Can English contract law keep pace with smart contracts?

16 Dec 2019

A smart contract is a contract that is self-executing. That is, the terms of the contract are written into lines of code. Upon satisfaction of a term, the smart contract will automatically execute a pre-determined action (e.g. affect a payment). The common comparison is that of a vending machine – upon the receipt of the requisite amount of money, the machine automatically dispenses an item. The smart contract exists on a distributed, decentralised network, the most common of which being Blockchain. 

The Statement made by the LawTech Delivery Panel that cryptoassets are to be treated in principle as property takes a pragmatic approach to the legal status of smart contracts. English contract law is well-established and sufficiently dexterous to be able to treat smart contracts as valid legal contracts, providing all the basic requirements for a contract are met. This is not precluded by the automaticity of performance of a smart contract.

Intention of the parties is key

A pertinent risk of smart contracts is where an error or imperfection in the code produces an undesirable outcome for the parties. Writing large amounts of code with no mistakes is very difficult, and such mistakes can have a cascading effect where numerous smart contracts form part of an ecosystem (as with a supply chain).

The key question then for the judge is what the parties objectively intended and in particular whether they intended to be bound by the behaviour of the code. The judge must determine whether the code (or part of it) was intended to define the obligations or whether it was merely to implement them. Any natural language in the smart contract can be assessed according to conventional principles. However, where smart contracts exist purely in code, this does not in isolation clearly reveal that the parties agreed to contract on such terms. The prima facie assumption to be drawn is that the parties intended for the code to behave as it has done. But this will not be the case in instances where the code misbehaves.

The Statement suggests that it might be possible to examine other areas of the code to ascertain the intended behaviour. However it is more likely that "a judge will need to look beyond the four corners of the code to interpret it" by reference to evidence extrinsic to the code itself. 

Offer and Acceptance

Where one party has offered code (via a smart contract) on a distributed ledger platform, any user on that platform can in theory enter that smart contract with the offeror, much like a conventional unilateral contract. Each case will be fact-specific, but if the offer is advertised on a public platform, it will be difficult to show that the offeror did not intend to enter legal relations and thus the contract is enforceable. The Statement believes that this also applies to smart contracts deployed on a Decentralised Autonomous Organisation (DAO).

Identity of the parties

The fact that the identities of the parties are anonymous or pseudonymous does not prevent it giving rise to binding legal obligations. However, the statement acknowledges the risks involved without dealing with recourse for breach of the contract or potential jurisdictional issues this creates.

Signature of a Smart Contract 

The Statement proposes that the statutory signature requirement is highly likely to be capable of being met by means of a private key. It is equated to how an electronic signature is capable of authenticating a document.


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