Law commission

The Law Commission confirms that the law of England and Wales can adapt to smart contracts | Shearman & Sterling LLP

The Law Commission concluded that existing legislation in England and Wales can accommodate smart contracts and that no legislative reform is required. It has published advice to the UK government and a separate summary of its findings on the subject. The Law Commission began its investigation into the ability of English law to accommodate both smart contracts and digital assets in September 2020. It issued a separate interim update on the Digital Assets Project, which sets out the status and timeline of the digital asset project. It plans to publish its consultation paper on digital assets in mid-2022 instead of late 2021, as originally proposed.

In a smart legal contract, some or all of the contractual obligations are performed automatically by a computer program and the contract is legally enforceable. The Law Commission’s investigations focused on contracts in which the contractual obligations were defined either in a combination of natural language and computer code or entirely in code. It drew conclusions in the following contractual areas:

  • Formation: Every contractual requirement of agreement, consideration, certainty, and intention to create legal relationships can, in theory, be established in a smart contract. However, the execution of smart contracts in the form of deeds is questionable according to the Law Commission. Smart contracts can satisfy the “in writing” aspect of performing the act, provided that any unnatural language elements are written in source code, but a lower level of code is probably not acceptable. Deeds are generally required for transferring real estate, where no counterparty is present and for certain powers of attorney. Witnessing a smart contract act can also be difficult unless the technology allows the witness to record on the smart contract that they observed the performance of the contract.
  • Interpretation: The principles of contractual interpretation can be applied to smart contracts even if they are written in code. It may be necessary to employ a coder to assist the court in interpreting what a “reasonable coder” would understand to mean a given coded term.
  • Remedies: The Law Commission has found that legal smart contracts can increase defective contract performance because the code can operate in ways not originally intended by the parties. Standard remedies were likely to be available for smart contracts, although adjustments may need to be made for some.
  • Consumers: The coded terms of a smart contract may not be intelligible to consumers, which could lead to a finding of unfairness in the event of a dispute. The Law Commission advises accompanying pre-contractual documentation that explains how coded clauses work.
  • Jurisdiction: The Law Commission advises parties to include a jurisdiction clause in their smart contracts and designate their choice of applicable law to mitigate uncertainties that might otherwise arise. The Commission will further consider the issues of determining the location of a digital asset and the location of certain actions on a distributed ledger in its conflict of laws work.

The Law Commission has also included a non-exhaustive list of issues that parties may wish to provide for in their smart contract.

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