Ricardian Contract

The Ricardian contract is a method of recording a document as a contract at law, and linking it securely to other systems such as accounting for the contract as an issuance of value. It is robust through use of identification by Cryptographic hash function, transparent through use of readable text for legal prose and efficient through markup language to extract essential information.

A Ricardian contract places the defining elements of a legal agreement in a format that can be expressed and executed in software. The key is to make the format both machine readable such that they can easily be extracted for computational purposes, and readable as an ordinary prose document such that lawyers and contracting parties may read the essentials of the contract without undue inconvenience.

From a legal perspective, the use of markup language embedded within a mostly legal prose document leads to reduced transaction costs, faster dispute resolution, better enforceability and enhanced transparency. From a computing perspective, the Ricardian Contract is a software design pattern to digitise paper documents and have them participate within financial transactions such as payments without losing any of the richness of the contracting tradition. Publication of the content and reference to that content by the unique cryptographic message digest eliminates frauds based on multiple presentations.

The method arises out of the work of Ian Grigg completed in the mid 1990s in contributions to Ricardo, a system of assets transfers that was built in 1995-1996 by Systemics and included the pattern. The system and the design pattern was named after David Ricardo in honour of his seminal contribution to international trade theory.

"A Ricardian Contract can be defined as a single document that is a) a contract offered by an issuer to holders, b) for a valuable right held by holders, and managed by the issuer, c) easily readable by people (like a contract on paper), d) readable by programs (parsable like a database), e) digitally signed, f) carrying the keys and server information, and g) allied with a unique and secure identifier."

The Ricardian contract separates the agreement of parties across time and domain. On the left of the "Bowtie" representation, the negotiation and formation of a legally binding contract leads to a single parent document that defines all of the intent of that agreement. On the right, the performance of that agreement might involve many transactions to be accounted for, logically separated from the meaning of the issue. The ‘join’ between the legal world and the accounting world is formed by the hash - each transaction locks in the terms and conditions of the precise deal of the parties by including the hash of the contract in every relevant transaction record, yet the operation of the transactions and the issuance of the contract are cleanly separated and thus perverse incentives are eliminated.

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