How to Form a Contract Under English Law?

Nov 21, 2019 · 7 min read

The UK Jurisdiction Taskforce just released a Legal Statement on Cryptoassets and Smart Contracts. It is an important read because it tackles some of the most foundational issues in crypto law, such as:

  • Are crypto instruments (different types of tokens) property under English law?
  • Are so-called ‘smart contracts’ considered contracts under English law?

Wrt contract law, here’s the tldr:

Contract Under English Law

The Legal Statement gives us a great chance to review the rules of contract formation under English law, which is useful because English law is influential not only in England and Wales, but in many other common law jurisdictions too.

So, here’s a typical English ‘formula’ for contract (K):

Ordinarily, K = A1 + I + C (see LS ¶ 137) —

  • A1 = agreement
  • I = intent
  • C = consideration

Ordinarily, A1 = O + A2 (see LS ¶ 138)

  • O = offer
  • A2 = acceptance

A1 — the agreement — is analogous to the US contract law concept of mutual assent. Intent means intent to be legally bound, which is generally presumed. See LS ¶ 139. Consideration (C) is a legal fiction that shows that the parties have promised to benefit one another (or third parties) in the process of making the K.

Crucially, who decides if these elements are met? An objective third party.

Yes, We Have a K!

If both parties agree there’s a K, there is no K formation dispute. Therefore, the parties may believe there is a K, and act as though there is a K. The parties can treat the K as a legal instrument. They can then sell and/or assign their contract rights to third parties (eg, create other derivative K instruments).

Please note, if the parties do not dispute whether there is a K, they may still have any number of contract disputes regarding breach, interpretation, and/or other matters, such as scope of enforcement mechanism(s) and/or remedies.

The contract formation question is complicated, of course, where one party says there was a contract, and another party denies that a contract was ever formed.

Please note, this configuration can come up even where both parties agreed there was a K at an earlier point in time, but now, one of the parties wants to deny there was a K.

Of course, it is also possible that parties both say there is no K at t1, and then one of them says there is a K at t2.

Who Decides If There’s a K?

Different party configurations, and the inherently changing and unpredictable nature of parties’ expectations at t0, t1, t2, t3 … is one of the reasons why we have formal dispute resolution systems (plural) to help parties resolve and manage these disputes.

It is precisely because A & B have not been able to agree on whether or not there is a K that we need to invoke a third party, C, who will help the parties resolve their dispute. C can be a court, an arbitrator, a mediator, or any other intermediary (such as a friend, or a software provider — think, eBay) who the parties think can help them resolve the dispute.

This third party (C) is supposed to use use an objective contract formation standard to determine if the so-called elements of K formation are satisfied (K = A1 + I + C):

What does it mean to ask if a K has been formed, ‘objectively’ — ?

This merely means that C is supposed to look at the external manifestations of the parties’ intent, as opposed to the parties’ internal subjective beliefs regarding the potential K.

This means asking what a reasonable similarly-situated person would look at what the parties said and/or wrote and/or how the parties acted vis-a-vis one another, as opposed to just putting the parties on a witness stand and asking them if they thought there was a K.

The reason why we cannot just ask the parties if they thought there was a K at t1 should be obvious, but is worth repeating for emphasis. Even if both parties thought there was a K at t1, this does not mean that both parties think there is a K at t2.

What if Parties Don’t Want C?

If all this seems unnecessarily complicated, you might be asking: can A & B agree that they don’t want any of these weird rules to apply? Can A & B agree to never submit their dispute to a C?

The best legal answer that anyone can give to these seemingly straightforward questions is: “maybe, it depends.” That’s how it works under English/Welsh law as well:

There are several factual reasons why parties cannot simply agree to opt out of any legal entanglements ahead of time. First, parties can and do frequently change their minds.

Second, notice the appearance of K1, whereas before we just had K? What does K1 signify? The fact that the agreement to not have K1 be a legal agreement, could itself be considered a … legal agreement … eg, contract (K2):

So, is it ever fully possible for A & B to opt out of legal entanglements like Ks with one another? Is it ever fully possible for A & B to block themselves from seeking recourse from any number of potential Cs down the road?

Legally speaking, the answer is no. For an atypically blunt English explanation for why that’s the case, please see Edmund Schuster’s recent article, Cloud Crypto Land.

People who keep writing things like “smart contracts” are neither ‘smart’ nor ‘contracts’ should really read the Legal Statement. Under English law, at least, the answer has always been and will always remain: maybe.

The same is true under US law, and in most other legal systems.

This is the law because the whole point of the common law of contracts is to facilitate contractual exchange, while retaining jurisdictional reach for state-based enforcement processes. Not exclusively (see the historical pervasiveness and explosive recent growth of arbitration), but ultimately. As in, judicial and executive-branch en-force-ment is the ultimate mechanism by which parties en-force contracts.

The Legal Statement wasn’t drafted by some pointy-headed academics or judges. It was a serious effort by an official government-appointed committee — the UK Jurisdiction Taskforce. You don’t need a legal education to connect the dots and see why a national Jurisdiction Taskforce would conclude that, yes, its law totally covers “smart contracts” as contracts, in appropriate cases.

What are those appropriate cases? “Well, please step right in to our jurisdiction, and we will help you figure out the answer. Hope this gives you the ‘legal clarity’ that you have long sought!”

You may disagree with this on ideological or political grounds, but this is uncontroversial on doctrinal grounds. This is what the law is.

“Smart contract” folks who thought they could completely opt-out of state en-force-ment mechanisms by proclaiming their transactions were self-enforcing were mistaken. There’s no such thing as self-enforcement.

This doesn’t mean we cannot or should not come up with better en-force-ment mechanisms. But it does mean that we have to start talking about en-force-ment in much more rigorous terms.

Otherwise, en-force-ment is being done on us, instead of by us.

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Crypto Law Review

A journal pushing the bounds of our legal imaginaries, on-chain, off-chain, and against the chain.