The UK Government sheds light on the status of cryptoassets and enforceability of smart contracts (Part II)

In his foreword to a legal statement issued by the UK Jurisdiction Taskforce (UKJT), Sir Geoffrey Vos, Chancellor of the High Court, is confident: “cryptoassets and smart contracts undoubtedly represent the future”. The IPKat has previously reported on the UKJT’s analysis of the cryptoassets as a property, see here. This post will provide an overview of the UKJT’s guidance on the enforceability of  smart contracts.

Are smart contracts enforceable?

As with the cryptoassets, the UKJT avoids formulating a precise definition for  smart contracts, seeking instead  to identify their novel and distinctive features. A smart contract is performed automatically without human intervention, which requires its terms to be embedded in a computer-readable code. Generally, there is no need for a party to either promise performance or  resort to law to enforce a promise by the other party.

However, in UKJT’s view, the scope for legal intervention in smart contracts may be much reduced, but not entirely eliminated:

 “[…] there will always be a risk that performance is affected by an event external to the code, for example, a system failure, or that the code operates in an unexpected or unintended way, and in such cases any dispute must be capable of adjudication.”

According to the UKJT statement, the automaticity of a smart contract does not preclude it from satisfying the conventional contract requirements, such as: (i) two or more parties objectively reaching  agreement as to the terms that are sufficiently certain; (ii) parties objectively having an intention to create a legal relationship; and (iii) the grant of mutual consideration. This makes a smart contract capable of having contractual force, though the specific determination may depend on the on the parties’ words and conduct, just as it does with any other contract.

How would an English court interpret a smart contract?

UKJT has relied on the modern approach to interpretation of commercial contracts: “it means what it says”. Unless the contractual terms are unclear, contradictory or ambiguous, a court will rarely depart from the language of the contract in ascertaining its meaning. A smart contract consisting solely of code with no natural language, in UKJT’s view, in most circumstances can be seen as sufficiently clear without there being any justification to depart from it. But this will not always be so. In such circumstances, ambiguities will be resolved by looking at the contract as a whole, as well as   relevant admissible evidence regarding what the parties objectively intended their respective obligations to be, i.e. using ordinary and well-established legal principles.

What happens if a smart contract is between anonymous or pseudo-anonymous parties?

UKJT is confident that there are no requirements under English law for parties to contract knowing the real identity of the other party. In fact, it is a commonplace practice in agency, unilateral contracts or auction scenarios. Therefore, a smart legal contract between anonymous or pseudo-anonymous parties is capable of giving rise to binding legal obligations.

Does a private key amount to a signature?

A statutory signature requirement “is highly likely to be capable of being met” by means of a private key. UKJT compares a private key with an electronic signature, which has a similar function and generally satisfies  the statutory signature requirement. It notes—

 “The key question is not what the signature looks like [e.g. is comprised solely of a signed message using signature authentication software confirming the validity of the signature], but whether or not it is clear that the party intended to authenticate the full terms of the document.”

Does a smart contract meet “in writing” requirement?

In UKJT’s view, to the extent the code can be said embodying  words and be made visible on a screen or paper, it will likely fulfil the statutory “in writing” requirement. The analysis may be less straightforward when the code is represented by machine-readable code and is not comprehensible without an expert translator. UKJT rejects the human comprehension argument on the premise that an expert translator is also needed to understand foreign human languages. Thus--

“We believe however that in very many cases the terms of the relevant contract will not be contained in the code itself; instead, the correct analysis will be that the parties have agreed to be bound by the effect of whatever the code does, rather than by what it says.”

Why does it matter?

Uncertainty has been a major obstacle to the mainstream adoption of cryptoassets and smart contracts. Even though UJT’s legal statement has no binding effect, it relies on technical, legal, judicial and academic expertise, hence it is meant to provide some comfort and possibly point to market confidence for the benefit pf  technological and legal communities  as well as the global financial services industry. The next step is for the UK Law Commission to consider whether statutory regulation in this area is necessary.

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