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Getting Smart about Smart Contracts

November 15, 2021


I started to research this article by typing “blockchain” and “smart contract” into a legal search engine and filtering to the jurisdiction of New Jersey.  There were zero results substantively discussing either topic.  It is not surprising that legal issues involving blockchain-supported smart contracts have not yet landed in our New Jersey courts, but it seems like an 800-pound digital elephant in the room as the business world moves increasingly quickly toward utilizing blockchain and smart contract technology as the new norm.

You may be familiar with blockchain technology because cryptocurrency utilizes blockchains to record and store data about each coin’s transaction history.  But blockchain technology is also used to store information related to smart contracts.  Smart contracts are computer-programmed contracts that execute automatically when certain terms or conditions are satisfied.  A smart contract might say if you transfer me $65,000, I will transfer ownership of one Bitcoin to you.  Or it might say if you transfer one Bitcoin to me, I will transfer ownership of my digital art to you.  Or in the legal world, imagine the automatic transfer of land ownership once funds are received.  The business world has utilized smart contracts for many years.[1]

With the growing pains of this new technology, questions will arise in our legal system on how we apply today’s laws to tomorrow’s contracts.  New Jersey, of course, has a Statute of Frauds that has formal requirements for contracts regarding the sale of certain goods and interests in real estate, that to enforce such a contract, there must be a writing signed by the parties against whom enforcement is sought.[2]  Is a smart contract a writing?  Is it signed?  It might be tempting to take a strict interpretation based on the kind of contracts we are used to (originally: paper, stapled; now: PDF, digitally signed).  Given that the objective purpose of contracts is to demonstrate and commemorate a meeting of the minds, New Jersey courts will likely enforce smart contracts if an agreement to essential terms is demonstrable.

Further, New Jersey adopted the Uniform Electronic Transactions Act (“UETA”), which provides that, “[a]contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation” and that a “signature may not be denied legal effect or enforceability solely because it is in electronic form.”  NJ Rev Stat § 12A:12-1 et seq.  So, New Jersey already understands that our contracts have moved to the digital world.

The UETA carves out some important exceptions.  It does not apply to transactions involving:  (i) the creation and execution of wills, codicils or testamentary trusts; (ii) adoption, divorce or other matters of family law; (iv) court orders or official court documents; (v) notices of the cancellation or termination of utility services; (vi) the default, acceleration, repossession, foreclosure or eviction, or (vii) the right to cure a default applicable to an individual’s primary residence.  It is conceivable, then, that it would be difficult to go to court to try to enforce a smart contract in these matters where it seems the State still wants that ink signature, and perhaps even a piece of paper.

It should be understood, however, that smart contracts offer up much more reliability and security than typical contracts with digital signatures.  The fact that the smart contract lives on a blockchain means that it is completely immutable (meaning that an evil cousin cannot hack into a smart-contract will and change an inheritance without being detected), transparent (meaning a contract cannot be altered without revealing that change – wouldn’t that be great to prove authenticity in court?) and secure (impossible to destroy, difficult to hack).  Therefore, smart contracts have immense utility in the legal world.

I would venture that in the next three years when I type “blockchain” and “smart contract” into a legal search engine, there will be a number of New Jersey cases discussing enforceability issues.  If courts refuse to enforce smart contracts based on existing statutory formalities, the business world will certainly push for the legal world to keep up with the times.  And we should!

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[1] Blockchain technology has immense utility in the banking industry, for example.  Banks utilize blockchain ledger technology to increase the speed of international transfers of funds.  See “How high-tech blockchain is creating new payment opportunities,” Juan Jimenez Zaballos, available at https://www.ibm.com/blogs/client-voices/blockchain-creating-payment-opportunities/ (May 17, 2019).

[2] See NJ Rev Stat § 12A:2-201 (“Formal requirements; statute of frauds”); NJ Rev Stat § 25:1-13 (“Enforceability of agreements regarding real estate”).