No statutory reform needed for smart legal contracts – takeaways

Towards the end of 2021, the Law Commission published its Advice to Governments: Smart Contracts, concluding that England and Wales’ current legal framework can accommodate smart legal contracts without the need for statutory reform, although there are several potential issues which require further thought.

At 227 pages, the Advice is a bit of a beast although the summary of 33 pages distils it nicely. Here are our takeaways:

• In determining what a smart contract is, lack of human involvement is key. Essentially, a smart contract is a legally binding agreement in which some or all of the obligations are performed by a computer without any human intervention.
• The Advice considers the main contractual issues as they apply to smart contracts, such as contract formation, interpretation and remedies.
• There are varying degrees of smart contracts, i.e. contracts which have written (natural language) terms, hybrid contracts where some terms are written and some are in code and contracts where all terms are in code. The Advice points out that an “incremental development” of common law may be necessary in certain cases (more likely in contracts where all contractual terms are in code).
• Interpretation issues could arise, particularly where all terms are in code rather than written in natural language. As such, the Advice suggests that it may be worthwhile including key terms in writing and making clear which of the written and code terms should prevail if there is conflict. A non-exhaustive list of issues that parties should consider and possibly address in their smart contract is appended to the Advice.
• The expectation is that model clauses and standard terms will develop over time, in a similar way to certain clauses which are often seen in traditional contracts. However, caution is required here for both smart and traditional contracts – a standard term which parties are used to seeing can often remain in a contract without a full understanding of its meaning or whether it is actually required, and this can cause unforeseen difficulties at a later date.
• It is unlikely that a smart deed will be seen anytime soon. While the current legal framework should not cause problems for smart contracts, smart deeds are another matter. The Advice explains that the additional formalities required for a deed can’t be effected through a smart contract.
• Determining the correct jurisdiction of a smart contract could also be tricky, especially where all terms are in code. This will be further considered by the Law Commission in due course (later this year has been mentioned) and the suggestion made that a written jurisdiction clause should be included in any smart contract for certainty.

While the Law Commission is confident that smart contracts can be dealt with under our current contract laws, flexibility will be required, and changes will be afoot. For example, remedies such as injunctions may not lend themselves particularly well to a smart contract and parties may have to be content with a financial remedy. IT/legal specialists may also be needed to understand the terms of the contract, rather than an individual being able to read it for themselves to remind themselves of a point. Could this be the advent of dual-qualified solicitor-coders?

Naomi is a Partner in our Corporate team.

Disclaimer

This note reflects our opinion and views as of 17 February 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.