Insights Law Commission confirms that existing law of England and Wales can accommodate and apply to smart legal contracts without need for statutory law reform

The Law Commission notes that, in some contexts, an incremental development of the common law is all that is required to facilitate the use of smart legal contracts within the existing legal framework.

The Law Commission’s analysis demonstrates the flexibility of the common law to accommodate technological developments, particularly in the context of smart legal contracts. It confirms that the jurisdiction of England and Wales provides an ideal platform for business and innovation.

These findings build on the conclusions reached by the UK Jurisdiction Taskforce’s legal statement on cryptoassets and smart contracts from November 2019, which established that the current legal framework is sufficiently robust and adaptable to facilitate and support the use of smart legal contracts; a view now reinforced by the Law Commission’s advice.

The Law Commission also encourages the market to anticipate and cater for potential uncertainties in the legal treatment of smart legal contracts by encouraging parties to include express terms aimed at addressing them. Examples of such provisions include clauses allocating risk in relation to the performance of the code and setting out clearly the relationship between any natural language and coded components. In addition, as smart legal contracts become increasingly prevalent, the Commission anticipates that the market will develop established practices and model clauses that parties can use to simplify the process of negotiating and drafting their smart legal contracts.

However, in undertaking its analysis of the application of existing legal principles to smart legal contracts, the Law Commission identified the conflict of laws as an area where further work is required. The Commission’s analysis highlights, in particular, the difficulties inherent in applying existing conflict of law rules to smart legal contracts and associated technologies, including distributed ledger technology, which can give rise to multiple connecting factors across various jurisdictions.

The problem of digital location, i.e. the difficulty of ascribing real-world locations to digital actions and digital objects, is amongst the most significant challenges that private international law will have to overcome in relation to emerging technology, including smart legal contracts. In this regard, the Law Commission has agreed with the Government to undertake a project looking at the rules relating to conflict of laws as they apply to emerging technology, including smart legal contracts and digital assets, and considering whether reform is required. The Law Commission hopes to be able to begin work on the new conflict of laws project in mid-2022.

The Law Commission has also published a short update paper relating to its work on cryptoassets and other digital assets. The Commission’s digital assets project seeks to support and facilitate the development of digital assets, including cryptoassets, and to suggest law reform where it considers reform is necessary. The digital assets project will consider whether digital assets are capable of being the object of property rights, and the consequences of any such legal treatment. The short update paper explains that the Commission’s work will address different sub-categories of digital assets. It also explains that the Commission will consider whether certain digital assets might be most accurately categorised within a third category of property, distinct from the existing categories of tangible property and intangible property. To read the Law Commission’s press release in full and for links to the paper on smart contracts click here.