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Smart contracts and English law

Smart contracts and English law

Max Alexander-Jones

11/01/2022

Reading time: four minutes

The phrase ‘smart contract’ evokes futuristic images of autonomous robots conducting agreements with each other. In actuality, smart contracts are modelled on the basic concept of a digitalised entity automatically conducting a transaction on the behalf of contracting parties – much like the idea of a vending machine.

The beginnings of the smart contract find themselves in the early 1990s, taking root in the works of lawyer, computer scientist, and cryptographer Nick Szabo. He proposed smart contracts as simply being “a set of promises, specified in digital form'.

Today, with the development of technology, we find ourselves in a position where this ‘digital form’ is evolving to become artificial intelligence (AI), capable of orchestrating contracts independently, and minimising the need for human intervention. 

Before smart contracts can become an established legal concept, however, there are still many questions to be answered - most importantly, how must the codified law of contract evolve to accommodate and account for smart contracts?

A smart contract deviates from a traditional contract’s offer and acceptance in that one or both parties are machinery. There is no official definition of the term, but the fundamental criteria for a ‘smart’ contract is a ‘code’ that will self-execute on certain conditions being fulfilled by the other (human) party. 

To put an example to the terms at hand, we can return to the earlier vending machine idea. When an individual purchases something from a vending machine, they are offering consideration in exchange for an item.

While the machine is not a legal entity, this exchange is regarded as a valid purchase contract as the automated technology has replaced the need for a third party to give the exchange legitimacy. 

Smart contracts are considered the future contracts following the recent explosion of blockchain technology. A ‘blockchain’ is a series of time-stamped blocks of data that are linked together and encrypted against fraudulent modification.

The security offered by this technology makes it an attractive method of contracting that can be enforced without the need for human intervention, thereby reducing the potential for human error or moral hazards.

The current vision for smart contracts places them in instances where there is a need for greater efficiency and security. This includes the provision of financial services or the purchase of property, where an automated transfer of goods or services would be contingent upon the stipulations of the blockchain mechanism being fulfilled. 

Smart contracts certainly do have a place within the English legal system, and they are now recognised as binding legal agreements. Despite this, there is very little case law on the concept, with none falling under the jurisdiction of English law, leading to a vacuum in legal guidance.

The Law Commission has submitted a recent call for evidence to help ensure that smart contracts can thrive under English and Welsh Law.

One primary point of contention regarding the validity of smart contracts is the inability to classify machines as ‘legal entities’ under existing law. Moreover, if an autonomous machine is granted the ability to conduct activity on behalf of a legal human entity, where would liability be placed in the instance of a contractual breach?

It would be unjust to hold the human party liable, as they will have blindly consented to only machine-readable code - however, liability also could not be placed on the machine, as it is not classed as a legal entity under existing law.

In November 2019, the LawTech Delivery Panel (established by the government, Judiciary, and Law Society) sought to address these gaps through the publication of an official legal statement on ‘Cryptoassets and Smart Contracts’.

While this does not qualify as binding legal authority, it is the most legitimate advice on the matter and is used as guidance by commercial entities.

It concludes that, where the three key features of contract formation are present (ie, an agreement, consideration, and intention to create legal relations), the existing rules of English contract law should apply to smart contracts. 

On the whole, many gaps within contract law remain. When consideration is given to the increasing use of AI by law firms, smart contracts seem the natural next step.

However, there is no doubt that solidifying smart contracts within English law will require large scale changes to existing law or perhaps even the creation of entirely novel legal doctrines.

Regardless, the role of smart contracts within English law will only grow in the coming decades.