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The legal sector is changing. For many years, other industry sectors have moved into the digital age, with smart digitised solutions for their businesses. The legal sector has been left behind. However, change is happening, so it’s time for all lawyers to take notice and get prepared for the exciting changes ahead.

Here we explain the journey of smart legal contracts, so you know where we are now and how we got here.

It Started With Blockchain Technology

It was actually as far back as 1991 when the Blockchain technique was first described by a group of researchers. Originally, it was intended to timestamp digital documents so they couldn’t be backdated or tampered with.

This technique was mostly unused until 2009 when it was adapted by Satoshi Nakamoto to create what we now know as Blockchain technology. It was then that Nakamoto used the technology to create the digital cryptocurrency, Bitcoin.

The term “smart contract” was first used in 1994 by Nick Szabo, 15 years before Nakamoto created Bitcoin. His vision was to enable a distributed ledger to store contracts. However, it was not until 2014 that Blockchain technology’s potential for other applications beyond currency was explored.

It was then that the Ethereum Blockchain System was created, and introduced computer programmes into the blocks. Ethereum allows for the storage and operation of a computer code, and this is where smart contracts were born.

Analysis of Smart Legal Contracts

In December 2017, the Law Commission was asked by the Lord Chancellor to consider electronic signatures and smart contracts. They intended to publish a call for evidence in January 2019 to enable them to study the use of smart contracts and help ensure that technology in England and Wales could thrive.

However, around this time, the LawTech Delivery Panel was created and as there was cross-over between the work of the LawTech Delivery Panel and the Law Commission. So, the Law Commission’s project was paused to avoid any duplication.

In November 2019, the ‘Legal Statement on Crypto Assets and Smart Contracts’ was issued by the UK Jurisdiction Taskforce (UKJT). The foreword of the Legal Statement was written by Sir Geoffrey Vos, Master of the Rolls and Chair of the UKJT, who is an advocate of Blockchain technology and smart contracts in the legal industry.

The Legal Statement confirmed that “in legal terms, crypto assets and smart contracts undoubtedly represent the future”. Its objective was to provide the legal sector with confidence and answer questions to prove it could be used effectively in English law.

Following the release of the Legal Statement, the Ministry of Justice (MoJ) asked the Law Commission to undertake a detailed analysis of smart contracts and their application within the law.

In September 2020, the Law Commission announced it had started work on the smart contracts project, an analysis to ensure that English law could accommodate the new technologies to revolutionise the industry. In December 2020, they launched a call for evidence.

They recognised that there was a growing use of the technology, which both increased efficiency in business and reduced the need for parties involved in a contract to trust each other, given the trust resided in the code of a smart contract.

However, this development of technology raised questions for them, such as:

  • In what circumstances will a contract written in code be legally binding?
  • How are smart contracts to be interpreted by a court?
  • What are the legal consequences of the code not performing as intended?

The Law Commission needed these questions answered to enable them to determine whether English law would maintain its “reputation, sophistication, coherence and efficacy,” and to ensure that businesses were confident in using such technology.

In April 2021, the UKJT published its ‘Digital Dispute Resolution Rules’ for on-chain digital relationships and smart contracts. This provided a new set of arbitration rules for digital and Blockchain dispute resolution. The new rules allow for experts to implement decisions directly on-chain using a private key and for the optional anonymity of parties. These were groundbreaking innovations and welcomed additions.

Results of the Analysis of Smart Legal Contracts

On 25 November 2021, the Law Commission announced that existing law in England and Wales is able to both accommodate and apply smart legal contracts and there would be no need for statutory law reform. It used the Legal Statement provided by the UKJT in November 2019 to help reach this conclusion.

Professor Sarah Green, the Law Commissioner for the Commercial and Common Law Team stated:

“Smart legal contracts could revolutionise the way we do business, particularly by increasing efficiency and transparency in transactions.

“We have concluded that the current legal framework is clearly able to facilitate and support the use of smart legal contracts; an important step in ensuring increased recognition and facilitation of these agreements.

“Our related work on digital assets and conflict of laws will further establish England and Wales as a global leader for technological innovations in the digital sphere.”

Current Position on Smart Legal Contracts

On 22 February 2022, LawTech UK and its UKJT released its report on ‘Smarter Contracts and Digital Assets”. The report sets out detailed case studies to demonstrate how this technology is being used to improve contracts across the commercial, financial and consumer industry sectors.

The report was not only to explain how smart contracts and Blockchain technology are being used, but to dispel any myths as to the risks associated with it.

At the launch of the Report on 24 February 2022, Master of the Rolls, Sir Geoffrey Vos, spoke and emphasised how new technologies within the legal industry is not something that might happen – it’s happening now.

With the evidence provided through the Legal Statement, the Digital Dispute Resolution Rules and the Law Commission’s advice on smart contracts, the current position is that English law provides a strong legal foundation for the use of smart contracts.

The Law Commision has other projects underway which will no doubt go on to support the use of smart contracts, advancing the UK to be a global leader in technological innovation within the legal industry.

Inspire Legal Group’s position on Smart Legal Contracts?

Inspire Legal Group is a technology-driven law firm with our fingers on the pulse. We’re more than a law firm: we’re a community that wants to revolutionise the legal industry with technology, making the lives of our lawyers and our clients easier through smarter solutions.

We’re pioneering the use of smart legal contracts and Blockchain technology as we believe implementing Blockchain technology and smart legal contracts into the legal sector is an extremely important step forward, and one which all firms should be taking.

If you’d like to speak to one of our experts about our Blockchain technology and how that can help you, get in touch with one of our experts, who will be more than happy to help.

*The content of this article was correct at the time of publication.