Archive for the ‘Creation’ Category

Marriage in Ethereum – A Cautionary Tale

June 24, 2016

In May 2016, a couple who intend to get married in December 2016 created a prenuptial smart contract agreement on Ethereum in blockchain. Ethereum is not a honeymoon resort, but provides a unique way to create, enter into, execute, pay for, secure, and enforce, contracts. The preparation of a prenuptial agreement in this manner heralds an evolution of contracts and contract management. What follows is my take on the legal intersection of autonomous contracting software and human relationships – specifically, a self-executing prenuptial agreement.

Prenuptial agreements are nothing new. Neither are virtual contracts. What is new is how this contracting process runs without human intervention based on a sequence of coded events monitored and executed by a virtual distributed transaction-based and encrypted system. What began as a transparent and public peer-to-peer financial ledger using bitcoin cryptocurrency, is now on the verge of managing personal lives as well.

I have watched bitcoin cryptocurrency and the underlying transaction software which supports the blockchain infrastructure for some time. Cryptocurrency evolved from the current fiat monetary system and has been compared to the gold standard. These monetary forms rely on a belief that the currency (in whatever form) has an agreed upon, or market created, value. Similarly, consideration, a necessary legal contract element, relies upon the parties agreeing that the value exchanged (the consideration – whether money or promises) is sufficient for an enforceable contract.

Blockchain is often described as an online decentralized ledger of financial transactions, the nature of which is transparent to others on the blockchain.  Ethereum is a blockchain platform over which cryptocurrency can be exchanged as well as smart contracts formed.

Co-founder, Vitalik Buterin, described Ethereum as “a “world computer”: a place where anyone can upload and run programs that are guaranteed to be executed exactly as written on a highly robust and decentralized consensus network consisting of thousands of computers around the world.” The Ethereum platform uses “ether” cryptocurrency, a competitor to the more familiar bitcoin. The smart contract manages a series of mini transactions (with the colloquial meaning, not the Ethereum definition), each of which build the agreement whole. Along the way, “fees” are paid for each interaction along the blockchain process. The fees pay the “miners” who process each transaction.

Now back to the marriage!

When I learned about this prenuptial agreement, I was intrigued. Initially, I wondered why anyone would want to do such a thing. Then I thought this experiment was a disaster waiting to happen. Finally, I realized that this could be awesome!

A prenuptial agreement is a promise in consideration of marriage which has to be in writing in most, if not all, 50 U.S. states and the District of Columbia. This writing requirement comes to the U.S. via the British “Act for the prevention of Frauds and Perjuryes,” which required some transactions to be in writing, whereas many oral agreements remained as enforceable as written ones. A promise in consideration of marriage is one example among many.

A case that I used in my Engineering Law class for several years was Curtis v. Anderson, where Curtis wanted Anderson to return an engagement ring when he broke off the engagement.  Anderson refused. Curtis brought a lawsuit which claimed that he gave her the ring in consideration of marriage and that she agreed to return the ring if they did not get married. In the alternative, the ring was a conditional gift.

If the ring was a promise in consideration of marriage, the promise would have to be writing under the statute of frauds.

If a ring is presented upon acceptance of a marriage proposal (the promises have already been exchanged in advance of the ring giving), it may be viewed as a conditional gift under Texas law. As a conditional gift, the gift’s terms don’t have to be in writing. The conditional gift rule only works, however, if the person who accepted the ring/gift broke the engagement.

Did Curtis get back the ring?

The court determined that the statutes related to prenuptial agreements and the statute of frauds applied. There was no writing, so whatever the parties said either before or after the engagement, did not create an enforceable prenuptial agreement. In addition, since Curtis broke off the engagement, the ring did not qualify as a conditional gift. Therefore, Anderson didn’t have to return the ring.

For my students, this was a much discussed result. Happily for me, the case was an opportunity to talk about the difference between ethics and law, as well as the difference between an engagement (which does not have to be in writing) and a promise in consideration of marriage (which does).

Which leads to the Ethereum prenuptial agreement and whether its terms would be enforceable. Generally, a contract in the U.S. is enforceable if: 1) the parties can legally enter into the contract; 2) there is an offer and acceptance; 3) there is consideration; and 4) the subject matter/form is legal.

Let’s look at each contract element in the Ethereum prenuptial agreement.

Parties and legality.  I don’t know how old the parties are or whether they may legally agree to marry. But, there is a clue – the prenuptial agreement is related to an anticipated marriage in India. If the parties entered into this agreement in India, it may not stand. Nonetheless, a dispute involving the prenuptial agreement may be resolved based on British common law which may apply in India via the Indian Contract Act of 1872.

Offer and acceptance. The parties’ acceptance may be indicated by their seemingly independent interactions with the smart contract.

Consideration.  The consideration in the prenuptial agreement is the exchange of promises to do or not do an enumerated list of things. In addition, there is consideration in the form of ether, which pays for the transactions in blockchain and which, in turn, creates the prenuptial agreement. The fees appear to have been paid and the parties appear to have agreed to its value and therefore have agreed to the prenuptial agreement’s terms.

Subject matter/form.  Let’s assume there are no statutory impediments to prenuptial agreements – could this version be enforceable if the parties live and marry in the U.S.? Prenuptial agreements are legal in the U.S. In the agreement, the magic words required for an enforceable prenuptial agreement are in writing: “in consideration of the marriage about to be solemnized between the parties.” The agreement also makes references to date nights, television viewing rules, insult restraint, etc. But to qualify as enforceable agreement, there would have to be acts that the parties have the legal rights to do, and in exchange for not exercising those rights, agree to be bound by the contract.

An example is the “dollar bill” clause of the prenuptial agreement, where the parties agree that “shopping sprees” are only permitted every fortnight, with the exception of food purchases, which have no monetary limit. If the parties do marry and one of the parties violates the $$ clause with daily shopping sprees using a joint bank account from which the shopping sprees are financed, could this violation be used as a reason to file for divorce? Maybe. Would it matter that the contract was entered into on the Ethereum platform? I do not believe so. The final written document can presumably be understood by both parties, even if they did not write the underlying code responsible for its formation. In addition, each phase of the transaction may be considered a separate agreement and further evidence of the parties’ consent to its terms. Absent fraud or duress, the agreement may be enforceable in the U.S.

There have been posts that say that smart contracts may not be legally enforceable. I was unable to discern the single element that would render them illegal. There are contracts that are illegal because of its purpose, e.g., a smart contract to commit fraud is illegal, and therefore unenforceable. Ultimately, the legal problems may be based on the blockchain code itself. If that is the case, I would suggest that each step be analyzed as a separate contract (because consideration is exchanged at every stage in Ethereum) to determine whether each transaction is legally enforceable, e.g., is there offer and acceptance? consideration? legal parties? proper form/legal? All would have to exist for a legally enforceable contract in the U.S.

This troubling issue was explained further in an article by an attorney, Stephen D. Palley. In summary, he suggests that since the nodes through which transactions pass are decentralized, there is no one entity responsible when the transaction fails due to a problem with the software. Once launched, a smart contract does not require or rely on human intervention and is managed by a decentralized autonomous organization or “DAO.” The inevitable legal problem a DAO faces, however, is who to sue if something goes wrong.

This issue is precisely what arose recently when unknown (as of June 23, 2016) Ethereum developers siphoned money from one decentralized autonomous organization’s (called The DAO) account. That smart contract was created using the Solidity programming language which operates in the Ethereum environment. The DAO was recently formed as a business entity similar to an LLC in Switzerland, perhaps in response to Mr. Palley’s articles and other calls to create a formal business entity. Within a year, liability risk went from non-existent to reality for The DAO investors.

Thus, there are two legal landscapes over which a potential user must navigate – the umbrella contract itself as well as the individual transactions over the blockchain.

Where do I see additional problems? The Ethereum platform uses language that is defined differently from legal terms of art. There are centuries of legal precedent that will not be overturned by code. That fact, however, does not mean that such a lexicon cannot be developed. Indeed, PAX has come up with a legal scripting language for Ethereum.

Upon my cursory review of this subject and applying it to a prenuptial agreement, Ethereum or something similar may make legal contractual transactions streamlined, transparent, and verifiable, especially with regard to simple purchases and template driven services.

Also, promoting something similar to a prenuptial agreement that is available for anyone to use without a disclaimer – e.g., this agreement may not be valid in your jurisdiction, or please consult local laws or we are not providing legal advice – should not be encouraged, even if intended to be humorous.

It is with both enthusiasm and caution that I look forward to what smart contracting, DAO, and cryptocurrency will become. I hope that the programmers recognize that the people with whom these systems interact are rarely streamlined, transparent or verifiable. I also hope that ethical, fiduciary, and social concerns are not abandoned as developers design automated contracts for some of the most intimate of human relationships.

Nothing in this article is purported to be legal advice. You can contact me via email at cynthia.gayton@gayton-law.com.

Advertisements

Year End Tips for You and Your Business

November 20, 2012

Greetings!

It may seem to be a little early to think about 2013, but if you are anything like me, the weeks after Thanksgiving are full of hustle and bustle and finding time to organize paperwork and consider the coming year are not at the top of my preparation list. However, thinking about 2013 now will put you ahead of the curve, so here are five things to consider before you become overwhelmed with the holiday season.

1. Get your paperwork and documents in order early for taxes

At least twice a year, I conduct a seminar for creatives and small businesses on taxes. While I do not hold myself out as a tax expert, I can identify several tax issues that daunt creatives and other entrepreneurs. Paperwork is unavoidable, even in this digital age. Even more so as many, if not most, transactions are conducted online and physical receipts are becoming rare.

But an organized approach to your documents can save you money and time. Many creatives and other small businesses ask me about the likelihood of an audit. In my experience, it is hard to make an accurate prediction, but I can say with certainty that having the right documents to support your tax filing can save you a lot of grief even if you are audited.

Gayton law can help you decide which business entity is right for you. Please ask about our Business Entity Selection table.

2. Look for money on the table

You are busy. You have ordered supplies, hired contractors, made sales, etc., but have you gone back to check whether you have received all the services for which you paid? How about royalties? If you were offered a discount on a purchase, did you receive that discount? On the flip side, have you fulfilled all your obligations to a customer? In either circumstance, money may be left on the table waiting for you to pick up. If you were promised a discount or service, go back and review your agreements to see if you received these things. If you provide services or offer discounts, this is an opportunity to build better customer relationships by contacting them to see if your service met expectations and perhaps get more business.

If you are concerned about whether you have received the services requested at the price you paid, contact Gayton Law to conduct a contract audit for your business. If you have contracts that need to be revised to better reflect your business services, Gayton Law can help you update your contracts and make suggestions to improve your contractual relationships.

3. Update your media policies

Even a one person operation should have in place an information and document retention plan, especially when so much of this information is in virtual as well as physical form. Maintaining and keeping old and outdated documents not only clutters your hard drives, cloud drives and desk drawers, but unmanaged documentation may create legal vulnerabilities for your business. Creating policies about document retention which apply to both physical and virtual documentation, as well as email and social media communication is a crucial business practice.

Gayton Law can prepare document retention policies for your business.

4. Employees and Independent Contractor Agreements

Now may be the time to review your employee and independent contractor agreements, especially if existing contracts (even oral ones!) are several years old. Good agreements protect the business as well as your employees and independent contractors.

Gayton Law can review your current agreements and provide advice about whether an update will be advantageous to you and better protect your interests.

5. Annual Business Meetings and Corporate Governance

Even small businesses should take a moment to assess the previous year. Whether you are an LLC, corporation, partnership or a sole proprietor, there is value in setting aside a day or even a few days to look over your accomplishments and start outlining future goals. For those of you with LLCs, corporations and partnerships, your business documents typically require annual meetings. Although everything may be well, getting into the habit of holding annual meetings is a useful way to maintain good businessrecords, which will assist you in the future.

Gayton Law can prepare the documents you need for a small business enterprise, including bylaws and operating agreements as well as assist with corporate governance processes.

Knowledge Asset and Governance Management

For those of you investigating whether knowledge asset and governance management practices are in your future, any knowledge management (KM) plan should incorporate all of the above considerations. Please contact Gayton Law for information about how to include these practices into your KM plan.

Recent Publications

In March 2012, Kendall-Hunt publishers released the 9th edition of Legal Aspects of Engineering by Cynthia Gayton. This book is used in several engineering courses and is a useful reference for anyone interested in contracting, intellectual property, engineering practice, and other general legal issues.

Thank you for reading. Have a great holiday season!

The information contained in this website is for general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts. The information contained in this newsletter should not be construed as a substitute for consultation with professional advisors. Certain links in this newsletter connect to other websites maintained by third parties over whom Gayton Law has no control. Gayton Law makes no representations as to the accuracy or any other aspect of information contained in other websites.