As technology develops, smart contracts are becoming technically feasible in areas such as IoT, share transfers, insurance and financial services transactions. But are “smart contracts” really contracts at all, and are they capable of being enforced like traditional word based contracts? This issue was recently considered by the UK Jurisdiction Taskforce (UKJT), resulting in the publication of a legal statement on the issue. We consider the findings of the UKJT from an Irish law perspective, and whether smart contracts could be recognised as valid contracts under Irish law.
Smart contracts are contracts which are written fully or partially in computer code. One of their distinguishing features is their ‘automaticity’ – the coded element of the contract can be performed without human intervention. We discussed some of the possible benefits and risks associated with smart contracts in our blog post last year, which can be accessed here.
In its consideration of smart contracts, much of the UKJT Statement focused on whether English and Welsh law, as it currently stands, is capable of being applied to the concept of smart contracts, or whether new legislation is needed in order to specifically accommodate the use of smart contracts. The UKJT concluded that the common law basis of English and Welsh law means that it is readily capable of being adapted to the use of smart contracts by businesses. Do the same principles of contract formation and contract interpretation apply in Ireland? Would smart contracts be recognised as valid contractual instruments under Irish law?
By way of whistle-stop tour, Irish law requires four basic elements in order for a legally binding contract to be formed:
- offer - this must be in terms which are unconditional, clear and certain
- acceptance - this must be clear and unambiguous; it can be conveyed verbally, in writing, or through the conduct of the party who is accepting the offer
- consideration - something of value
- the intention to create legally binding relations - often linked to certainty of the terms; if the terms are ambiguous, the court may conclude that there was no intention to create legally binding relations
The UKJT found that, in principle, smart contracts are capable of satisfying these requirements. Whether these requirements have been met in a particular scenario depends on the parties’ words and conduct, as is the case with any other contract. The UKJT noted that, in a commercial context, there is a presumption that the parties intend to be legally bound by their actions, and that ‘very unusual circumstances’ would be required to displace this presumption. Consequently, the UKJT Statement finds that a smart contract may be interpreted and enforced using well-established legal principles.
It seems that Irish law on contract formation is also capable of applying to smart contracts, and the question as to whether a legally enforceable contract has been formed will depend on whether the contract in question meets these requirements. Smart contracts have the potential to be clear, transparent, and to irreversibly record the terms agreed in the offer and acceptance. There may be challenges of the code being understood by the courts, which is an evidential burden the parties should bear in mind when drawing up the code in their smart contract.
Irish law on the intention to create legally binding relations is similar to England and Wales, in that there is a strong presumption that commercial entities intend to be bound by their actions. Electronic data interchanges (EDI) may be regarded as a form of automatic contract, which commercial entities routinely treat as creating legally binding relations. The question of whether the parties intended to create legally binding relations by their actions through transactions using distributed ledger technology (DLT), blockchain, or otherwise ‘smart contracts’, will be a question of fact.
- In Writing
The UKJT Statement notes that English and Welsh law does not normally require contracts to be in any particular form, and will enforce a contract that complies with contract formation requirements. If a contract was required to be ‘in writing’, the UKJT Statement suggests that the requirements of the UK Interpretation Act 1978 would be met if the computer code (i) represents words, and (ii) is visible on a screen or printout. The UKJT Statement also notes a recent Court of Appeal decision that held that a statutory requirement that a contract be in writing was satisfied by a series of emails between the parties.
The general principle under Irish law is that a contract does not need to be in writing in order to be enforceable. There are statutory exceptions to this principle, which would need to be individually assessed in order to determine whether they would prevent the use of a smart contract for that particular category of contractual relations. For example, the Irish Copyright and Related Rights Act, 2000, is generally regarded as containing exceptions to the general principle that contracts do not need to be in writing; however, the definition of ‘writing’ within that Act appears to capture the use of computer code. In addition, the definition of ‘writing’ set out in the Irish Interpretation Act 2005 would seem to capture the use of computer code. The reason for imposing formal requirements for certain contracts is often to reduce evidential disputes, and to protect potentially vulnerable parties. In the context of contracts between commercial entities, it seems that many of these concerns may not apply to smart contracts.
For contracts with consumers, Irish law on consumer protection may mean that smart contracts would be considered unfair, and therefore unenforceable, if their terms have the effect of irrevocably binding the consumer to terms which the consumer does not have the opportunity of becoming acquainted with. This would likely be the case unless the consumer in question is fluent in the relevant computer code.
- Signature Requirements
The UKJT found that, in principle, private keys used in DLT, which are intended to authenticate a document, could satisfy statutory signature requirements, as they are just a ‘particular type’ of electronic signature.
Under Irish law, certain legal documents, for example, wills and interests in real property, may not be executed by electronic signature, and so it follows that they may not be entirely in the form of computer code. These exclusions may be lifted by ministerial order, notably ‘for the purpose of encouraging the efficient use of electronic communication facilities’. Aside from these statutory exclusions, electronic signatures may be used in the same manner as wet-ink signatures. Provided that the ‘key’ used to authenticate a smart contract meets the definition set out in the eIDAS Regulation, it is capable of meeting signature requirements under Irish law.
The role of computer code in smart contracts may vary from contract to contract. In some instances, the code may define the terms of the contract. In other cases, the code may simply implement the terms of the contract, or the contract may be a hybrid of coded and non-coded terms.
The UKJT Statement notes that the English and Welsh law approach to contract interpretation is that unless the contract wording is unclear, a court will generally conclude that it means what it says. It involves determining what a reasonable person, having the background knowledge that the parties would have had, would understand the language of the contract to mean. The wording of the contract itself is the clearest indicator of what the parties intended, other than in ‘very unusual cases’. Where the coded element of a smart contract is intended to implement the terms of the contract, but not to define them, the UKJT Statement suggests that the contract would be interpreted without reference to the computer code. The code would only be relevant to show if what was happening in practice correlates with what the parties agreed.
The UKJT Statement notes that it is where there is no natural language contract at all that the issue of contract interpretation differs most, and a court would need to refer to extrinsic evidence in order to determine the parties’ intentions. This appears to be similar to interpretation in the context of oral contracts, and so the normal rules of interpretation should apply.
The Irish courts demonstrate a greater willingness to look beyond the words of the contract, adopting a ‘text in context’ approach, stating that the nature of the document provides important context in terms of how it will be constructed by the courts. For smart contracts, an Irish court may be more willing to consider extrinsic evidence in order to interpret the contract. This is particularly likely to be the case where the contract is comprised of computer code which is used to define its terms, and where lawyers have had limited involvement in the negotiation of its terms.
This purposive approach by the Irish courts to contract interpretation also applies to the doctrine of mistake. This means that if there is an error in the coded-element of a smart contract, the Irish courts are likely to look beyond the literal meaning of computer code, in order to ascertain what the parties intended. This ability to consider the parties’ intentions, beyond what is set out in computer code, may reassure parties executing smart contracts, particularly given the potentially expensive ramifications if the contract is coded incorrectly.
While the UKJT Statement has no legal effect, it seems likely that its contents will be relied upon by both lawyers and judges in considering the validity of smart contracts, as the English Commercial Court recently did in finding that Bitcoin was capable of constituting property.
The UKJT noted that ‘perceived legal uncertainty’ was a barrier for adoption of this technology, which it hoped the UKJT Statement would dissipate. While it may be the case that the Irish laws on contract are capable of being applied to smart contracts, there are a couple of steps to go before there is sufficient certainty for businesses to start relying on them.
A hybrid model of paper and code seems to be the way smart contracts will develop at first, with a legal “wrapper” which references the code, and the automatic or deterministic terms being contained in the code. It would be good to see the Irish Law Reform Commission assess the current state of Irish law as it applies to smart contracts, and the changes needed to iron out the issues mentioned above. That should lead to legislation, creating a solid basis in Ireland for parties considering embracing smart contracts in their business activities.
*The UKJT Legal Statement on Cryptoassets and Smart Contracts can be accessed here.