Smart contracts – can they get smarter?


10 August 2021

What kind of a world would we be living in if we had contracts which could automatically be created, executed and enforced without the need for human intervention? Well, you don’t need to think too hard because we already have those types of smart contracts and they are the key to the operation of blockchain and cryptocurrency trading. Perhaps the better question is – what next for these smart contracts?

Smart contracts have until now developed rather ‘in the background’. The UK Government Chief Scientific Adviser has described them as the ‘application layer’ (some might say ‘glue’) that enables blockchain technology to support a multitude of uses such as cryptocurrency transactions, supply chain management and music distribution. The list of uses of blockchain technology is growing by the day, and with it comes the increasing use of associated smart contracts.

A smart contract is really just a set of coding instructions (if ‘X’ happens, then ‘Y’ must follow) which have been written to work with blockchain technology in a way that gives certain outcomes, for example, recording that a payment has been made or that an asset has been registered. The contracts are ‘smart’ because they perform in an automated way. No human intervention, from a contracts lawyer or anyone else, is needed to negotiate, execute or enforce them.

A smart contract that is replicated and distributed across a blockchain could be used in many different ways in the future. Is it too difficult to imagine the use of smart contracts in on-line voting for political elections? Or maybe in the buying and selling of residential property. Of course there would need to be checks and balances, but in both examples given certain inputs (a ‘yes’ vote or payment in cleared funds), the smart contracts would produce a certain outcome (voting for the next Prime Minister or the transfer and registration of the property).

In other respects, smart contracts are not so smart and do have limitations. As commercial contract lawyers we see many contracts that use words such as ‘reasonable’, ‘satisfactory’ or ‘in good faith’, and other terms which call for a subjective, rather than an objective, interpretation. There are often important commercial terms which cannot readily be translated into the binary approach that is required for a smart contract. Also, a smart contract cannot be varied or amended like a traditional contract if circumstances change (and the parties agree). If a change is required, a new smart contract must be written which replaces the previous contract and modifies its effects.

So how might smart contracts become smarter? Maybe the world of artificial intelligence has a role to play here with algorithms and deep learning techniques being deployed to assist smart contracts in the processing and analysis of big data. Or maybe it would help if we were to develop a legal framework for smart contracts, just in the same way that computer programs were able to flourish once it was established that they enjoyed the protection afforded by copyright. A law of smart contracts could be used to develop standardised terms applicable to particular uses of smart contracts or blockchain technology, or as the basis for some form of regulation or regulatory bodies. These are the types of development which allow for more investment and innovation, resulting in a wider application of smart contracts to existing or new technology.

You might be surprised to learn that the Law Commission (which is charged with keeping the law of England & Wales under review and recommending reform where it is needed) is currently considering smart contracts and related legal issues. It believes that our current legal framework needs to be reviewed to ensure that it facilitates the use of smart contracts. The intention is to publish a scoping study later this year, but in the meantime the Law Commission has said that there are questions about the circumstances in which a smart contract will be legally binding, how smart contracts are to be interpreted, how vitiating factors such as mistake can apply to smart contracts, and the remedies available where the smart contract does not perform as intended.

All of this suggests that smart contracts will indeed be getting smarter in the future. It’s just a question of whether the law and smart commercial lawyers can keep up!

The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at August 2021.

Author

Andrew Priest

Partner

+44 (0)7557 161211

Contact

* denotes required fields.