UK Law Commission confirms flexibility of the common law to accommodate smart legal contracts

Last week, the UK Law Commission (the "Commission") published its much anticipated advice to the Government on the application of the legal framework in England and Wales to support the use of smart contract technology. While there continue to be some potential areas of uncertainty about the application of smart contracts, particularly in the area of deeds and private international law, the Commission has concluded that the flexibility of the common law is capable of adapting to the likely range of legal issues and only incremental developments to common law are needed.

The advice follows a formal call for evidence, published in December 2020, to which Slaughter and May submitted its views, and expands on the November 2019 findings of the UK Jurisdiction Taskforce’s (“UKJT”) legal statement on cryptoasset and smart contracts which concluded that smart contracts are capable of giving rise to binding legal obligations, enforceable in accordance with their terms.

A more detailed analysis of the advice can be found in our client briefing. However, key observations include:

1. Smart contracts can be used to establish legally enforceable relationships.
2. Solely code smart legal contracts present the most complex challenges, but are unlikely to be in frequent use.
3. Adopt the “reasonable coder” test - coded terms can (and should) be susceptible to contractual interpretation and the “reasonable coder” test is the appropriate test to apply in these circumstances.
4. Allocate risk for defective performance of code as part of the contracting process.
5. Retailers wishing to adopt B2C smart legal contracts should avoid solely code smart legal contracts unless accompanied by a pre-contractual explanation of the coded terms.
6. Further consideration of deeds and private international law is required.
7. Smart clauses for smart contracts - as the market develops, established practice and model clauses are likely to be developed. In the interim, the Commission has included a helpful appendix of issues that it recommends parties address expressly in their smart legal contracts to promote certainty and party autonomy.

Smart legal contracts have the potential to revolutionise the way that businesses engage with each other across all sectors. This advice provides welcome clarity on the future potential and adoption of smart legal (and enforceable) contracts in England and Wales and includes a number of practical guidelines for businesses to build into their smart legal contract platforms and processes.