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'SMART CONTRACTS' AND THE LAW (B2)

New technology is constantly changing the way we live. Therefore, it is unsurprising that it is also changing the way we work; yes, even for lawyers! The law does not always respond quickly to change. However, the reality is that the commercial world is not going to stop or slow down just because the law, generally, moves more slowly. This is certainly a challenge for lawyers everywhere.


The emergence of ‘smart contracts’ offers just one example of how technology is changing the commercial – and, therefore, the legal – world. In this post, we will take a brief look at what smart contracts are, one or two of the legal problems that smart contracts may cause, and steps that are being taken to address these.

What is a ‘smart contract’?

‘Traditional’ contracts are often, thought not always, negotiated between two parties who wish to enter into a transaction; for example, for the sale of goods or to provide a service. The parties will negotiate the terms and conditions that they want to regulate their agreement, and these will usually be written down in a document which both parties will sign (or ‘execute’).


A smart contract is a self-executing contract. The terms of the agreement between the parties are written into lines of code. The code, and agreement, exist across a decentralised blockchain network. The code controls the execution of the contract. Transactions are both trackable and, importantly, irreversible.


One advantage is that trusted agreements can be carried out between many parties. There is no central authority, external enforcement mechanism, or legal system. In short, smart contracts could help you exchange money, property, shares, or anything of value, securely and transparently, and with the advantage that you do not need to pay a third-party. In other words, transaction costs are reduced.

The Potential Legal Problems with Smart Contracts

The use of smart contracts will have implications in a number of legal areas, including contract law and company law, and consumer protection law, among others. It is easy to see the kind of legal problems that may arise; for example, issues over void contracts. Once a smart contract is executed, it cannot be reversed. There are ways of dealing with this, but the void transaction would be kept on the smart contract’s blockchain. There are also issues over possible incorrect or incomplete codes. Smart contracts may also have implications in the field of data protection and regulation. These are just a few of the potential issues that may arise. There are likely to be others.

The Legal Response

It is inevitable that the law has to respond to emerging technologies, like smart contracts, and the potential legal issues that may arise. In the United Kingdom, the Law Commission has launched a project which will analyse the law relating to smart contracts, to find any gaps in the law, and to identify reforms to ensure that the law responds appropriately to the growth in the use of this technology. In doing so, it will focus on:


· the formation and enforceability of smart contracts;

· interpretation;

· the performance of the contract;

· contractual remedies; and

· vitiating factors.

One thing seems certain; that the emergence of new technologies will continue to challenge the law to respond to the changes much more quickly than it has historically done. Whether that happens remains to be seen.


Glossary


to execute (a contract) – Under English law, to execute a contract means to sign an agreed contract. At that point, the terms and conditions in the contract become legally binding and enforceable between the parties.


Law Commission - The Law Commission is an organisation which has the function of keeping the law in England and Wales under review and to recommend reform of the law, where it is needed.

shares - Shares are the equal parts into which a company’s capital is divided. The people who own shares in a company are called ‘shareholders’.

vitiating factors – In English law, a ‘vitiating factor’ is something which may affect the legal validity of a contract. Examples of vitiating factors include misrepresentation, mistake, undue influence, and illegality.


void – In English law, void means ‘not valid or legally binding’; in other words, of no legal effect. Several things may make an English contract void; for example, if the contract would break the law or offend against public policy.

© Cambridge Legal English Academy 2020

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