Shearman & Sterling LLP | FinReg | Law Commission Confirms England and Wales Law Can Accommodate Smart Contracts
Financial Regulatory Developments Focus
This links to the home page
Financial Regulatory Developments Focus
  • Law Commission Confirms England and Wales Law Can Accommodate Smart Contracts

    The Law Commission has concluded that the existing law of England and Wales can accommodate smart contracts and there is no need for legislative reform. It has published advice to the U.K. Government and a separate summary of its conclusions on the subject. The Law Commission commenced its investigation into the ability of English law to accommodate both smart contracts and digital assets in September 2020. It has published a separate interim update on the digital assets project, which sets out the status and timing of the digital assets project. It anticipates publishing its digital assets consultation paper in mid-2022 as opposed to end-2021, as originally proposed.

    Under a smart legal contract, some or all of the contractual obligations are performed automatically by a computer program and the contract is legally enforceable. The Law Commission's investigations focussed on contracts in which contractual obligations were defined either in a combination of natural language and computer code, or entirely in code. It drew conclusions in the following contractual areas:
    • Formation: each contractual requirement of agreement, consideration, certainty and intention to create legal relations can, in theory, be established in a smart contract. However, execution of smart contracts in the form of deeds is questionable in the Law Commission's view. Smart contracts may satisfy the "in writing" aspect of deed execution, provided any non-natural language element is written in source code, but a lower level of code is not likely to be acceptable. Deeds are generally needed to transfer real estate, where no consideration is present and for certain powers of attorney. Witnessing a smart contract deed may also be challenging unless the technology allows the witness to record on the smart contract that they have observed execution of the contract.
    • Interpretation: principles of contractual interpretation can be applied to smart contracts even if written in code. It may be necessary to employ a coder to assist the court in interpreting what a "reasonable coder" would understand a given coded term to mean.
    • Remedies: the Law Commission considered that smart legal contracts may increase defective performance of contracts, as code may perform in ways not originally foreseen by the parties. The standard remedies were likely to be available for smart contracts, although adjustments may need to be made for some.
    • Consumers: the coded terms of a smart contract may not be intelligible to consumers which could result in a finding of unfairness in the event of a dispute. The Law Commission advises accompanying pre-contractual literature which explains how the coded terms operate.
    • Jurisdiction: the Law Commission advises parties to include a jurisdiction clause in their smart contracts and to designate their choice of governing law in order to mitigate uncertainties which might otherwise arise. The Commission will consider further the issues of determining the location of a digital asset and the location of certain actions on a distributed ledger in its work on conflicts of law.

    The Law Commission has also included a non-exhaustive list of issues that parties may wish to provide for in their smart contract.

    Return to main website.