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Status
IN PROGRESS
OutcomeContract Law 101
Due date31 July 2019
Owner
Updated byRobert Kost


Summary

The intent of this section is to provide software engineers, developers and users of the Hyperledger suite a basic working knowledge of contract law as it applies in the context of "smart contracts". References and further reading suggestions are provided below if the reader would like to expand their knowledge of the legal principles involved.

Disclaimer

This material is not intended to be, nor provided as, legal advice and the reader is encouraged to obtain their own legal advice on the topics discussed below. Neither the Linux Foundation, Members nor the authors accept any liability for any loss, damage or claims suffered or incurred in reliance of these materials which are provided "as-is" and for general educational purposes only.

Glossary of Contract Law

This section is in-progress.

The purpose of this glossary is to provide a common semantic foundation for discussions concerning contract principles as they relate to smart contracts.  So, for example, if a question were to arise about whether a given smart contract constitutes a legally binding agreement, we would have reference to the definitions of Offer, Acceptance and Consideration as described below.   There is a known bias toward contract law in the United States and Great Britain.  This section should be supplemented by, and distinctions drawn with respect to, definitions from other countries.  

TermDefinition
Acceptance

Acceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer. Acceptance by performance requires that at least part of what the offer requests be performed or tendered and includes acceptance by a performance which operates as a return promise.  (Restatement of Contracts 2nd).

Accord and Satisfaction

(1) An accord is a contract under which an obligee promises to accept a stated performance in satisfaction of the obligor's existing duty. Performance of the accord discharges the original duty.

(2) Until performance of the accord, the original duty is suspended unless there is such a breach of the accord by the obligor as discharges the new duty of the obligee to accept the performance in satisfaction. If there is such a breach, the obligee may enforce either the original duty or any duty under the accord.

(3) Breach of the accord by the obligee does not discharge the original duty, but the obligor may maintain a suit for specific performance of the accord, in addition to any claim for damages for partial breach.

Restatement of Contracts 2nd.

Anticipatory RepudiationDenying a contract before it can be fulfilled. The party can be sued for the breach. The two types are express and implied. Implied takes the contract duties and gives it to another party. Express is a direct refusal. (Black's Online Law Dictionary (https://thelawdictionary.org)
AssignmentThe act by which one person transfers to another, or causes to vest in that other, the whole of the right, interest, or property which he has in any realty or personalty, in possession or in action, or any share, interest, or subsidiary estate therein. Black's Online Law Dictionary
BreachA legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party’s performance. Black's Online Law Dictionary
ConditionAn agreement or stipulation in regard to some uncertain future event, not of the essential nature of the transaction, but annexed to it by the parties, providing for a change or modification of their legal relations upon its occurrence. Black's Online Law Dictionary.
ConsiderationThe inducement to a contract. The cause, motive, price, or Intel he influence which induces a contracting party to enter into a contract. The reason or material cause of a contract. Some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss, or other responsibility, given, suffered, or undertaken by the other. Black’s Law Dictionary (print), West Publishing Company, 1979
Contract

A contract is a legally binding agreement which recognises and governs the rights and duties of the parties to the agreement. (Wikipedia https://en.wikipedia.org/wiki/Contract)


Express Contract: an expressed contract is an actual agreement of the parties, the terms of which are openly uttered or declared at the time of making it, being stated distinct and explicit language, either orally or in writing.  Black's Law Dictionary.  

Implied Contract: an implied contract is one not created or evidenced by the explicit agreement of the parties, but inferred by the law, as a matter of reason and justice from their acts for conduct, the circumstances surrounding the transaction making it a reasonable, or even a necessary, assumption that a contract existed between them.  Black's Law Dictionary.

Executed and Executory Contracts: contracts are divided into executed and executory.  In an executed contract nothing remains to be done by either party, and the transaction is complete at the moment that the arrangement is made, and payment therefore is made on the spot.  In an executory contract, some future act is to be done, as where an agreement is made to build a house in six months, or to do an act on or before some future day, or to lend money upon a certain interest, payable at a future time.  Black's Law Dictionary.

Bilateral Contract: A term, used originally in the civil law, but now generally adopted, denoting a contract in which both the contracting parties are bound to fill fill obligations reciprocally towards each other; as a contract of sale, where one becomes bound to deliver the thing sold, and the other to pay the price of it.  Black's Online Law Dictionary. 

Unilateral Contract: A unilateral contract is one in which one party makes an express engagement or undertakes a performance, without receiving in return any express engagement or promise of performance from the other.  Black's Online Law Dictionary.

Note concerning standards of preference in interpretation: express terms are given greater weight than course of performance, course of dealing, and usage of trade, course of performance is given greater weight than course of dealing or usage of trade, and course of dealing is given greater weight than usage of trade.  Restatement of Contracts 2nd.

CounterofferA statement by the offeree which has the legal effect of rejecting the offer and of proposing a new offer to the offeror.  The UCC (governing the sale of goods in the US) treats a counteroffer as proposed additional terms proposals for addition to the contract. (Black’s Law Dictionary).
Damages

Expectation
Reliance
Restitution
Liquidated
Punitive
Specific Performance

(separate definitions for each of above)

Defenses

Misunderstanding
Incapacity
Mistake
Fraud / Misrepresentation
Duress
Illegality
Unconscionability

(separate definitions for each of above)

DelegationThe act of giving another party the responsibility of carrying out the performance agreed to in a contract. Wikipedia
Excuse

Impossibility
Impracticability
Frustration of Purpose

(separate definitions for each of above)

IndemnityAn Indemnity Is a collateral contract or assurance, by which one person engages to secure another against an anticipated loss or to prevent him from being damnified by the legal consequences of an act or forbearance on the part of one of the parties or of some third person. Black's Online Law Dictionary.  
Integration

An integrated agreement is a writing or writings constituting a final expression of one or more terms of an agreement.

(2) Whether there is an integrated agreement is to be determined by the court as a question preliminary to determination of a question of interpretation or to application of the parol evidence rule.

(3) Where the parties reduce an agreement to a writing which in view of its completeness and specificity reasonably appears to be a complete agreement, it is taken to be an integrated agreement unless it is established by other evidence that the writing did not constitute a final expression.

Restatement of Contracts, 2nd.

Merger ClauseA provision in a contract to the effect that the written terms may not varied by prior or oral agreements because all such agreements have been merged into the written document.  Black's Law Dictionary.
Mitigation of DamagesAlthough a plaintiff is able to recover damages from a defendant, there is this specific legal rule that the plaintiff is also under a duty to avoid damage escalation. A court can penalize a plaintiff who takes very little reasonable care to stop or prevent avoidable damages. Also refer to duty to mitigate. Black's Online Law Dictionary.
ModificationAt common law, modification of an existing contract must be supported by consideration. Agreements to modify a contract may still be enforced if: i) There is a rescission of the existing contract by tearing it up or by some other outward sign, and then the entering into of a new contract, whereby one of the parties must perform more than she was to perform under the original contract; ii) There are unforeseen difficulties, and one of the parties agrees to compensate the other when the difficulties are discovered if those difficulties would make performance impracticable; or iii) There are new obligations on both sides. Unlike under the common law, under UCC Article 2, no consideration is necessary to modify a contract; however, good faith is required. Thus, if one party is attempting to extort a modification, it will be ineffective under the UCC.  (various) 
OfferA manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it. (Restatement of Contracts 2nd) A promise; a commitment to do or refrain from doing some specified thing in the future. The offer creates a power of acceptance permitting the offeree by accepting the offer to transform the offeror’s promise into a contractual obligation.  (Black’s Law Dictionary).
Parol Evidence RuleUnder this rule, when parties put their agreement in writing, all previous oral agreements merge in the writing and a contract as written cannot be modified or changed by parol evidence, in the absence of a plea of the state or fraud in the preparation of the writing.
Party
PerformanceThe fulfillment or accomplishment of a promise, contract, or other obligation according to its terms.  Black's Online Law Dictionary
RelianceA promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce the action or forbearance is enforceable notwithstanding the Statute of Frauds if injustice can be avoided only by enforcement of the promise. The remedy granted for breach is to be limited as justice requires. (Restatement of Contracts 2nd).
RevocationAn offeree's power of acceptance is terminated when the offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract. (Restatement of Contracts 2nd).  An offer may generally be revoked before acceptance.  
Risk of Loss
Statute of Frauds

This is the common designation of Avery celebrated English statute, passed in 1677, adopted in modified form by all states in the US.  Its chief characteristic is the provision that no suit or action shall be maintain on certain classes of contracts or engagements unless there shall be a note or memorandum thereof in writing signed by the party to be charged or by his authorized agent.  Its object was to close the door to numerous frauds and perjuries.  (Black’s Law Dictionary).  Contracts that fall within the Statute of Frauds are unenforceable unless evidenced by a writing. The writing must: i) Be signed by the party against whom enforcement is sought; and ii) Contain the essential elements of the deal.  The writing need not be formal (i.e., receipts or correspondence can serve as memoranda). The essential elements may be in more than one writing only if one of the writings references the other(s). The writing need not be delivered to the party trying to enforce the contract. Even if it is lost or destroyed, it still operates to satisfy the Statute of Frauds, and its prior existence can be proved by oral evidence.

Most states require that the following five categories of contracts be evidenced by a writing:
Marriage - A contract made upon consideration of marriage;
Suretyship - A contract to answer for the debt or duty of another;
One year - A contract that cannot be performed within one year from its making;
UCC - Under the UCC, a contract for the sale of goods for a price of $500 or more; and
Real property contract - A contract for the sale of an interest in real property.

TerminationTermination refers to an ending, usually before the end of the anticipated term of the contract, which termination may be by mutual agreement or may be by exercise of one party of one of its remedies due to the default of the other party. (Black’s Law Dictionary).  Termination may also be at-will and without cause, if the contract so states.
Third Party Beneficiary
Waiver
Warranty

Sections

Basic Principles of Contract under Common Law Countries (UK, Australia, NZ etc)

[NOTE TO AUTHORS: This is an indicative high level summary of issues to cover. This list is comprehensive and could be simplified based on feedback from the community as some topics below will be less relevant for the purposes of a basic overview of contract law.]

FORMATION OF A CONTRACT

  • The Fact of Agreement
  • The Requirements of Certainty and Completeness
  • Consideration
  • Intention to Create Legal Relations
  • The Requirement of Writing
  • Capacity

TERMS OF A CONTRACT

  • Express Terms
  • Implied Terms
  • Construction of Contractual Terms
  • Construction of Exclusion Clauses

VITIATING FACTORS

  • Misrepresentation
  • Misleading or Deceptive Conduct
  • Mistake
  • Duress
  • Undue Influence
  • Unconscionable Transactions
  • Unfair Contracts

DISCHARGE

  • Discharge by Performance
  • Discharge by Agreement
  • Discharge by Breach
  • Discharge by Frustration

ILLEGALITY

  • Statutory Illegality
  • Common Law Illegality
  • Effect of Illegality

REMEDIES BASED ON CONTRACT

  • Damages for Breach of Contract
  • Actions for a Fixed Sum and Debt
  • Specific Performance
  • Injunctions
  • Equitable Damages
  • Rectification
  • Rescission

OTHER BASES OF RELIEF

  • Equitable Estoppel
  • Liability in the Law of Torts
  • Restitution

THIRD PARTY RIGHTS

  • Privity of Contract
  • Assignment of Contractual Rights and Liabilities


Basic Principles of Contract under Civil Law Countries (EU)

(to be completed)


Basic Principles of Contract under US law

(to be completed)


Basic Principles of Contract under the laws of the PRC

(to be completed)


References

Norton Rose Fulbright, ‘Can smart contracts be legally binding contracts’, (full text can be requested at https://www.nortonrosefulbright.com/en/knowledge/publications/a90a5588/can-smart-contracts-be-legally-binding-contracts)


Further Reading

N. Szabo, Smart Contracts: Building Blocks for Digital Markets (1996) (http://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/szabo.best.vwh.net/smart_contracts_2.html)


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