Smart Legal Contracts and Common Law

Syed Rahman of Rahman Ravelli details the Law Commission’s analysis of smart legal contracts

The existing law in England and Wales can apply to smart legal contracts.

The Law Commission has confirmed that the law as it stands can accommodate such contracts, with no need for statutory law reform. The Commission has said that, in some circumstances, gradual 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 reached by the UK Jurisdiction Taskforce’s legal statement on cryptoassets and smart contracts. That statement concluded that the current legal framework is robust and adaptable enough to support the use of smart legal contracts.

Uncertainties

The Law Commission is asking the market to foresee and respond to possible uncertainties in the legal treatment of smart legal contracts by encouraging parties to include specific terms that would address the issues in question. Examples include clauses allocating risk in relation to the performance of the code and setting out clearly the relationship between any natural language and coded components. 

As smart legal contracts become increasingly 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 such contracts.

Lord  Wolfson of Tredegar QC, Parliamentary Under-Secretary of State, Ministry of Justice, has welcomed the Law Commission’s conclusions for providing “that all-important legal certainty’’ for those seeking to use smart legal contracts, which he sees as essential for ensuring the law supports emerging technologies.

Conflict of Laws

In analysing 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 further work. 

The Commission placed particular emphasis on the challenges involved in applying existing conflict of law rules to smart legal contracts and associated technologies (including distributed ledger technology) that can give rise to multiple connecting factors across various jurisdictions. This difficulty relates to the need to attribute real, physical locations to digital assets and actions involving them, which  is one of the biggest challenges that national and international law has to address, if it is to relate to in the areas  of emerging technology such as smart legal contracts.

Due to this, The Law Commission has agreed with the UK government that it will assess the rules regarding conflict of laws as they relate to emerging technology – such as smart legal contracts and digital assets - and examine whether there is a need for reform. The Law Commission aims to begin work on this by the middle of next year.

Conclusion

Professor Sarah Green, the Law Commissioner for the Commercial and Common Law Team, has acknowledged that smart legal contracts have the potential to revolutionise how business is conducted, and may increase transaction efficiency and transparency.

The Law Commission’s analysis of legal smart contracts has shown just how flexible the common law can be when it comes to accommodating such technological developments. Its analysis can also be viewed as a boost for business and innovation in England and Wales, where such contracts look set to play an increasing role in the near future.