Algorithmic Contracts

Abstract

Algorithmic contracts are contracts in which an algorithm determines a party’s obligations. Some contracts are algorithmic because the parties used algorithms as negotiators before contract formation, choosing which terms to offer or accept. Other contracts are algorithmic because the parties agree that an algorithm to be run at some time after the contract is formed will serve as a gap-filler. Such agreements are already common in high speed trading of financial products and will soon spread to other contexts. However, contract law doctrine does not currently have a coherent approach to describing the creation and enforcement of algorithmic contracts. This Article fills this significant gap in doctrinal law and legal literature, providing a definition and novel taxonomy of algorithmic contracts.

The algorithmic contracts that present the most significant problems for contract law are those that involve “black box” algorithmic agents, whose decision-making is not functionally understandable ex ante – or sometimes even not human-intelligible at all. There is only a tenuous case for their enforceability under currently accepted approaches to contract law. The Uniform Electronic Transactions Act (UETA) was written and widely adopted nearly twenty years ago to make sure that contracts made electronically using basic automation techniques would be recognized as enforceable. However, the language of the UETA may be read to treat all putative contracts made with algorithms as properly formed, simply because they happen to be electronic. Unintended consequences of this approach include opportunities for fraud, market manipulation, and a general lack of algorithmic accountability.

This Article’s approach looks to the common law of agency for inspiration. Some algorithms commonly used in contract formation have been delegated a level of responsibility that justifies the use of agency principles. Algorithms should be considered constructive agents for the purpose of contract formation. The company consenting to the contract can be said to have authorized or ratified the contract formed on its behalf by the algorithm. This approach explains easy cases while also showing why algorithmic contracts, even many black box algorithmic contracts, are enforceable. Furthermore, establishing a doctrinally robust connection between the actions of the algorithm and the intent of the contracting party promotes algorithmic accountability.  

Keywords: contracts, private law, internet law, algorithms, bitcoin, ethereum, restitution, quasi-contract, commerical law