Legal framework in England and Wales is sufficiently robust and adaptable to be able to facilitate and support the use of smart legal contracts.
In November 2021 the Law Commission concluded that the current legal framework in England and Wales is sufficiently robust and adaptable to be able to facilitate and support the use of smart legal contracts. This legal clarity makes it clear that smart contracts are legally binding and enforceable agreements, and also sets out the rules for creating, executing and interpreting smart contracts.
What are smart legal contracts and why are they useful?
The report defines smart legal contracts as being ‘computer programs that record and perform the obligations of a legally binding contract’ with the main benefit of automating a contractual obligation is that it ‘enables contractual performance to occur without the need for human intervention’. Read our other blog post for more details on smart legal contracts and their differences with smart contracts.
The Law Commission report outlined some benefits of adopting smart legal contracts by claiming opportunities exist: “ through standardisation of contracts covering employment, insurance, supply chain, credit, tax and intellectual property, as well as more complex agreements. ”.
Use cases that were highlighted by the report that could be of benefit from improved contract automation included helping organisations to meet environmental, social and governance (ESG) commitments by providing transparency and efficiencies in critical supply chains, and by restoring trust in audit and corporate governance.
Members of the Accord Project contributed to the Smarter Contracts project from LawTech UK that explored potential benefits of areas such as smart legal contracts. Some advantages outlined by their report include: “reducing the opportunity for fraud, the technology increases efficiency and transparency in business and reduces the need for contracting parties to trust or even know each other.”.
This comprehensive report contains case studies that demonstrate digital-first solutions to real-world problems: electronic signatures, contract automation and management, insurance, renewable energy, financial services, trade, sale of goods and services, logistics and transportation, the digital ownership of physical assets, sport sponsorship, and home buying and selling. An example of representing transfer of ownership of electronic trade documents using an NFT and based on Accord Project technology was showcased in the report.
Types of smart legal contract
In order for the Smart Legal Contract to be legally enforceable it must also have the necessary requirements of any legally enforceable contract including: agreement, consideration, certainty and completeness, intention to create legal relations, and compliance with formalities. The smart legal contract should also have clauses that include choice of court & applicable law and choice of law clauses and proposed approach to disputes.
The Law Commission highlight three forms a smart legal contract can take depending on the role played by the code in the contractural structure, namely:
- A “natural language” (or “external”) contract in which some or all the contractual obligations are performed automatically by the code of a computer program. The code itself does not define any contractual obligations (as it falls outside the scope of the parties’ natural language contract). Instead, the code is merely a tool the parties employ to perform obligations. This form of smart contract appears to be the most commonly used at present and does not raise any novel legal issues in the form of contract formation or interpretation;
- A “hybrid” contract in which some terms are defined in natural language, and other terms are defined in the code of a computer program. Some or all the contractual obligations are performed automatically by the code; or
- A “solely code” contract in which all the contractual terms are defined in and performed automatically by the code of a computer program. No natural language version of the agreement exists. According to the report, this type of contract presents the most challenges from a contract law perspective.
The report also includes suggestions for having the ability for suspension of performance of the code by having the capability to pause or stop execution of the contract and suggestions in handling mistakes related to the code not matching the intent of the agreement. Other scenarios include where there are bugs and other issues that cause the implementation of the agreement to not function as expected, such as unreliable data feeds from external sources such as Oracles.
The report further outlines proposals for rectification to resolve these types of issues, or to rectify the state of the agreement in the event of a dispute. This is further complicated if a DLT is used to underpin the agreement where the code and state cannot be altered.
Implementing smart legal contracts using Accord Project
The Accord Project supports hybrid contracts in the following ways:
- CiceroMark – for providing templates for natural language contracts
- Concerto – for defining data models to represent the parameters and data
- Executable Clauses – implementing the logic of executable contract clauses
The project is evolving to support a number of programming languages. Initially the project supported a domain specific language called Ergo, which can be cross compiled into other languages, more recently support is extending into TypeScript, Rust, Clojure and others, so contract clause logic can be executed in a number of deployment environments. Example deployments include Amazon AWS Lambda and DLT solutions such as Hyperledger Fabric and Corda and other experiments such as using Hedera Hashgraph. The continued extension to other languages will allow for more flexibility in the deployment options of these contract clauses, allowing them to be used in even more environments.
For integration with the broader emerging legaltech ecosystem, the Accord Project is currently defining ways of integrating with existing document assembly and contract lifecycle management (CLM) tooling to deploy smart legal contracts.
In conclusion, as smart legal contracts are now recognized as legally enforceable, businesses and individuals can use smart contracts with confidence, knowing that this legal framework is sufficiently robust and adaptable to facilitate these types of legally binding agreements. The Accord Project provides a solid and compliant starting point for organisations wishing to adopt smart legal contracts.