English law, how smart! English legal system ready to take on smart contract disputes without new legislation

The Law Commission has recently published advice to the Government concluding that English common law is sufficiently flexible to deal with issues arising from the use of smart contracts without the need for statutory law reform. This advice builds on, and was borne out of, the acknowledgement  from the UK Jurisdiction Taskforce in 2019 that smart contracts are capable of giving rise to binding legal obligations enforceable in accordance with their terms.

Smart contracts can be defined as legally binding contracts where some or all of the terms are defined in and/or performed automatically by a computer, typically on a blockchain.

Whilst smart contracts have been brought to the fore by facilitating transfers on decentralised cryptocurrency exchanges and in NFTs (non-fungible tokens, such as “Cryptoart”), they are also increasingly thought of as the route to the next potential revolution in the way we conduct business, promising an efficient, secure and transparent means of forming contracts.

The Law Commission’s advice is accompanied by a list of considerations for parties dealing with smart contracts, some of which are summarised below.

1. The form the smart contract will take (e.g. a natural language contract with automated performance or a contract solely in code) and whether this varies between individual obligations.
2. The role of the code in smart contracts (e.g. is the code intended both to define contractual obligations as well as to perform them, or only to perform them).
3. The potential conflict between natural language and coded terms, and which takes precedence.
4. The allocation of risk in relation to issues that may arise from smart contracts (e.g. coding errors and inaccurate data inputs).
5. The inclusion of a choice of court and choice of law clause in smart contracts, either in a separate agreement, or by way of comments in the code.

In addition to recent case law making clear that the English Courts are willing to go to great lengths to assist the victims of “crypto-fraud”, which we have previously reported on, the Law Commission’s paper is yet another indicator that the English Courts are well equipped to deal with disputes arising from smart contracts and crypto-assets using traditional legal principles.

As the ubiquity of smart contracts and cryptocurrencies grows, so will the number of disputes which arise from these emerging technologies, and the English legal system is ready and able to take on the challenge.