Smart legal contracts and common law
Existing law in England and Wales may apply to legal smart contracts.
The Law Commission has confirmed that the law as it stands can accommodate such contracts, without the need for statutory law reform. The Commission stated that, in certain circumstances, the progressive development of the common law is all that is needed to facilitate the use of smart legal contracts within the existing legal framework.
The Commission’s conclusion complements that of the UK Jurisdiction Taskforce’s legal statement on crypto-assets and smart contracts. This statement concluded that the current legal framework is robust and adaptable enough to support the use of smart legal contracts.
The Law Commission is asking the market to anticipate and respond to potential uncertainties in the legal treatment of legal smart contracts by encouraging parties to include specific terms that would address the issues in question. Examples include clauses allocating risk based on code performance and clearly stating the relationship between any natural language and the components being coded.
As smart legal contracts become more common, the Commission expects the market to develop established practices and model clauses that parties can use to simplify the process of negotiating and drafting these contracts.
Lord Wolfson of Tredegar QC, Parliamentary Under-Secretary of State, Ministry of Justice, hailed the Law Commission’s findings for providing “this very important legal certainty” for those seeking to use smart legal contracts, which he sees as essential to ensuring the law supports emerging technologies.
Conflict of laws
In analyzing how existing legal principles could be applied to smart legal contracts, the Law Commission identified conflict of laws – the area of law that determines where disputes should be adjudicated and the law applicable to those disputes – as an area that requires additional work.
The Commission placed particular emphasis on the challenges of applying existing conflict of laws rules to smart legal contracts and related technologies (including distributed ledger technology) which may give rise to multiple connecting factors in various jurisdictions. This difficulty is linked to the need to attribute real and physical locations to digital assets and actions involving them, which is one of the greatest challenges that national and international law must meet, if it is to relate to the areas of emerging technologies such as smart legal contracts.
For this reason, the Law Commission has agreed with the UK government that it will assess rules regarding conflict of laws in relation to emerging technologies – such as smart legal contracts and digital assets – and consider whether there are a need for reform. The Law Commission aims to begin work on this by the middle of next year.
Professor Sarah Green, Statutory Commissioner of the Commercial and Common Law team, acknowledged that smart legal contracts have the potential to revolutionize the conduct of business and can increase the efficiency and transparency of transactions.
The Law Commission’s analysis of smart legal contracts has shown how flexible the common law can be when it comes to adapting to such technological developments. His analysis can also be seen as a boost to business and innovation in England and Wales, where such contracts are expected to play an increasing role in the near future.