South Africa: Smart Contracts Definition and Legality

South Africa South African contract law developed from Roman Dutch legal principles. There are five requirements that must be met before a valid contract can exist:

  • Consensus: this is similar to the English common law requirement of reaching agreement
  • Contractual capacity: the parties must have the necessary capacity to be able to form legal intent for the purpose of concluding a contract
  • Lawfulness: the contract must be lawful and not contrary to the common law, any statute, public policy or good morals (for example, a contract to conclude an illegal activity, such as purchase and sale of illegal drugs would not be enforceable)
  • Physical possibility: performance of the contract must be determined or determinable at its conclusion (for example, if A agrees to sell its entire yield of corn crop to B for a price per ton, although A does not know exactly how much crop they will yield, the amount and price is capable of being determined at a future date)
  • Dormalities: the contract must comply with any requirements prescribed by law or between the parties themselves (for example, an ante-nuptial contract must be in writing and signed in the presence of a notary public).

Formation of electronic contracts: the Electronic Communications and Transactions Act 2002 (ECTA) gives communications via data messages the same effect as non-electronic documents. This means that if there is a requirement to have a document in writing, the ECTA gives the same legal effect to that document in electronic format. 97 “Data” is defined as “electronic representations of information in any form”, and “Data message” is defined as “data generated, sent, received or stored by electronic means”. This would include online transactions and data sent via emails.

Consensus – offer and acceptance: section 22 of the ECTA concerns the formation of electronic agreements and states that “an agreement concluded between parties by means of data messages is concluded at the time when and place where the acceptance of the offer was received by the offeror.”

Section 23 of the ECTA deals with the time and place of communications, dispatch and receipt, and states that a data message must be regarded as having been received:

  • By the addressee when the complete data message enters an information system designated or used for that purpose by the addressee and is capable of being retrieved and processed by the addressee (for example, when an email arrives in an inbox)
  • At the addressee’s usual place of business or residence.

Section 26 of the ECTA states that “an acknowledgement of receipt of a data message is not necessary to give legal effect to that message.”

In relation to smart contracts, we suggest that the contract might be concluded when Party 1’s information system receives a notification that Party 2 has accepted the “offer”, and is concluded at Party 1’s usual place of business.

However, the parties might instead first agree terms “off the ledger”, including which parts of the agreement will be coded into self-executing instructions as a smart contract. Nothing in the ECTA prevents parties from entering into agreements that are partly physical and partly electronic, but the parties must ensure that nothing in the contract precludes them from using both methods.

Where a smart contract is coded to only contain the executable obligations of an agreement (while the rest of the agreement may be in physical or other electronic form), South African law allows for it to function as one agreement.

Contractual capacity – automated transactions: section 20 of the ECTA sets out the requirements when an electronic agent performs some of the actions that are required by law for an agreement to form (for example, accepting an offer).

Electronic agent is defined widely enough to include the use of distributed ledger technology and smart contracts. It allows for a situation where all the parties to a contract are using an electronic agent.

A party that chooses to use an electronic agent to form an agreement is presumed to be bound by the terms of that agreement (irrespective of whether a person reviewed the actions of the electronic agent or the terms of the agreement). However, if the terms are not capable of being reviewed by a natural person prior to the agreement forming, a party interacting with an electronic agent is not bound by the terms of this agreement.

This means that the option to review the terms needs to be available to a natural person before conclusion of a contract. If a party elects not to review the terms, that party will be bound by the terms through the electronic agent.

There are a few requirements that need to be met when a natural person interacts directly with an electronic agent and makes a material error (this may be unlikely in a smart contract scenario, as all parties should normally be participating through electronic agents rather than as natural persons). No agreement is formed if a natural person made a material error and:

  • the natural person did not have an opportunity to prevent or correct an error 98 “Electronic agent” is defined as a computer program or an electronic or other automated means used independently to initiate an action or respond to data messages or performances in whole or in part, in automated transactions.
  • the natural person notifies the other person of the error as soon as practicable after that person has learned of it
  • the natural person takes reasonable steps to return performance or destroy performance, if instructed to do so
  • the natural person has not used or received any material benefit or value from any performance received from the other person.

If smart contracts are encoded in a manner that allows for natural persons to interact with the technology, these opportunities to correct a material error made by the natural person will need to be catered for in order for the contract to become legally binding under South African law.

Formalities – “signed and in writing”: a South African court decision, Spring Forest Trading v Ecowash, potentially allows contracting parties to sign their electronic contracts by way of a data message (which is wide enough to include emails and other communication platforms such as WhatsApp and social media) by typing their name at the end of a message.

In the case, the contract was subject to a nonvariation clause stating that no variation or consensual cancellation would be valid unless reduced to writing and signed by both parties. An email signed “Greg” was held to be a signed document. In this case, a person’s name at the end of an email satisfied these requirements. It might similarly be easy for a smart contract to meet these ordinary electronic signature requirements too.

South African law lessons for smart contracts: ECTA provides some welcome clarity for the likely legal status of smart contracts under South African law. The involvement of a natural person in the contracting process does of course complicate matters under the Act and would need to be factored into a smart contract deployment involving South Africa.


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