25th November 2021
The Law Commission has reported today that, after a period of consultation, it has concluded that smart legal contracts are able to be accommodated within the existing framework of the laws of England and Wales without the need for wholesale statutory reform.
Questions on the topic had been raised as the application of blockchain technology became increasingly adopted. The concept of a smart contract – essentially a computer program that automatically executes without requiring further human input – existed prior to the recent rise of blockchain, however it was its combination with the distributed ledger technology that improved security significantly and prompted a rapid rise in use cases.
The Law Commission’s analysis specifically looked at smart legal contracts, being smart contracts that also meet the formality requirements of a contract at law (i.e. a legally binding contract in which some or all of the terms are recorded in or performed by a computer program deployed on a distributed ledger). Contracting parties are encouraged to anticipate and cater for potential uncertainties in the legal treatment of smart legal contracts by including express terms aimed at addressing them, for example clauses allocating risk in relation to the performance of the code, and setting out clearly the relationship between any natural language and coded components.
In a summary of its advice, the Law Commission was keen to stress that “flexibility of our common law ensures that the jurisdiction of England and Wales provides an ideal platform for business and innovation”.
Luke Jackson, a senior associate in the Technology & Digital Group, commented:
“As smart legal contracts mean that contracting parties only need to place trust in the code – rather than each other – to fulfil obligations, this technology has the potential to greatly improve efficiency, trust and certainty in business. The Law Commission’s announcement represents a very positive step forwards in the wholesale adoption of the concept as a genuine option for documenting binding agreements.”
Nick McQueen, a partner in the Commercial Dispute Resolution practice, noted the conflict of laws implications:
“One area which the Law Commission’s report identifies requires further work is ‘conflict of laws’, that is the area of law that determines where disputes should be resolved and the law applicable to those disputes, due to the issue of ascribing real-world locations to digital actions. This is an area that will need to be developed further. In the meantime, dealing with issues such as jurisdiction (where disputes will be resolved) and choice of law (which law will govern those disputes) expressly in contractual terms should reduce uncertainties and mitigate legal risk.”