What Is the Legal Position of Smart Legal Contracts?

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A smart contract is just another technology to emerge with the use of blockchain technology, but arguably will have the biggest impact in business. These are self-executing contracts that are executed based on the computer code used and built into the blockchain. Given this, smart contracts can be used to define and perform the obligations of a legally binding contract. Therefore, smart legal contracts can be defined as legally binding contracts in which some or whole of the contractual obligations are defined in and/ or performed automatically by a computer program. For instance, if “X” occurs, then execute stop “Y”. These types of contracts are increasingly being used in real estate transactions, banking and finance and insurance amongst other industries. 

In a paper published on 25 November 2021, the Law Commission concluded that the current legal framework in England and Wales can accommodate the use of smart legal contracts, without the need for further statutory law reform. This means that current contractual principles apply, for instance to do with interpretation or when a contract becomes void. The Law Commission does anticipate though that the problems with smart legal contracts will likely increase instances of defective performance as the code may execute contracts in such a way that the parties did not intend.  However, it was recognised that the common law will have to evolve to keep up with technological advancements and highlighted contractual interpretation as a particular area of concern in which precedent needs to be developed. 

Whilst smart legal contracts can fit within the current legal framework, they may not replace all types of contracts, and if used need special consideration. For instance, for a deed to be valid they must be witnessed and attested to. Fulfilling this formality may be difficult with smart legal contracts given the nature of smart legal contracts as computer code. Furthermore, in their paper the Law Commission recommends certain terms that parties should expressly outline in their smart legal contracts to overcome certain hurdles such as Jurisdiction, applicable law and allocation or risk in respect of errors or mistakes with the code performance. 

The use of smart legal contracts presents an opportunity to create greater transparency, trust and efficiency in doing business because of the blockchain technology that is utilised. However, contracts can become very complicated and as such caution needs to be taken if using smart legal contracts in these circumstances.

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