Smart Legal Contracts: The Law Commission Gives the Green Light

By Christelle Sim

man writing in office
Source: https://www.walkermorris.co.uk/publications/english-law-can-accommodate-smart-legal-contracts/

On 25 November, the Law Commission confirmed the accommodation of smart legal contracts (SLCs) within the existing legal framework in England and Wales, without the need for statutory law reform.


What are SLCs?

SLC is a legally binding digital agreement in which some or all of the contractual terms are intended to perform as algorithmic instructions. The Law Commission considers three general forms of SLC - natural language contract (language of a traditional contract) with automatic performance by a computer code, hybrid contract with some contractual obligations defined in natural language and others defined in the code, and contract recorded solely in code.[1]


Unique features of SLCs:

SLCs operate on a conditional logic - if X occurs, then Y is executed. An analogy to a vending machine can be made - only if the buyer has fulfilled the conditions of the ‘contract’ (inserting the said amount into the vending machine and selecting the item), then the machine will automatically dispense the item, completing the transaction. This will reduce the need for a middleman’s involvement in a transaction between two parties. The nature of blockchain technology also makes SLCs immutable, preventing cases of fraud and tampering of transactions. Under SLCs, the transactions are stored safely and accurately using cryptography, and are only accessible through cryptographic signatures. Upon verification, the transactions are permanently written to the blockchain and cannot be amended or deleted. SLCs can be used to manage supply chains, check and transfer payments for insurance claims, as well as bookkeeping in financial services.


Legal Impact of SLCs:


Offer and Acceptance?


While the publication of SLCs may amount to an offer made and accepted, it might pose challenges in identifying who made the offer and who accepted it, as well as when the acceptance took place. For instance, acceptance could occur when the final party to the transaction approved it by entering its private key; or when the transaction is accepted through the consensus algorithms and is published to the blockchain as part of a valid block.


Intention to create legal relations?


Although there is a presumption of intention in commercial contexts, it might be difficult to establish any intention to create legally binding relations in standalone SLCs. The issue is compounded SLCs are unlikely to be drafted directly by lawyers.


[1] Law Commission, ‘The Law of England and Wales can Accommodate Smart Legal Contracts, concludes Law Commission’ <https://www.lawcom.gov.uk/the-law-of-england-and-wales-can-accommodate-smart-legal-contracts-concludes-law-commission/> accessed 28 November 2021