Financial Cryptography

Reinventing Contract

This article by Professor Burke, of the Riga Graduate School of Law, explains how the common law tradition creates a framework of contracts based on negotiation by equal parties, and tries to squeeze all agreement into its framework. Yet, form contracts do not squeeze so readily, and only the presence of legal fictions - ones fraught with potential for flaky rulings - can make these form contracts work under the regime of the classical negotiated contract.

Standard form contracts are those written by a vendor, for their clients, to create the terms and conditions for some product.

The difference is in the absence of negotiation, consideration of terms, and meeting of the minds. A form contract is presented, and there is no discussion as to terms. Indeed, Burke says, the counterparty, the customer, has no necessary appreciation of the terms, and not even any especial knowledge that there are terms to consider!

Thus, as an inescapable conclusion, there can be no meeting of the minds in a form contract. Yet, form contracts are totally legal, totally acceptable, and people travel to work every day on them: we derive huge economic benefit from them, from bus and airline tickets to dry cleaning stubs, from insurance contracts to software licences...

In fact, Burke proposes that form contracts are 99% of all contracts (albeit with recognition that there is no empirical study to back this up). Whereas 99% of the tradition of contract law is negotiated contracts. This is, to my layman's eye, a huge criticism of the state of the law, but we must drag ourselves back to the here and now.

Ricardian Contracts are Form Contracts. In this sense they are like airline tickets. The user acts according to a purchase of a product. The product is a payment, a transaction, and the product is "purchased" as a whole entity, including the terms and conditions that apply.

What the user does not do is negotiate the contract. The user of a Ricardo transaction doesn't enter into a bargain, nor examine the terms, nor suggest their own terms. They simply buy a product called a payment.

Indeed, in a form contract, as there is no meeting of the minds, there is no symbol to record that event - so, there is no "need" of signatures.

We've known for a long time that the digital signature of the Issuer was ... an act of some pretence, in the sense that it was completely overdone: the hash entanglement, the publication of the document, and original sales create far more of a record of the intent of the Issuer than any mathematical nonsense dressed up as a signature. But we have puzzled over the question of the user's intent.

Surely, goes classical contract logic, we needed the user's signature to record their intent and act of entering into the contract? No, it appears not, if Burke's critique is to be taken at face value. This is a form contract, and the usage of the product is as much as we can expect, and as much as we need.

This discovery doesn't solve every unanswered question about Ricardian Contracts, but it does shift emphasis away from trying to craft a user's signature as a legal symbol (a task of some contortion, if you know your digsig politics). In the general case, the Issuer of a Ricardian Contract needs a signature from the user no more than an auditorium owner needs a signature from members of the audience, as they walk in.

Both are still covered by terms and conditions of the contract for admittance. It may be that a signature is collected for entrance to a shareholders' meeting, as opposed to a concert, but that's a matter of content, not form.

Posted by iang at March 22, 2004 11:08 AM | TrackBack