What Are Ricardian Contracts and How Will EOS Enable Them?

In this article we're gonna cover the basis about Ricardian Contracts. And nothing beats the basics like explaining what it is we're talking about. So...

What is a Ricardian Contract?

In brief, a ricardian contract is a method to register a written contract into a machine-readable contract. This creates a single agreement that presents two different forms: one form being human-readable as a plain legal document (such as an agreement drafted by a lawyer) and another form that is legible by computer programs.

The written form of a ricardian contract is hashed into a machine-readable format through the use of cryptography. The model for the ricardian contract was created by Ian Grigg, a financial cryptographer. Here is a model of how ricardian contracts work:

Image © Ian Grigg

The use cases for ricardian contracts are very broad and thus far we have only seen the tip of the iceberg. In theory, ricardian contracts can be used for any type of agreement, ranging from a simple lease agreement to more complex legal documents.

The use of ricardian contracts could decrease transaction costs and promote machine automation of legal agreements, including by merging them with smart contracts, as we will explain below. Ricardian contracts are also important because they have a tangible written form, as well as a machine-readable form.

As blockchain adoption increases, written agreements may give comfort to users or investors with little or no coding knowledge.

Are Ricardian Contracts legally binding?

Ricardian contracts are written in legal prose, as a paper document. Only then will they be hashed into a machine-readable document. Because ricardian contracts are written agreements, they are equally enforceable, so long as they comply with general rules of contract law.

As an example, just like with any other contract, a ricardian contract signed by a 5-year old would not be enforceable in most cases, because it does not comply with certain legal requirements (in this case, legal capacity to enter into a contract). Absent this type of defect in the formation and execution of the contract, ricardian contracts present the features necessary to ensure its validity and enforceability.

Although ricardian contracts are a new feature and there is a scarce number of precedents on the issue, certain courts have enforced and validated ricardian contracts. Thus far, two landmark cases named DigiGold.NET Ltd. v. Systemics, Inc. have been held in the Anguilla Supreme Court (in 2001) and the American Arbitration Association (in 2002).

In both cases, the ricardian contracts under dispute were not challenged and the court and arbitration enforced their terms without hesitation.

It is still early to know exactly how courts throughout the world will interpret and enforce the provisions of ricardian contracts, but the issue of the enforceability of such contracts seems to be somewhat resolved: courts will tend to look at and enforce the ricardian contract’s human-readable form as they would do to any other written agreement.

How are Ricardian Contracts different than smart contracts?

Smart contracts are a digital agreement that can be executed automatically by a software or hardware. Similar to a vending machine, a preprogrammed smart contract can establish a certain output (“release a can of soda”) if given a certain input (“put $2.00 in the machine and press the B2 button”).

Ricardian contracts, on the other hand, serve a different purpose. They simply mirror a written agreement into the world of code through the use of cryptography, thus transforming a “regular” legal prose agreement into a machine-readable contract.

One of the main underlying functionalities of ricardian contracts is that their legal form may address issues that smart contracts would not be able to. Even though smart contracts represent a great advancement in contract law, there is still a general belief that not everything can be automated through a smart contract.

This is the case, for example, of unforeseeable or force majeure issues that may arise during the execution of a smart contract (e.g. The DAO hack). Because “legalese” usually resorts to vague and general language, lawyers are able to address issues that an automated smart contracts would not be able, although there is no legal certainty as to the end result of the output.

As an example, a written agreement drafted by a lawyer could address The DAO hack or other unforeseeable event as follows: “In the event of any unforeseeable event, an arbitrator will decide in an equitable and fair manner to protect the interest of the investors”.

As you probably noted, there is no legal certainty as to what the arbitrator would decide, but at least the contract sets out a standard of action if a certain thing happens.

Because smart and ricardian contracts play different roles, it is expected that there will be an increasing use of both types of contracts combined together in hybrid forms.

Projects Implementing Ricardian Contracts

You can find a list of some projects that currently implement ricardian contracts here.

Ricardian Contracts and EOS

One of the main advantages of EOS is that it aims to foster mainstream adoption of the distributed ledger technology. To achieve that purpose, it was recognized early that a bridge between the real and the crypto worlds had to be created. The technical language and complexities of most protocols is still a major barrier to mainstream adoption.

This is where many believe ricardian contracts could be a great resource to power contracts on the EOS platform. Contracts will play a major role in the EOS ecosystem, ranging from the establishment of an EOS Constitution, which will set forth the main principles of the network and the rights of its users, to smaller contracts negotiated between users.

Ian Grigg, the creator of ricardian contracts and a partner at block.one, has been a great proponent of EOS and its advantages. He is also a great believer in the synergies between EOS and ricardian contracts, including proposing that the EOS constitution be written in ricardian form.

It is yet unknown exactly how and which of these implementations will take place, but it looks like EOS has great plans for ricardian contracts. Further, the implementation of ricardian contracts on a large scale by EOS could also foster the utilization of this technology in the blockchain space, including through a hybrid use with smart contracts.

This post was created by Luis Brecci, a legal advisor for EOS Argentina. If you have any questions or comments about it, feel free to e-mail Luis at [email protected] or EOS Argentina at [email protected].

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