The Law Commission recently published an informative paper on the subject of smart legal contracts, which was contributed to by many industry experts, including Page & Page. The paper discusses the concept of a smart legal contract, which is defined as a legally binding agreement in which one or more contractual obligations are defined and/or executed by a computer program. The Commission further breaks this down into three categories: contracts that use natural language and have an automated element (such as online auctions), contracts that are completely in code (such as the automatic trading of cryptocurrencies), and hybrid contracts that use both natural language and code.
The paper acknowledges that smart legal contracts are currently not well-suited for concepts that require human judgement, such as provisions that require discretion or acting reasonably. Instead, their potential lies in their ability to execute tasks based on "if x, then y" logic. For example, "if the weather according to the Met Office shows there is >0.5mm per hour of rainfall at Alexandra Park for >2 hours between 9am and 5pm in July-August AND the day is a weekend or bank holiday, then pay 0.3 Bitcoin under the poor-weather insurance policy that the ice cream van owner has taken out".
The Law Commission has suggested that the use of smart legal contracts in the legal industry raises several important issues. Specifically, the paper highlights two problem areas: conflict of laws and deeds. The issue with conflict of laws arises because parties in a commercial agreement typically choose how disputes will be resolved and under what governing law, but expressing this choice in code is not straightforward. Meanwhile, for deeds, the requirement of a signature creates a challenge for smart contracts that are entirely in code.
The Commission has noted that certain legal areas may require reform in order to accommodate smart legal contracts, particularly with regard to conflict of laws and deeds. They have promised to make recommendations on this matter in due course. In the meantime, coders may consider using the UK Jurisdictional Taskforce’s Digital Dispute Resolution Rules (2021) in the comments of simple smart legal contracts, which includes a choice of English law. However, it is uncertain whether coders are aware of these rules or understand the significance of choosing them. Ultimately, international cooperation may be necessary to make smart legal contracts truly effective in the legal industry.
When it comes to commercial agreements, it is common for parties to expressly choose how disputes are to be resolved and under what governing law. However, in the case of smart legal contracts, expressing a choice of law or forum entirely in code is not practical since neither is something that makes operational sense within a piece of code itself. Instead, the choice can be expressed as a natural language comment within the code, or an algorithmic determination can be made.
In the absence of an express choice, default rules apply to determine the governing law and forum for disputes. These rules often focus on the identity and location of the parties and the place of formation or performance of the contract. However, determining these factors can be difficult, especially if the smart legal contract is part of a distributed network.
For simple smart legal contracts, coders may consider incorporating the UK Jurisdictional Taskforce’s Digital Dispute Resolution Rules (2021) in the comments, which includes a choice of English law. However, the significance of this choice may not be apparent to all coders.
Regarding contract formation, the Law Commission has suggested that although there were arguments that a smart legal contract could be made by way of a deed, there was not enough certainty to give parties confidence. The cases of Quoine, SSP, and Thornton demonstrate how offer, acceptance, and agreement can operate. The English Court of Appeal in Golden Ocean held that a guarantee was "signed" by an email containing just the first name of the sender and referring to, but not containing, the guarantee. Similarly, parties may authenticate coded terms by signing a natural language document that refers to and explains the effect of the coded terms. A private key and digital signature may also be used to show the parties' intention to authenticate a coded transaction.
The Interpretation Act 1978 states that "writing" includes various modes of representing or reproducing words in a visible form, including human-readable source code. However, if a statutory requirement for something to be in writing is contained within a piece of consumer regulation, binary object or machine code may not suffice.
The Law Commission has asked whether anyone has expressly described interactions in code as having no intention to create legal relations. There is limited evidence of this, but it raises an interesting question about whether smart contracts need to be legally binding.
Regarding interpretation, code is usually deterministic, meaning that the same input will always produce the same output. However, this may not always reflect the parties' intentions. The Law Commission proposes that a court should consider what the term in question would mean to a reasonable person with knowledge and understanding of the code - the "reasonable coder." Comments in the code or reference to official user guides may also be helpful for interpreting code.
Exploring the "human" aspects of causes of action is not a concept that was introduced by the Law Commission, but it is a classification inspired by the ideas presented by Nik Yeo. One example of this is the knowledge element to unilateral mistake, as demonstrated in the Quoine case. The court had to decide how to handle a deterministic computer program that traded at 250 times the value of a cryptocurrency due to a built-in function designed to handle a thin market. The majority of the Singapore Court of Appeal held that the question to ask is whether the programmer was aware, at the time of programming, that the offer would only ever be accepted by a party operating under a mistake and was acting to take advantage of such a mistake. Lord Mance, the only judge to dissent, proposed tweaking the rules of equitable mistake, saying that the requirement of knowledge would be satisfied by evidence that the parties actually knew that there had been a fundamental mistake as soon as the computerized transaction came to their attention, even if that knowledge only arises afterwards.
However, there are still tricky areas that require attention, but the incremental evolution of the common law has managed to keep pace. Nonetheless, just because the law can provide an answer, it does not mean it will be the answer parties are looking for. Therefore, it is recommended that complex high-value transactions should have hybrid arrangements with natural language provisions. For instance, in the Quoine case, would the parties have entered into a natural language contract spelling out the consequences of a thin market? This approach would have led to a fully informed decision. For the time being, it is doubtful that we will see mainstream complex smart legal contracts that are wholly in code, and it is likely that their deployment will be limited to relatively simple legal transactions such as buy/sell trades, albeit subject to complex pre-conditions.