The Law Commission has published a call for evidence on smart contracts, “seeking views about, and evidence of, the ways in which smart contracts are being used, and the extent to which the existing law can accommodate them”. It may subsequently lead to proposals for law reform although, as the technology and use cases are developing there is a risk any proposals quickly become outdated, so the Law Commission is starting with the scoping study.
What is a smart contract?
For the purposes of the call for evidence, a smart contract is a legally binding contract in which some or all of the contractual obligations are recorded in or performed automatically by a computer program deployed on a distributed ledger. Examples of smart contracts in the real world could include automated insurance claims – if X event happens then Y payment is made. The Law Commission wants to see how smart contracts are being used.
We already have some indication of how English law accommodates smart contracts. In November 2019 the LawTech Delivery Panel’s UK Jurisdiction Taskforce (UKJT) published its Legal Statement on smart contracts (which we have written about previously). This concluded that a smart contract is capable of satisfying the requirements for valid creation of a contract. The UKJT’s 2019 legal statement is not binding in law. The Law Commission now builds on the UKJT's foundations, considering additional legal questions and asking for evidence.
What does the Law Commission’s call cover?
The call for evidence sets out the Law Commission’s current understanding of the law, asks questions that seek to refine this interpretation, and assesses the difficulties that may arise.
The Law Commission’s call covers the following categories:
- What is a smart contract?
- Effect on consumers
Certainty and uncertainty - identifying (un)novel issues
The Law Commission does not anticipate novel issues in some legal areas or in some circumstances of how smart contracts are written/coded (but is calling for evidence to test this view). For example, where the smart contract is written in natural language with automated performance by code, novel issues for interpretation are unlikely because the courts are used to determining the interpretation of natural language contracts. Some legal issues, such as certainty of contractual terms, are not expected to raise novel issues regardless of what form the smart contract takes.
However, the call for evidence also highlights areas where there are likely to be issues as smart contracts are adopted more widely. For each topic, the Law Commission has set out its current understanding of the law and practice, but not made suggestions. Here are a few:
- Interpretation. Should the court be concerned with what a computer or a reasonable person with knowledge of code would understand the code to mean?
- Remedies. Tying a contract to the blockchain makes amending a contract difficult or impossible. For traditional contracts the court can fall back on remedies like rectification when a written agreement does not reflect both the parties’ intentions (for example, if there has been an error in translation), or voiding the contract (due to a vitiating factor like undue influence). Will parties be denied remedies they may have chosen otherwise, and will new remedies be required?
- Jurisdiction. The Law Commission specifically notes that “smart contracts may pose certain unique challenges when seeking to identify the geographical location of performance … such as where the obligations under a smart contract are performed on a distributed ledger rather than involving any physical performance in the real world”.
The call for evidence closes on 31 March 2021 and the Law Commission would welcome responses from people using or considering using smart contracts, and coders and other technologists developing smart contracts.
This article was written by Andrew Wilson and Tom Whittaker.
These smart contracts are expected to increase efficiency, trust and certainty in business, and reduce the need for contracting parties to trust each other; the trust resides instead in the code.