Law commission

Law Commission advice on legal smart contracts: Can the laws of England and Wales cope with this emerging technology?

As the Law Commission said, smart legal contracts are set to revolutionize the way business is conducted. In light of this potential paradigm shift, the Law Commission has been asked to consider whether the existing legal framework in England and Wales can support the use of smart legal contracts and whether there are any uncertainties or gaps important in law.

Following consultation between December 2020 and March 2021, the Law Commission published its advice to the UK Government on legal smart contracts on 25 November 2021. An interdisciplinary team of our lawyers provided responses to sections of the appeal evidence from the Law Commission earlier this year, and their analysis is cited in several places in the opinion document.

The opinion concluded that the current legal framework in England and Wales is able to facilitate and support the use of smart legal contracts and that legislative reform is currently not required. Current legal principles can be applied to smart legal contracts in the same way as traditional contracts, but with a step-by-step development based on common law principles required in specific contexts. However, there are pitfalls for the unwary.

In this article, we take a look at the key features of the Law Commission’s guidance on smart legal contracts.

Key Features of the Law Commission Opinion

For the purposes of the Law Commissions paper, a legal smart contract is defined as a legally binding contract in which some or all of the contractual obligations are defined or performed by algorithmic code.

A legal smart contract can take any of the following forms: (i) written in natural language and executed by code; (ii) written only in code and executed by code; or (iii) a hybrid contract written in both natural language and code, and executed by code.

In November 2019, the government-backed LawTech Delivery Panel’s UK Jurisdiction Taskforce said that smart contracts can, in principle, give rise to binding legal obligations (see here). Going further, the Law Commission has now concluded that the ordinary rules of contract law in England and Wales can apply to legal smart contracts in the same way as to traditional contracts. Although new issues may arise, there is sufficient flexibility in the common law of England and Wales to respond to these issues (while acknowledging that reform and/or regulatory intervention may be needed in time wanted when the current legal framework is not sufficient).

The advice relates in particular to questions relating to the formation and interpretation of contracts, contractual remedies and questions relating to the determination of the applicable jurisdiction. These concepts should already be very familiar to legal practitioners, as they are key considerations to keep in mind when considering entering into or performing any contract. The guidance examines how current law in England and Wales relating to these concepts can be applied to legal smart contracts.

The Law Commission also notes that certain considerations may be required when entering into a smart legal contract that parties to a traditional contract do not need to take into account.

With this in mind, the Law Commission has sought to assist parties to legal smart contracts by providing a list of issues that parties may wish to consider and/or provide for in their legal smart contracts. Specifically, these are issues that the Law Commission says can lead to disputes if not properly considered from the outset by the parties entering into a legal smart contract. Problems include:

  1. the role of code in the legal smart contract, and in particular whether the code is intended both to define contractual obligations and to perform them, or simply to perform them;
  2. the relationship between any natural language and code, and, in particular, where a term is expressed in both natural language and code which prevails in the event of a conflict;
  3. how the risks should be contractually allocated if, for example, there are inaccurate data entries, bugs and coding errors, performance issues caused by external factors such as IT upgrades or misunderstandings as to how the code will work;
  4. the role of non-executable comments in the code and whether these should be considered to have the effect of contractual terms;
  5. whether it is necessary to explain the operation of the terms coded in natural language and to specify whether this language is part of the contract, so that the intentions of the parties concerning the proper execution of the code can be correctly understood; and
  6. whether to include choice of court and choice of law clauses, through a separate natural language agreement or comments in the code, so that there is an express choice in the event of a dispute regarding the smart legal contract.

Parties will need to think carefully about these issues before entering into a smart legal contract, and legal advisors will need to ensure that they know enough about these issues to be able to properly advise their clients.

Conclusion

The Law Commission’s advice builds on the work of the UK Jurisdiction Taskforce and provides further reassurance that the legal framework in England and Wales is able to facilitate and support the use of smart legal contracts without reform. immediate legislation.

The advice echoes the sentiments of Sir Geoffrey Vos, Master of the Rolls, in his lecture “Crypto-assets as property: how English law can build trust among potential parties to smart legal contracts?” this “English law is well placed to provide the legal infrastructure necessary to facilitate smart legal contracts if, but only if, we try to keep the necessary reforms simple.

However, while the advice confirms that English law can cope with smart legal contracts, as always with legal concepts and documents, the devil is in the details, or perhaps more aptly in this case the devil is in the ‘application.