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Tue, 26 January 2021

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Law Commission seeks views on smart contracts

Law Commission

3 min read Partner content

The Law Commission has today launched a call for evidence to help ensure that the technology of smart contracts can thrive in England and Wales.

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.

The growing use of smart contract technology is expected to increase efficiency and certainty in business, and reduce the need for contracting parties to have to trust each other; instead the trust resides in the code.

However, there are questions about the circumstances in which a smart contract will be legally binding, how smart contracts are to be interpreted, how vitiating factors such as mistake can apply to smart contracts, and the remedies available where the smart contract does not perform as intended.

The responses to the call for evidence will inform the Law Commission’s scoping study on smart contracts, which will provide an accessible account of the current law and set out how it will, or may, apply to smart contracts. Our project is intended to inform public debate and seek a consensus about where reform may be needed to create an environment that encourages the use of this technology.

Professor Sarah Green, the Law Commissioner for Commercial and Common Law, said:

“Smart contracts promise to revolutionise the way we do business. However, there are lingering uncertainties about how English contract law applies to smart contracts. We believe there is a compelling case for reviewing the law in this area to ensure that the jurisdiction of England and Wales remains a competitive choice for businesses using this emerging technology.”

The call for evidence

To inform the scoping study, the Law Commission is asking for evidence and views on a range of issues relating to smart contracts, including:

  • The definition of smart contracts, how smart contracts are being or might be used, and the potential benefits and costs associated with the use of smart contracts.
  • The formation of smart contracts, including the use of distributed ledger technology to conclude agreements, the intention of the parties to enter into legal relations, and the ability to satisfy statutory “in writing” and “signature” requirements.
  • The interpretation of smart contracts, including how the coded terms of a smart contract are to be interpreted by the courts and the role of expert coders in the interpretation exercise.
  • The remedies that might be awarded where a smart contract is vitiated (that is, rendered defective for example due to mistake, misrepresentation, duress or undue influence), the code is incorrectly recorded or the code does not perform as the parties expected.
  • Consumer protection issues that might arise when non-code-literate parties enter into smart contracts, and how existing consumer protections might apply in the smart contracts context.
  • Jursidiction issues, including the factors which may determine whether the UK courts have jurisdiction in relation to a smart contract which does not contain a jurisdiction clause.

In the call for evidence we set out our current understanding of these issues and ask for stakeholders’ views and experiences. The responses to these questions are vital for informing the scoping study, which will identify the legal issues arising from the use of smart contracts and areas in which further work or reform may be required. The call for evidence is open until 31 March 2021. We aim to publish the scoping study in late 2021.

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