The law of England and Wales can accommodate smart legal contracts, concludes Law Commission
The Law Commission has today confirmed that the existing law of England and Wales is able to accommodate and apply to smart legal contracts, without the need for statutory law reform.
The Law Commission notes that, in some contexts, an incremental development of the common law is all that is required to facilitate the use of smart legal contracts within the existing legal framework.
The Law Commission’s analysis demonstrates the flexibility of the common law to accommodate technological developments, particularly in the context of smart legal contracts. It confirms that the jurisdiction of England and Wales provides an ideal platform for business and innovation.
These findings build on the conclusions reached by the UK Jurisdiction Taskforce’s legal statement on cryptoassets and smart contracts. The legal statement established that the current legal framework is sufficiently robust and adaptable so as to facilitate and support the use of smart legal contracts; a view reinforced by the Law Commission’s advice.
The Law Commission also encourages the market to anticipate and cater for potential uncertainties in the legal treatment of smart legal contracts by encouraging parties to include express terms aimed at addressing them. Examples of such provisions 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. In addition, as smart legal contracts become increasingly prevalent, the Commission anticipates that the market will develop established practices and model clauses that parties can use to simplify the process of negotiating and drafting their smart legal contracts.
Professor Sarah Green, the Law Commissioner for the Commercial and Common Law Team, said:
“Smart legal contracts could revolutionise the way we do business, particularly by increasing efficiency and transparency in transactions.
“We have concluded that the current legal framework is clearly able to facilitate and support the use of smart legal contracts; an important step in ensuring increased recognition and facilitation of these agreements.
“Our related work on digital assets and conflict of laws will further establish England and Wales as a global leader for technological innovations in the digital sphere.”
Lord (David) Wolfson of Tredegar QC, Parliamentary Under-Secretary of State, Ministry of Justice, said:
“I would like to thank the Law Commission for this important paper analysing the current law as it applies to smart legal contracts. We in Government are excited about the transformative potential of emerging technologies, including smart legal contracts. We want a world-leading legal services sector, and that means ensuring English law can accommodate the technologies of the future. The Law Commission’s findings provide that all-important legal certainty for those seeking to use smart legal contracts. I also want to thank the Commission for their update paper on digital assets, as well as to highlight their new project on conflict of laws – both are essential to ensure English Law supports emerging technologies”.
Other issues and related Law Commission work
Conflict of laws and emerging technology
In undertaking its analysis of the application of existing legal principles to smart legal contracts, the Law Commission identified conflict of laws – that is, the area of law that primarily determines where disputes should be adjudicated, and the law applicable to those disputes – as an area where further work is required. The Commission’s analysis highlights, in particular, the difficulties inherent in applying existing conflict of law rules to smart legal contracts and associated technologies, including distributed ledger technology, which can give rise to multiple connecting factors across various jurisdictions.
The problem of digital location – that is, the difficulty of ascribing real-world locations to digital actions and digital objects – is amongst the most significant challenges that private international law will have to overcome in relation to emerging technology, including smart legal contracts.
In this regard, the Law Commission has agreed with Government to undertake a project looking at the rules relating to conflict of laws as they apply to emerging technology, including smart legal contracts and digital assets, and considering whether reform is required. The Law Commissions hopes to be in a position to begin work on the new conflict of laws project in mid-2022.
Digital assets update
The Law Commission has also published a short update paper relating to its work on cryptoassets and other digital assets. The Commission’s digital assets project seeks to support and facilitate the development of digital assets, including cryptoassets, and to suggest law reform where it considers reform is necessary. The digital assets project will consider whether digital assets are capable of being the object of property rights, and the consequences of any such legal treatment. The short update paper explains that the Commission’s work will address different sub-categories of digital assets. It also explains that the Commission will consider whether certain digital assets might be most accurately categorised within a third category of property, distinct from the existing categories of tangible property (things in possession) and intangible property (things in action).