In August 2019, we published a Client Alert entitled “Smart Contracts in the Physical Commodity Markets”. This new Client Alert covers recent developments concerning the treatment of smart contracts under English law.
UK Jurisdiction Taskforce’s Legal Statement
In November 2019, the UK Jurisdiction Taskforce (UKJT) published a legal statement concerning, amongst other matters, its views on the treatment of smart contracts under English law. This followed a period of consultation across the industry and the legal profession during which the UKJT were asked to consider key questions concerning English law’s approach to smart contracts.
Effect of the UKJT’s Legal Statement
One should be careful not to construe the statement as binding. It has no legal effect, and it cannot formally be endorsed by the English judiciary. How smart contracts are treated under English law will be for the courts and the legislature to determine. In the meantime, it now falls to the Law Commission to consider whether any legislation might be desirable.
Nonetheless, the statement does serve some useful, and principally commercial, purposes. It suggests that the English courts would be flexible in adapting the common law to embrace technological developments in the market. This should give a degree of predictability and assurance to developers, investors and users. This in turn should encourage the market to develop.
What the UKJT’s Legal Statement Says
The statement confirms that a smart contract is capable of satisfying the requirements for a binding contract under English law. These require that agreement has been reached between the parties, that there has been an intention to create legal relations, and that legal consideration has been given between the parties. This is no different from the position under English law in relation to conventional contracts.
What Technologists Say
For smart contracts, many technologists argue that the law and the courts have no role to play. They reason that as the algorithm contained in the code automates performance, no legal dispute resolution should ever be needed by the parties.
Whilst it is true that the scope for legal disputes and the need for recourse to the courts will be reduced given the automation of the parties’ performance, risks can arise that would require redress through the courts. Risks can arise where there is e.g. a technological failure; a malfunction of the code; or a disruption or failure of the data reference source (this is known as an oracle).
Smart Contracts in Physical Commodity Trading & Trade Finance
Smart contracts have certain core attributes that will bring many benefits to participants operating in the physical commodity trading and trade finance markets. These attributes include automation, standardisation, and certainty.
Automation of the fulfilment of contractual obligations will shorten the transaction lifecycle, extinguish cumbersome and unnecessary manual processes, and reduce counterparty trade and settlement risks.
Standardisation of the forms of smart contract used in the market will lead to the reduction of negotiation time and related costs.
Certainty as to the underlying terms and conditions of the transaction will reduce the incidence of contractual disputes.
About the Author
Justin Boyd has over 28 years’ legal and regulatory experience in commodities trading, origination and financing, wholesale banking, bank regulation, energy project development, financial derivatives and corporate transactions.
He has held senior in-house legal and regulatory risk positions, and has been a partner of an international law firm. Most recently, he was the Global Co-Head (Legal) of Financial Markets, and the Head of Global Regulatory Reform, both at Standard Chartered Bank.
The information contained in this Client Alert is intended to be a general guide only and not to be comprehensive, nor to provide legal advice. You should not rely on the information contained in this Client Alert as if it were legal or other professional advice.
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