USA: Can Smart Contracts be Nullified?

Current U.S. contract law varies state to state. However, 45 of the U.S. States have approved the Uniform Electronic Transactions Act, which applies widely across the U.S.

Uniform Electronic Transactions Act (UETA)

The Uniform Electronic Transactions Act (UETA), which was adopted on a state-by-state basis, recognizes the validity of electronic signatures and contracts under state laws. It allows for contracts to be formed by automated transactions, stating that “A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.” Section 10 of the UETA is worth reading in full on this issue. It provides the effects of changes or errors on electronic contracts, which probably also apply to smart contracts. It states that “If a change or error in an electronic record occurs in a transmission between parties to a transaction, the following rules apply:

  • If the parties have agreed to use a security procedure to detect changes or errors and one party has conformed to the procedure, but the other party has not, and the nonconforming party would have detected the change or error had that party also conformed, the conforming party may avoid the effect of the changed or erroneous electronic record
  • In an automated transaction involving an individual, the individual may avoid the effect of an electronic record that resulted from an error made by the individual in dealing with the electronic agent of another person if the electronic agent did not provide an opportunity for the prevention or correction of the error and, at the time the individual learns of the error, the individual:
  • promptly notifies the other person of the error and that the individual did not intend to be bound by the electronic record received by the other person;
  • takes reasonable steps, including steps that conform to the other person’s reasonable instructions, to return to the other person or, if instructed by the other person, to destroy the consideration received, if any, as a result of the erroneous electronic record; and has not used or received any benefit or value from the consideration, if any, received from the other person”
  • If neither of the above clauses apply, then other law, including the law of mistake applies.

According to the commentary, “The section covers both changes and errors. For example, if Buyer sends a message to Seller ordering 100 widgets, but Buyer’s information processing system changes the order to 1000 widgets, a “change” has occurred between what Buyer transmitted and what Seller received. If on the other hand, Buyer typed in 1000 intending to order only 100, but sent the message before noting the mistake, an error would have occurred which would also be covered by this section.”

The language indicates that even if the blockchain is immutable, the counterparties can “avoid the effect” of a transaction due to error or mistake. Usually the means by which this happens is restitution, or other details that would be proscribed by the law of mistake in U.S. contract law.

[Notes] Arizona - “HB 2417, in pertinent part, clarifies that electronic records, electronic signatures and smart contract terms secured through blockchain technology and governed under UCC Articles 2, 2A and 7 will be considered to be in an electronic form and to be an electronic signature under AETA.”


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