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Tech & Sourcing @ Morgan Lewis

TECHNOLOGY, OUTSOURCING, AND COMMERCIAL TRANSACTIONS
NEWS FOR LAWYERS AND SOURCING PROFESSIONALS

The Law Commission of England and Wales has published a detailed analysis of the application of existing law to smart legal contracts and concluded that the current legal framework is able to facilitate and support the use of smart legal contracts. The Law Commission determined that the jurisdiction of England and Wales "provides an ideal platform for business and innovation, without the need for statutory law reform."

A “smart legal contract” is a legally binding contract “in which some or all of the contractual obligations are defined in and/or performed automatically by a computer program.” Contracting parties are increasingly using emerging technologies, such as distributed ledgers, to create smart legal contracts. According to the paper, smart legal contracts can perform transactions on cryptocurrency exchanges, facilitate games and the exchange of collectibles between participants on a distributed ledger, and run online gambling programs.

The Law Commission considered three different forms of smart legal contract for its paper. The first form is a natural language contract with automatic performance of contractual obligations by code. The second form is a hybrid contract, where some contractual obligations are written in natural language, and others are written in computer code. The third form is a contract recorded solely in code, meaning the contractual terms are written in, as well as performed by, computer code.

Under English law, there are several requirements to form a legally binding contract: agreement, consideration, certainty and completeness, intention to create legal relations, and compliance with formalities. The Law Commission found that smart legal contracts can meet all of these requirements. For example, the first requirement of “agreement” is met by extension of an offer and acceptance of such offer. As with traditional contracts, the expectation is that prior to the formation of most smart legal contracts, the contracting parties will engage in natural language negotiations or other communications, such as deploying and interacting with code. In any scenario, the words and conduct of the contracting parties will determine whether there was an offer and acceptance.

The Law Commission also considered the interpretation of smart legal contracts and concluded that an appropriate test for interpreting coded terms in smart legal contracts is what the Law Commission is calling the “reasonable coder” test. The “reasonable coder” test asks what a person with knowledge and understanding of code would understand the coded term to mean. This test focuses on what the contracting parties intended the code to do, rather than the computer’s actual performance of the code.

The Law Commission’s paper points out that there are still risks in using smart legal contracts—as there are with traditional contracts—but the current legal framework means that parties and developers have the flexibility to take steps to address those risks. For more information on smart legal contracts and how they fit into the current legal framework in England and Wales, read the Law Commission’s full paper or a summary of the paper.