California: Smart Contracts Definition and Legality

Federal E-Sign Act

California businesses fall under the jurisdiction of the 2000 Federal Electronic Signatures in Global and National Commerce Act (“E-Sign Act”), which recognizes electronic signatures, contracts, and records with the same legal weight as paper ones. This act may sufficient legal weight for smart contracts to be enforced under the existing law. (source)

Uniform Electronic Transactions Act (UETA)

In addition California has adopted the Uniform Electronic Transactions Act (UETA) in 1999, which validates electronic signatures and contracts under state law. The Uniform Electronic Transactions Act allows for contracts to be formed by automated transactions. (For example, see comment (2) on pg.7 of the UETA) It states that “A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.” (UETA, pg 26)

In Section 14 of the UETA on Automated Transactions, it is provided that

  • “A contract may be formed by the interaction of electronic agents of the parties, even if no individual was aware of or reviewed the electronic agents’ actions or the resulting terms and agreements.

  • A contract may be formed by the interaction of an electronic agent and an individual, acting on the individual’s own behalf or for another person.”
 The comments to this section note that “(This section) negates any claim that lack of human intent, at the time of contract formation, prevents contract formation. When machines are involved, the requisite intention flows from the programing and use of the machine.” This seems to imply that smart contracts, whether between two human agents or between humans agents and machines acting on behalf of human agents, are legally valid contracts.

A note on contracts created by Artificial Intelligence

In the comments to section 2 of the UETA, it is noted that “While this Act proceeds on the paradigm that an electronic agent is capable of performing only within the technical strictures of its preset programming, it is conceivable that, within the useful life of this Act, electronic agents may be created with the ability to act autonomously, and not just automatically. That is, through developments in artificial intelligence, a computer may be able to ‘learn through experience, modify the instructions in their own programs, and even devise new instructions’… If such developments occur, courts may construe the definition of electronic agent accordingly, in order to recognize such new capabilities.“ (UETA, pg 11)

Currently electronic contracts between people or between people and machines acting on their behalf are guaranteed by the UETA, while current guidance has not come about to explicitly clarify the status of smart contracts involving artificial intelligence agents. However, the commentary text of the UETA explicitly notes this as a possibility and seems to to allow for the the possibility of their inclusion under the jurisdiction of the UETA. At this point, it seems probable that such contracts are legally binding in California under the UETA, but we await explicit court guidance on this matter.


Previous Section Next Section

Have a comment, edit, or item to add? Share your thoughts by commenting below!

comments powered by Disqus