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Smart legal contracts: The common law can handle them

Our current legal framework is able to facilitate and support the use of “smart legal contracts” without the need for legislative intervention.

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Published 4 January 2022

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In a recent report, the Law Commission of England & Wales (Commission) has concluded that our current legal framework is able to facilitate and support the use of “smart legal contracts” without the need for legislative intervention.

Distributed ledger technology (like blockchain) makes it possible to automate transactions, thus increasing efficiency and certainty for the counterparties. In a smart legal contract, each party’s contractual obligations are defined within and/or performed automatically by a computer program.

These agreements tend to follow a conditional logic with specific and objective inputs: if “event X” occurs, then “step Y” is executed, and so on. In this manner, smart legal contracts reduce the need for the contracting parties to trust each other, because the trust resides within in the computer code itself.

Smart contracts can be used to perform transactions on cryptocurrency exchanges, pay employees based on certain conditions being met, or facilitate the safe exchange of large volumes of data.

Their varying degrees of complexity and automation can take smart contracts outside the realm of legal familiarity, particularly in the context of contract formation, interpretation and remedies. However, the Commission considers that our common law flexibility “ensures that the jurisdiction of England and Wales will be an ideal platform for business and innovation”.

Although the Commission noted that incremental and principled development of the common law may be required in specific contexts, it is confident that the current legal principles can apply to smart legal contracts in much the same way as they do to traditional agreements.

A summary of the Commission’s report can be found here. This helpfully identifies particular issues that parties may wish to address in smart legal contracts in order to promote legal certainty.

 

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Shorter Reads

Smart legal contracts: The common law can handle them

Our current legal framework is able to facilitate and support the use of “smart legal contracts” without the need for legislative intervention.

Published 4 January 2022

Associated sectors / services

Authors

In a recent report, the Law Commission of England & Wales (Commission) has concluded that our current legal framework is able to facilitate and support the use of “smart legal contracts” without the need for legislative intervention.

Distributed ledger technology (like blockchain) makes it possible to automate transactions, thus increasing efficiency and certainty for the counterparties. In a smart legal contract, each party’s contractual obligations are defined within and/or performed automatically by a computer program.

These agreements tend to follow a conditional logic with specific and objective inputs: if “event X” occurs, then “step Y” is executed, and so on. In this manner, smart legal contracts reduce the need for the contracting parties to trust each other, because the trust resides within in the computer code itself.

Smart contracts can be used to perform transactions on cryptocurrency exchanges, pay employees based on certain conditions being met, or facilitate the safe exchange of large volumes of data.

Their varying degrees of complexity and automation can take smart contracts outside the realm of legal familiarity, particularly in the context of contract formation, interpretation and remedies. However, the Commission considers that our common law flexibility “ensures that the jurisdiction of England and Wales will be an ideal platform for business and innovation”.

Although the Commission noted that incremental and principled development of the common law may be required in specific contexts, it is confident that the current legal principles can apply to smart legal contracts in much the same way as they do to traditional agreements.

A summary of the Commission’s report can be found here. This helpfully identifies particular issues that parties may wish to address in smart legal contracts in order to promote legal certainty.

 

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