1. What is the Legal Commission document on smart legal contracts?
On November 25, 2021, the Law Commission released its opinion to the UK government on smart legal contracts (the “Paper“) (see here). Among other things, the paper examines how English law applies to smart legal contracts, and identifies particular areas of uncertainty and where reform may be needed. The paper builds on work reports conducted by the UK Jurisdiction Taskforce (see our briefing note here).
2. What is a smart legal contract?
A smart legal contract is a legally binding contract, in which some or all of the obligations are recorded and / or executed automatically by a computer program. The key feature here is automaticity – that is, performance (at least in part) is rendered automatically, without human intervention.
There are three forms that a smart legal contract can take, depending on the role played by the code: (i) a natural language contract with automated execution by code; (ii) a hybrid contract; or (iii) a single code contract.
Smart legal contracts are often (but not always) deployed on distributed ledger technology, such as blockchain. They are now used in many industries including insurance, finance, decentralized finance, real estate, supply chain and intellectual property.
3. Is legal reform needed?
The Law Commission confirms that “the current legal framework is clearly able to facilitate and support the use of smart legal contracts”. In particular, it highlights the flexibility of English common law as an advantage in technological development, providing “an ideal platform for business and innovation, without the need to reform statutory law” . At the same time, the Law Commission also recognizes that progressive and principled development of the common law may be necessary in areas such as contractual interpretation. Agrees with previous comments of the UK Jurisdiction Task Force that “it is not necessary to declare smart contracts as a special category of contracts to which the normal rules of interpretation are not applied” (see here at ), the Law Commission concludes that, when interpreting coded terms, the appropriate legal test is “what a person knowing and understanding the code would understand the coded term to mean” (c.
4. Are there any problem areas?
Deeds and private international law are two areas where the Law Commission considers that further work may be needed to support the use of smart legal contract technology. Since acts have various formal requirements (for example, they must be attested and attested), the Law Commission is not convinced that, as things stand, hybrid or only coded contracts can be used to create an act. Separately, difficulties may arise in determining jurisdiction and applicable law for certain smart legal contracts, especially where smart legal contracts are one-sided and only coded, or formed by autonomous interaction of computer programs. While these difficulties are not insurmountable, express choice of law and jurisdiction clauses are therefore considered desirable. The issue of digital location (that is, the need to assign real-world locations to digital assets and actions that “take place” on a distributed ledger) is also a significant challenge. The Law Commission said it would consider this issue as part of its future project on conflict of laws in the context of emerging technologies.
5. What should the parties do?
As smart legal contracts become more mainstream, the Law Commission predicts that the market will develop established practices and model contracts that parties can use when negotiating and drafting their smart legal contracts. To alleviate uncertainty and reduce the scope of disputes, parties are encouraged to include express terms in their smart legal contracts, such as choice of law and jurisdiction clauses. Annex 3 of the document usefully includes a non-exhaustive list of issues that parties may wish to address in their smart legal contracts in order to promote party security and autonomy.