Disputes Quick Read: what claims exist when a smart contract is breached?

Quick read

The English legal system is heralded for its ability to keep pace with technological changes. Smart contracts, distributed ledger technology (such as blockchain) and cryptoassets are high on the agenda when it comes to anticipating and addressing the legal challenges which might arise as new technologies become increasingly mainstream.

The Law Commission's November 2021 report provides useful insights into how the current law might apply in the context of a smart contract.

Avoiding the pitfalls

Key areas which require extra caution include:

Be aware of the type of smart contract you are dealing with - is it a contract which is agreed in natural language where the obligations are 'translated' into and performed by code, or one where the obligations are defined by code (as well as everything in between)?
Does the platform through which the smart contract will be recorded and executed meet the parties' needs?
What happens if the code malfunctions or does not operate in the way that the parties envisaged?
Smart contracts are more likely than traditional contracts to be cross-border in nature so the inclusion of a clear jurisdiction clause is very important as is a choice of governing law.

What happens when it all goes wrong?

While smart contracts seem unlikely to require the creation of new causes of action, they do give rise to new fact patterns which require careful consideration. The categories of claims that might arise in a contractual context will be familiar.

Rectification

If there has been an error in recording the agreed terms of a contract, a party might seek rectification of those terms so that they reflect the parties' actual common intention at the time of entering the agreement.

Claims based on vitiating factors

These are factors which render a contract defective such that it can be said that it never came into force in the first place, or there are grounds to have it set aside. These include mistake, misrepresentation, duress and undue influence.

Breach of contract

The usual principles relating to contractual interpretation and construction would apply to a traditional, natural language contract and be deployed to assess whether an automated code has failed to perform those obligations correctly.

Frustration

In the case of smart contracts, performance of the code might become physically impossible if there is a technical malfunction or some unforeseen shutdown of the platform on which the code is deployed. Alternatively, there could be an event which causes the code to execute in a way which is radically different from that contemplated by the contract.

Illegality

If the purpose or performance of a contract involves conduct that is illegal, the contract may not be enforced by the court.

Comment

The good news is that the law of England and Wales is sufficient to address legal issues arising in a smart contract context. A more detailed look at some of the points raised in this article can be found here. If you want to know more about smart contracts and the applicable law, please contact the team who will be happy to discuss further.

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