So before we get to smart contracts let's look at contracts.
First we need to define them and set out some of the characteristics that they have that are relevant
to the crypto world.
But the same things are relevant to the wider world.
So what's a contract.
Well we have a definition but it's very broad.
A contract is an agreement.
It's intended to be enforceable at law.
What does that mean.
So an agreement is clear.
It has a natural language meaning one or more parties can agree between themselves to do something or
not do something.
The distinction that we've focused on here is what do we mean by enforceable law.
When does the law step in and say that an agreement between two parties should be and will be enforced.
And when we say enforced we mean enforced by the courts generally.
So there are lots of agreements every day.
We agree with people that we relate to that we will do or not do things but they're generally not expected
to be enforced by a court process.
So the distinguishing feature of a contract is whether parties expect that they will act on reliance
in that agreement and the consequence of failing to comply with the terms of the agreement by one party
will be that the other can sue under the agreement can go to the courts and say to the judges we had
an agreement between myself and the other party the other party has failed to comply and my remedy should
be obtained through the court.
So the contract is really distinguished by the fact that it has a remedy.
How do we identify the circumstances where it is appropriate that there should be a remedy that's generally
left to the parties to decide to the test of when an agreement becomes a contract is where the parties
have shown an intention that they expect to be bound by that document in a way that can be enforceable
in a court.
So a contract is an agreement where the parties have intended to enter into legal relationships and
that legal relationship with the courts representing the wider society have an interest in supporting
because that provides certainty for economic activity.
If we can't distinguish those agreements that will be enforced against agreements that won't be enforced.
We don't have enough predictability in the economic system for economic life to proceed in an efficient
way.
Now the the contract is broken down by legal scholars into different elements but all of them are broadly
looking at the same question have the parties shown evidence that they intend to be bound by the contract.
The kinds of things that you would hear legal scholars and practicing lawyers talk about in a contract
is.
Has there been consideration from both sides of the contract.
Consideration is a technical term used by lawyers to refer to a bargain.
The parties economic bargain between the two of them.
So if one party agrees to pay 10 dollars to another party for that second party providing a service
or transferring an asset then that evidence of the payment of the money and the agreement to provide
the service or to provide the asset is one of the indications that the courts would use to distinguish
that as an enforceable agreement from something that's not enforceable the courts are looking at evidence
of what it is that the parties have brought to their relationship that shows that they intend to be
banned as part of that relationship.
And the intention to be banned is often written into documents.
So some contracts will say this is a document intended by the parties to be binding on it.
And that is bringing to the fore this point around showing that the parties intended that this was a
formal legal relationship not just an agreement.
I might agree to meet my friend for coffee and I might even agree to show up and give them 50 dollars.
But if we haven't entered into a formal contract they can ask me for the 50 dollars and morally I may
owe it to them but I don't legally owe it to them unless we've shown that we intend to be bound by that
relationship.
So a contract has certain defined characteristics.
It's easy to enter into contractual relationships.
You simply need the intention to be bound have some form of economic bargain.
They used to be a number of older more technical rules that had to apply in relation to any contracts.
But the courts and parliaments in the UK and in the US have become more flexible about that over time.
What they're focused on is this intention and less about the technical rules.
So when we talk about remedies for breach of contract the reason for entering into a contract we're
saying is because you can predict that a remedy will be available to you if the other party breaches
the contract.
What remedies.
We generally talking about they fall into two categories.
In most jurisdictions the first one is a performance remedy.
You've entered into an agreement with another party that they will do something they will perform a
service or transfer in assets.
For example if you make your payment you satisfy your side of the bargain then it is possible to claim
in the court that the court should require the other party to perform their side of the bargain.
And that seems logical that you've entered into a bargain on both sides.
You've done your bit so the other party should do that.
But most remedies don't fall into that category.
The courts are generally not interested in the morality of whether a person should do that thing that
they've agreed to do.
Contracts are sitting in this economic framework social policy around the economic life of parties.
So the courts will generally say what has the party that has performed lost out on.
And if it's possible to equate that to an amount of money then the court will require the defaulting
party to pay that amount of money to the party that has performed.
So you have a party that performs a party that doesn't perform.
The courts will generally say if there is an economic remedy that we can apply then that's what we'll
do.
And that's what's known as damages.
So most court cases are claims for damages not claims for the particular enforcement of the specific
terms of the contract.
This is an economic relationship and generally money is a good enough substitute for performance.
That's a quirk of contract law and it comes from many years of cases being decided by judges where there
may be some hardship on the defaulting party in performing the specific obligations.
But they should be able to provide money to compensate the other party that has performed.
Do I need a contract.
So sometimes we have conversations with clients or with colleagues who are looking at the question of
Is it necessary for there to be a contract in relation to a particular relationship.
Well no surprise.
Lawyers generally think it is necessary if you want to have a bargain where there is a predictable ability
to enforce that contract and ensure that you get what you expect thing out of the bargain a contract
is the way to do it.
Do I need a lawyer to enter into a contract.
No.
Contracts can be informal.
So we've talked about them so far and most of the contracts that you would think about maybe written
terms and conditions or long form contracts.
It's perfectly possible to have oral contracts to a party that satisfies the obligations with another
party to intend to enter into legal relations and to have a bargain on both sides.
One party agrees to do one thing in exchange the other party agrees to do another thing.
That's perfectly valid.
It gives rise to evidential problems because the party that hasn't performed will quite likely turn
round and say I didn't intend that I would have written it down if I intended to be bound or to find
myself in court.
But oral contracts are valid under the common law systems particularly the UK and the US as no particular
formality for most forms of contracts civil law jurisdictions apply a few more specific rules because
they have that background legislation but generally you can assume that if you have intended to enter
into a legal relationship relationship with a party that that will constitute a contract.
If both parties have that same intention to be banned that it can be enforced ultimately by the courts
and that there is a bargain on both sides.
So you don't need a lawyer.
We'll get into question at the end of this session what the lawyers do then when they're looking at
contracts.
One point to bear in mind when you're dealing with lawyers though bigger lawyers a regulated profession
in every jurisdiction of the world that I'm aware of.
So lawyers come with some regulatory backgrounds they have a regulatory oversight so there is something
called the Law Society in the UK the Bar Association in the US that works as a kind of regulatory authority.
And all lawyers are subject to rules of professional conduct.
So if you're working with a lawyer there is some some some things that come with that.
You don't need a lawyer simply to enter into a contract.
Two final questions that come up a lot.
What can a contract be about and can more than one person be a party to a contract.
Well a contract can be about anything.
There are rules at the limits about contracts not being contrary to public policy.
Why might that be.
Because they're illegal for example or there is some other overwhelming public policy reason why a contract
what purports to be a contract should not be enforced by the courts but generally in the US and the
UK we have a principle called freedom of contract which means that private parties private individuals
are able to contract with each other on whatever terms they like.
The courts will not stop you doing a bad bargain with another party.
Now there's a caveat there which comes in the form of consumer protection over the course of the 20th
century the courts have been more concerned to ensure that consumers who are not expected to be experienced
in commercial contracts are given a degree of protection that they're not put in a position where a
party with a great deal of experience a strong bargaining power whatever it may be is able to take advantage
of them.
But the broad principle is freedom of contract in this world of crypto currencies.
We're looking at a couple of key examples of consumer protection.
One are the rules set by the regulators in the UK the Financial Conduct Authority of Financial Conduct
Authority makes the distinction between utility tokens and security tokens.
We have books of rules to protect consumers on the issue of a security.
Those rules are concerned about ensuring that the business is sound.
That full disclosures have been made that the same terms are offered to all of the participants in the
security of their own security tokens unless they benefit from the exception for low value tokens which
will come until they are subject to all of the rules set by the regulator about security.
Utility tokens not securities say their freedom of contract applies and to the extent that contracts
exist between the parties that isn't a requirement that they contain or don't contain any specific points.