Series: Smart Contracts and the UCC #1

Smart contracts have the potential to touch a dizzying number of areas that have well-developed rules of law. Predictable and reliable commercial laws allow people to limit risk in business so that they may focus their energy on growth of the business itself. In the coming years, it will be the challenge of lawyers working in the blockchain community to illuminate the murky space between programming and law as the system evolves to encompass more and more users.

The United States faced analogous issues in the mid-twentieth century.  As humans began to transact business across territorial state lines, the widely varying state of contract law across the country made commerce cumbersome and limited the ability of large companies to plan and utilize resources across jurisdictions. At the same time, contract law was growing more complex by the day and the human lawyer’s job of anticipating and planning contingencies became difficult. The Uniform Commercial Code was the solution: a code that provided for predictability in transacting business. The UCC itself is not law and does not operate at the federal level — it’s a model that states copied and enacted in their own legislatures, tweaking the code where necessary.

The UCC and contract law emphasize that contracting parties are free to make any agreement they want, but complying with the UCC makes agreements more functional. The UCC acts as a gap filler and a best practices guide. For example, if a creditor goes through the steps outlined in UCC Article 9 (Secured Transactions) when repossessing and reselling collateral, the creditor is entitled to a judicial presumption of a commercially reasonable sale. Creditors can use different methods, but they won’t get the benefit of the presumption. They will have to prove entitlement to relief by fact and law, which can be expensive and unpredictable.

The UCC is divided into eleven articles dealing with specific areas of commerce like negotiable instruments, bank deposits, sales, investment securities, letters of credit and secured transactions. The UCC evolves with commercial needs. For example Article 2, Sales, forked into Article 2A, Leases, as leasing became an important part of business in the late twentieth century. Other uniform acts have evolved, like the Uniform Computer Information Transactions Act, which works in tandem with the UCC in jurisdictions that have adopted it and gives useful guidance for jurisdictions that have not.

The blockchain is a new legal jurisdiction devoted to commerce. It is evolving new rules of law quickly, but to the extent that “smart contracts” do not anticipate every contingency or entanglement with traditional law, the UCC and other laws will act as gap fillers. The UCC gives smart contracts programmers the guidance and support they need to transact business in the United States. The role for lawyers is helping programmers code smart contracts that anticipate as much commercial activity as the UCC so that smart contractors avoid entanglement with the traditional legal system.

This series will discuss each article of the UCC as it relates to cryptocurrency, smart contracts and the blockchain. Next: Article 9: Secured Transactions.