Law Commission's advice on smart legal contracts: can the laws of England and Wales cope with this emerging technology?
As the Law Commission put it, smart legal contracts are expected to revolutionise the way business is conducted. In light of this potential paradigm shift, the Law Commission was 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 significant uncertainties or gaps in the law.
Following a consultation between December 2020 and March 2021, the Law Commission published its advice to the UK Government on smart legal contracts on 25 November 2021. A cross-practice team of our lawyers provided responses to sections of the Law Commission's Call for Evidence earlier this year, and their analysis is cited in several places in the advice paper.
The advice concluded that the current legal framework in England and Wales is able to facilitate and support the use of smart legal contracts and that statutory reform is not currently required. Current legal principles can apply to smart legal contracts in much the same way as they do to traditional contracts, albeit with an incremental and principled development of the common law required in specific contexts. However, there are some traps for the unwary.
In this article, we consider the key features of the Law Commission’s advice on smart legal contracts.
Key features of the Law Commission's advice
For the purpose of the Law Commissions’ paper, a smart legal contract is defined as a legally binding contract in which some or all or the contractual obligations are defined in or performed by algorithmic code.
A smart legal contract may take one of the following forms: (i) written in natural language and performed by code; (ii) written solely in and performed by code; or (iii) a hybrid contract written in both natural language and in code, and performed by code.
In November 2019, the government-backed LawTech Delivery Panel’s UK Jurisdiction Taskforce stated that smart contracts can, in principle, give rise to binding legal obligations (discussed here). Taking this further, the Law Commission has now concluded that the ordinary rules of contract law in England and Wales can apply to smart legal contracts in much the same way they do to traditional contracts. Whilst there will be novel issues that may arise, there is sufficient flexibility in the common law of England and Wales to cater for these issues (albeit with the recognition that reform and / or regulatory intervention may be required in due course where the current legal framework does not suffice).
The advice focuses in particular on issues relating to contractual formation and interpretation, contractual remedies, and issues relating to determining applicable jurisdiction. These concepts should already be very familiar to legal practitioners, as they are key considerations to be borne in mind when considering entry into or performance of any contract. The advice considers how the current law in England and Wales relating to these concepts can be applied smart legal contracts.
The Law Commission also notes that there are certain considerations that may be required when entering into a smart legal contract which parties to a traditional contract need not consider.
With this in mind, the Law Commission has sought to assist parties to smart legal contracts by providing a list of the issues parties may wish to consider and/or provide for in their smart legal contracts. Specifically, these are issues that the Law Commission considers may lead to disputes if not properly considered early by parties entering to a smart legal contract. The issues include:
- the role of code within the smart legal contract, and in particular whether the code is intended both to define contractual obligations and perform them, or just perform them;
- the relationship between any natural language and code, and, in particular, where a term is expressed both in natural language and code which takes precedence in the event of a conflict;
- how risks are to be contractually allocated if, for example, there are inaccurate data inputs, bugs and coding errors, performance issues caused by external factors such as IT upgrades, or misunderstandings as to how the code will perform;
- the role of non-executable comments in the code and whether these should be considered to have the effect of contractual terms;
- whether to explain the workings of coded terms in natural language, and to make clear whether such language forms part of the contract, so that the parties' intentions regarding the proper performance of the code can be properly understood; and
- whether to include choice of court and choice of law clauses, by way of separate natural language agreement or comments in the code, so that there is an express choice should a dispute arise in relation to the smart legal contract.
Parties will need to give such issues careful thought before entry into a smart legal contract, and legal advisers will need to ensure they are familiar enough with these issues so that they can properly advise their clients.
The Law Commission’s advice builds upon the work of the UK Jurisdiction Taskforce and provides further comfort that the legal framework in England and Wales is able to facilitate and support the use of smart legal contracts without immediate statutory reform.
The advice echoes the sentiments of Sir Geoffrey Vos, Master of the Rolls, in his lecture 'Cryptoassets as property: how can English law boost the confidence of would-be parties to smart legal contracts?' that “English law is in a good position to provide the necessary legal infrastructure to facilitate smart legal contracts if, but only if, we try to keep any necessary reforms simple.”
However, although the advice confirms English law can cope with smart legal contracts, as ever with legal concepts and documents the devil is in the detail, or perhaps more aptly put in this case, the devil is in the application.