforceability solely because it is in electronic form” and that “A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.” (Section 7)

• Just like the E-Sign act, in the 47 states that have adopted the Uniform Electronic Transaction Act, the state law may already allow for enforcement of smart contracts. However, guidance on this matter will have to follow on a state-by state basis.
• As of that date, Arizona is the only state that has passed a law explicitly approving smart contracts. Two other U.S. states have issued laws giving legal recognition to data stored on a blockchain, which may apply also to smart contracts: Nevada, and Vermont. These states may set a precedent for others to come to clarify their position on the status of blockchain data and smart contracts. We summarize the laws below.

As of that date, Arizona is the only state that has passed a law explicitly approving smart contracts. Two other U.S. states have issued laws giving legal recognition to data stored on a blockchain, which may apply also to smart contracts: Nevada, and Vermont. These states may set a precedent for others to come to clarify their position on the status of blockchain data and smart contracts. We summarize the laws below.

Arizona (HB2417 - Passed April 2017)

• Smart contracts are defined as ‘an event-driven program, with state, that runs on a distributed, decentralized, shared and replicated ledger and that can take custody over and instruct transfer of assets on that ledger.’
• The sections of the law regarding smart contracts state that:
• “A record or contract that is secured through blockchain technology is considered to be in an electronic form and to be an electronic record.”
• “Smart contracts may exist in commerce. A contract relating to a transaction may not be denied legal effect, validity or enforceability solely because that contract contains a smart contract term.”
• Seems to be the strongest endorsement of smart contracts in any US state law as of this writing.

Nevada ( Passed June 2017)

• Does not explicitly mention smart contracts.
• Extends already present legal recognition to electronic records, signatures, and contracts to records stored on a blockchain. This allows such records to, under certain circumstances, satisfy requirements for written records or signatures.

Vermont (H868 Sec I.1. 12 V.S.A. § 1913. Passed June 2017)

• Does not explicitly mention smart contracts
• Established that ‘a fact or record’ verified on a blockchain is ‘authentic’. This gives said data legal bearing in court. This gives data on a blockchain legal bearing in court.

Sources

• The Enforceability of Smart Contracts
• US Congress ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT
• Smart Contracts: Navigating Legal, Regulatory and Consumer Protection Issues
• Arizona House Bill 2417
• Nevada Senate Bill 398
• Vermont May 26, 2016 Journal of the Senate
• When is a Smart Contract Actually a Contract?
• Smart Contracts: Navigating Legal Regulatory and Consumer Protection Issues