Contract Formation and Smart Legal Contracts

The formation of contractual relations in smart legal contracts has been compared to how contractual relationships arise in vending machine transactions (Szabo 1997; 1996; Rohr 2019). A vending machine’s owner offers goods for sale in the automated machine. The purchaser selects an item from the vending machine and inserts payment (acceptance of the offer). The vending machine selects and dispenses the item to the purchaser. In this transaction, consideration is the payment the purchaser made in reliance that the vending machine will dispense the selected item. It may be argued that the physical act of the individual to insert funds into the vending machine and the availability of goods in the vending machine show an intention for the parties to enter a legal relationship with each other. Money is paid to receive a consumer item, and there is also an expectation that the item will not be dispensed without payment. The contract is executed once the coin or amount is inserted into the vending machine. There are differences between contract formation in vending machine transactions and smart legal contracts. One noticeable difference is that a human is involved in initiating the purchase by inserting money into the vending machine. Another is that the parties are known or can become known to each other. There is likely information about the vendor displayed on the vending machine, and the identity of the individual making the purchase can be ascertained. In smart legal contracts on a permissionless blockchain,30 for example, the parties are not known to each other or are known by pseudonyms.

In Canada, as in several other common law jurisdictions, contracts can be formed with the aid of computer programs or entirely by computer programs. Ontario’s Electronic Commerce Act, for instance, specifies that “a contract may be formed by the interaction of an electronic agent and an individual or by the interaction of electronic agents.”31 This means that the formation of smart legal contracts is not challengeable based solely on the fact that it executes and enforces an agreement without human involvement. This position is also explicitly taken by Arizona’s (US) legislation on the validity or enforceability of a “smart contract.” Suppose a blockchain transaction is disputed in Arizona. In that case, it may not be disputed because it was performed by a smart contract as these agreements “may not be denied legal effect, validity or enforceability solely because…it contains a smart contract term.”32

30 See Table A2 in the Appendix for a categorization of the different types of blockchains and the relationship between these characteristics and the nature of their operations. Permissioned blockchains impose restrictions on access and usage of their system. Permissionless blockchains do not have these restrictions and instead allow anyone to join and participate in the network.

Table 1 provides examples of the types of transactions that can be performed on Ethereum blockchains; this includes the creation and transfer of digital representation of physical assets.33 The nature of transactions in smart legal contracts may be as follows. A joins an Ethereum blockchain and creates a contract by embedding coded language into the software program, which is then posted on the blockchain.34 The embedded script allows smart contract (A) to transfer X (a digital representation of a famous violin) for ETH 50 before 11:55 a.m. ET on September 30, 2022, to another party who satisfies the offeror’s requirement.

31 Electronic Commerce Act, 2000, SO 2000, c 17, s 20.

32 Arizona Revised Statue, Title 44-7061 (A-C), 2017, signatures and records secured through blockchain technology; smart contracts; ownership of information; definitions, online: Arizona Legislature <www.azleg.gov/ ars/44/07061.htm>.

33 Table 1, second column, fifth row.

34 Programming languages for smart contracts include Solidity, Vyper, Yul and Yul+. See https://ethereum.org/en/developers/docs/smart-contracts/ languages/#solidity.