Emerging technologies such as distributed ledger technology and artificial intelligence are being adopted to create 'smart contract' programmes which run automatically, in part or in whole, without the need for human intervention whilst still being legally enforceable. Smart contracts are created by hard coded inputs that give rise to a set of defined outputs. Smart contracts can have specific uses such as on decentralised cryptocurrency exchanges or in the exchange of non-fungible tokens (NFTs).
They can also be 'smart legal contracts' – defined as legally binding contracts in which some or all of the obligations are defined in and/or performed automatically by a computer programme. The UK's current legal framework facilitates and supports the use of smart legal contracts without the need for statutory reform. However, the Law Commission found that there are some areas of legal uncertainty that could eventually lead to legislative changes which include:
- Contractual formation (other than for deeds) including factors such as: whether the source code is intended to define and perform contractual obligations; the relationship between natural language and coded terms; the allocation of risk in relation to technical malfunctions and errors; and governing law and jurisdiction.
- Questions of contractual interpretation
- Ensuring practical justice can be achieved via court orders despite the immutable nature of block chain which may mean the contract cannot be rescinded.
In 2022 the Law Commission are continuing with projects on smart legal contracts and the extent to which English Law, and England and Wales as a jurisdiction, is able to facilitate and attract burgeoning markets in digital assets and crypto assets, e.g. "tokenised" assets such as NFTs.
Both the advantages and risks must should be fully appreciated before using smart legal contracts. Businesses choosing to experiment with smart legal contracts are taking steps to appreciate the implications of the identified legal uncertainties and to mitigate them through practices such as being completely clear about when contracts become binding, the buy/sell triggers and issues of precedence. Businesses may decide to follow the Law Commission's projects to anticipate any potential future reforms.