Blockchain-Enabled Smart Legal Contracts

Abstract

A smart legal contract is a binding contract in which some or all the contractual terms are defined in and/or performed automatically by a computer program. It runs on a blockchain platform and carries the features of the blockchain of being automatically self-executed, and immutable, providing permanent records with real-time information, and reducing cumbersome documentation using high processing power. In major jurisdictions around the world, it is generally recognised that the smart legal contract is capable of having contractual force just like a traditional natural language contract. It has the potential to have entire complex commercial contracts written in and executed by computer codes. This chapter explains the concept and operation of the smart legal contract. Its advancement as an integral part of legal practices and a mainstream area of law is described in chronological order. The judgement of the first significant case relating to the use of smart contracts is unpacked. Whilst the acceptance of smart contracts by legal practices has gained pace, novel legal issues have been emerging in this area of law. This chapter identifies and proposes solutions to key legal issues arising from the operation of computer code and the resolution of disputes of smart legal contracts.

1. Introduction

Blockchain is a distributed ledger comprised of immutable blocks chained together to create an encrypted history of transactions. It carries the functionalities of automatically self-executed, avoiding human errors, immutable, providing permanent records with real-time information, and reducing cumbersome documentation using high processing power. Its embedded feature of transparency and integrity shows the reliable nature of the technology. These features are attractive for commercial use that involves a large amount of repetitive and similar transactions for example in the logistics sector for management of supply chains [1, 2], the financial services industry [3], the insurance industry to deal with payment of claims [4, 5], the handling of health care data [6, 7], the UK court justice system [8, 9], and the list is growing fast.

A smart legal contract is a computer program that defines obligations between parties and is performed, solely or in part, automatically by software algorithms. It runs on a blockchain platform and carries blockchain features. It has the potential to replace the traditional natural language contract system so that the benefits offered by blockchain technology are fully utilised.

Commercial contracts have always been using natural language, and their development represents human civilisation in doing business [10]. It remains a scientific fantasy that offers no practical use to society if the smart contract is not recognised and enforceable as a way of entering contracts between parties. The smart contract is now developed in such a way that it is no longer the law of the future. However, as its applications become widespread, novel legal issues emerge. Each of these issues creates barriers to adoption in industries and practices. Identification and resolutions of these issues are essential for maximising the benefits of the technologies.

The objectives of this chapter are threefold. Firstly, there have been diverse discussions on the validity and enforceability of contracts written in computer code. This chapter seeks to clarify and unify the descriptions of blockchain-enabled smart contract that gives legal effects. Secondly, it provides an understanding of the development history of smart contracts to give further development of this practice area a sense of direction. The third objective is to identify the legal issues that arise from this novel practice area where the technology behind it is in a nascent state with vast scope for development and reaching maturity.

Section 2 of this chapter gives an account of the advance of the smart contract from its origin as a concept to today’s status of being recognised by the legal profession as enforceable and does not require any law reforms for its application in England and Wales. The first reported court case that has significant impacts on the use of smart contracts is unpacked considering the current status of its recognition and applications. Section 3 identifies and proposes solutions to key legal issues arising from the operation of computer code. The current digital dispute resolution rules that apply to smart legal contracts are examined in Section 4.

At the outset, it is noteworthy that there are various types of emerging technologies, including artificial intelligence (AI) and blockchain. The current recognised practice of smart legal contracts is enabled by blockchain without any deployment of AI. This book chapter does not cover any discussions of the concept of combining AI and blockchain technology that potentially offers other versions of a smart contract.

It should also be noted that this book chapter builds on, but far from exclusively, the materials discussed and reported in the author’s published work [11, 12]. Readers will realise that this chapter represents substantial work, in breadth and depth, beyond those reported in the previous publications.

2. The status of smart legal contracts

2.1 The origin

The concept of smart contracts was created by a computer scientist, Nick Szabo. In his publication in 1997 [13], he defined a smart contract as “A set of promises specified in digital form, including protocols which the parties perform on those promises.” Szabo illustrated his definition by reference to a vending machine. A consumer inserts coins into the machine (satisfying the condition of the contract), and the vending machine automatically dispenses the chocolate bar (meeting the terms of the “contract”). The transaction is facilitated by software, which enables the transfer of output (the chocolate bar) on the occurrence of input (the correct payment). A smart contract is, therefore, a computer program that contains certain inputs and executes a set of instructions to come to one of many pre-determined outcomes upon the occurrence of a triggering event. It is a computer program that defines obligations between parties, and it runs on a blockchain. Since then, whilst the definition of a smart contract has been refined, many debates have been on whether the smart contract is a breakthrough discovery or a mere fantasy. Amongst these discussions, the terms, smart contract and smart legal contract, are now defined by the Law Commission of England and Wales (the “Law Commission”) [14]. The smart contract is defined as “Computer code that, upon the occurrence of a specified condition or conditions, is capable of running automatically according to pre-specified functions”. Whereas the smart legal contract is defined as “a legally binding contract in which some or all of the contractual terms are defined in and/or performed automatically by a computer program.”

2.2 Smart contract v traditional natural language contract

Contracts define the rights and obligations between the parties. The legal principles of contract law are well established, and their application is pervasive in our daily life. Contracts written in the natural language can be traced back to the Middle Ages and they form the bedrock of doing business. No alternative forms had been considered until the birth of smart contracts. With such attractiveness emerging from blockchain technology, can smart contracts replace natural language contracts entirely? The question begs a comparison of the smart contract with the contract written in natural language.

A short answer is no, not at present. The smart contract has its limitations on handling only the pre-determined outcomes programmed in the software. By contrast, the nature of natural language contracts is flexible and ambiguous. It allows room for courts to interpret contracts and exercise judgement to maintain justice and fairness. Smart contracts cannot handle the nuances and intricacy of various clauses in complex commercial contracts.

Figure 1 sets out, in unidirectional, the various stages of the development of smart contracts with the eventuality of replacing natural language with computer code. Stage 0 is the traditional natural language contract that we have been using since ancient times. It is possible to draw up a traditional contract with certain functions encoded in digital form. The transformation starts in Stage I by writing the straightforward rules-based functions responding to specific inputs, like payment is processed when the goods are delivered and verified. The logic is if the delivery of goods is fulfilled, the payment will be released in a simple contractual arrangement for the payment of a purchase.

Figure 1.

A unidirectional illustration of the smart contract development.

Stage II extends the rules-based functions to more complex cases that define parties’ performance obligations, like the automatic deduction of liquidated damages for late delivery of work when the level of damages is pre-estimated and agreed upon before the work starts. Therefore, the logic is the payment function will not be triggered until the goods are delivered. However, if the delivery is late, the sum equal to the liquidated damages will be deducted automatically.

Stage III is more advanced with interactions between the natural language contract and coded computer software. Following the above example, will the delay be caused by the occurrence of an event that excuses the late delivery and avoids the application of liquidated damages? The ultimate Stage IV is a complete replacement of a natural language contract with computer code.

2.3 Making an inroad

Even with the limitations that not all of them are fully automated by computer codes, smart contracts are efficient in many ways and generate positive impacts on the contracting life cycle. Optimum benefits can only be gained if smart contracts are recognised and used by the legal professions. In England and Wales, over a period of four years, blockchain-enabled smart contract progressed from being the least accepted emerging technology to being recognised as an instrument fulfilling the same function as the traditional natural language contract. Figure 2 shows the rise of smart contracts from an emerging technology that aids to define and perform contractual obligations to becoming an integral part of legal practices and a mainstream area of law.

Figure 2.

The timeline of the reception of smart contracts by the legal profession.

In 2018, the legal profession did not embrace blockchain technology with much enthusiasm. This is reflected in the survey done by PWC on the top 100 law firms regarding the use of emerging technologies in legal practice [15]. The survey reveals that blockchain technology was not interested/aware and it was classified as being under research by law firms. The technology was the least mature in application amongst other digital and emerging technologies at the time, like Artificial Intelligence, Robotic Automation, and Predictive Analytics. Since then, the reception of smart contracts by the legal industry has grown from zero to formally embraced as an instrument that is capable of having contractual force just like a traditional natural language contract. This is demonstrated by a series of publications from the government-backed UK Jurisdiction Taskforce, the Law Society, and the Law Commission of England and Wales.

In 2019, the UK Jurisdiction Taskforce (UKJT) published a legal statement on smart contracts [16]. Based on extensive consultation from a broad range of experts: technologists, legal practitioners, judiciary, and academics, the legal statement states that a smart contract satisfies the legal requirements of creating an agreement between parties and is capable of having contractual force just like the traditional natural language contract. The rights and obligations written in computer code are binding and enforceable under the well-established English contract law.

In 2020, the Law Society of England and Wales published regulatory guidance on blockchain technology [17]. The guidance provides a rich source of information on the best practices for legal practitioners working on transactions involving smart legal contracts. This represents a formal recognition of the accepted use of smart contracts. A significant implication of this publication is that every practising lawyer in England and Wales must be conversant with the application and operation of smart contracts as per the professional code of conduct. Keeping the regulations in sync with the other advancements, the second edition of the report was published in March 2022 [18].

In 2021, on consideration of whether statutory reform is required to deal with the increasing use of smart contracts, the Law Commission carried out an extensive study on the application of existing English law to the smart contracts [14]. It should be noted that each country has its own legal system. In general, the legal systems in countries around the world can be classified as either common law or civil code. In common law countries, the system is based on case law derived from judicial decisions; whereas the civil code is built on codified statutes [19].

The Law Commission concluded that “the current legal framework is clearly able to facilitate and support the use of smart legal contracts”. They confirmed that statutory law reform is not needed as common law in general can respond consistently and flexibly to new commercial mechanisms. Judges can apply and adapt existing principles to new situations as they arise. The Law Commission’s study supports the earlier UKJT legal statement that a smart contract can be enforced and used as a natural language contract.

2.4 Smart contracts and civil code

The above-mentioned reports and statements represent the current status of legal opinion and practices in England and Wales. The Law Commission report [14] reveals that in the United States of America, which is common law jurisdiction, several states, including Arizona, Nevada, Ohio, and Tennessee have provided legislation to protect the legal effects of smart legal contracts. The report also shows that smart legal contracts are recognised, with or without legislation, in Australia, China, Dubai, Estonia, India, New Zealand, Sweden, and Switzerland. These jurisdictions include both common law and civil codes countries. On this basis, it appears that it does not matter whether the jurisdiction is based on common law or the civil codes insofar as the smart legal contracts are concerned. Indeed, the issues in implementing smart contracts in any legal system should be the same irrespective of the structure, practice, and overarching principles of the legal system. However, there is not enough evidence to draw any conclusion that it is no difference in the application of smart legal contracts given that there are some fundamental differences between common law and civil code jurisdictions in the context of contract law, including the requirement and consideration in the formation and conceptual interpretation.

2.5 Forms of smart legal contracts

Based on the degree of automation in a given contract, the Law Commission characterises smart legal contracts in three forms as follows:

1. Form 1 - Natural language contract with automated performance: a contract in natural language but includes agreement from certain aspects of the contract to be performed using a computer program designed for this purpose. In Form 1, the role of the code is limited to performing obligations, and the parties’ obligations are defined in the natural language contract. This is currently the most common form of smart legal contract being used.

2. Form 2 - Hybrid contract: In a hybrid contract, the contractual terms are defined both in natural language and code. The code defines contractual obligations as well as performing them. This leads to the situation where some or all of the contractual obligations are performed automatically as per the code written.

3. Form 3 - Solely coded contract. In this form, all the contractual obligations between parties are defined and performed automatically by computer code. e. This represents a total replacement of the natural language contract. As explained above, the current technology behind the smart contract does not reach this stage. The Law Commission classifies that this form represents the extreme of the spectrum and considers the use of solely coded contract as “low”.

The subsequent discussions will follow the three forms as characterised by the Law Commission.

2.6 Case law

The development of smart legal contracts in the common law jurisdictions will be influenced and steered by court decisions on any cases that come to light. Quoine Pte Ltd. v B2C2 Ltd. [20] is the first significant case that concerns cryptocurrency trading and has implications for the interpretation of smart contracts. The decisions of the Singapore High Court and Court of Appeal have been widely reported and analysed in various jurisdictions across the globe.

The case concerns contracts made by two computer programs using deterministic algorithms that are executed automatically. In a trading of cryptocurrency, B2C2 traded Ethereum in exchange for Bitcoin with Quoine on Quoine’s automated trading platform. B2C2’s computer program initiated the trade and made an offer to sell in Ethereum and the automatic function of Quoine’s platform accepted that offer, leading to an exchange of cryptocurrency. It credited B2C2’s account with the proceeds of the trades without human intervention. However, caused by an error in the automated contracting system, the exchange rate calculated by the algorithm was 250 times higher than the true value of the currency. When the technical officer later manually reviewed the trades, he discovered the error and reversed the trade. B2C2 disagreed and claimed that Quoine was in breach of the contract between the parties. Quoine’s position was that if there was a contract, such contract was vitiated because of the mistake.

In its judgement, the Singaporean court confirmed that the automation process gives rise to a binding contract for the sale of cryptocurrency. The parties held their programs as a mechanism for reaching an agreement and were bound by the agreements that were entered into by those programs. This part of the decision confirmed the contracts entered automatically by computer codes, like the smart legal contracts, create legal effects and are enforceable.

In considering the unilateral mistake made by Quoine’s computer program, the courts concluded that the intention of the party should be assessed at the time when the computer code was written, and what is relevant is the state of the mind of the programmer. Applying the principles developed by the successive cases based on traditional natural language contracts, the courts found, in the instant case, that unilateral mistake did not vitiate the contract as it did not go to the terms of the contract.

In assessing the remedy of the breach of contracts, considering the automatic self-execution of the trading system and the cryptocurrency volatility of the market in which the system operated; the court decided that a remedy mechanism of reversing the trades at prevailing rates was not appropriate. This approach was the same to that of the breach of traditional natural language contracts when operating in a volatile environment. Given the common feature of computer programs, like smart contracts, for being self-execution, automotive and, high-speed that by the time when a breach occurred in a specific transaction is discovered, many other subsequent transactions would be completed, it is envisaged that the application of specific performance as a remedy will be limited.

Quoine v B2C2 is the leading case to date concerning contracts entered by computer programs without human intervention. It showed how the courts apply well-established legal principles to deal with novel issues arising from the use of emerging technologies. No doubt, as the adoption of smart legal contracts becomes more and more common, further court decisions will provide further and better guidance by the legal precedents. This is how the contract law in the natural language has been developing since ancient times and the experiences and wisdom generated by the case law will guide and steer the maturity of the law of smart contracts.

3. Specific legal issues

3.1 Additional steps and process

The usual procedure for parties entering a commercial contract is that the parties negotiate the heads of terms on the commercial arrangement of the transaction. They seek legal advice on the risks and any appropriate compromises to close the deal. The lawyers’ task is to find out their clients’ needs and protect their clients’ interests and draft a contract for agreement with the opposing party. The terms and the clauses, which reflect the intention of the parties, should be clear without ambiguity.

Traditionally, the negotiation, instructions to lawyers, and the drafting of a contract are carried out in natural language. The formation and execution of a smart legal contract between parties involves additional steps and processes. Coupled with its self-execution and immutable nature, novel legal issues emerge. This section focuses on certain specific key legal issues that emerge from the use of smart legal contracts as discussed below. Other issues that are in common with digital technologies like data privacy and cyber security are not considered.

3.2 Interpretation of computer codes

Language is often susceptible to more than one possible meaning. When things go wrong, parties argue about the meaning of the language used in the way that suits them. It is not uncommon that the courts are asked to interpret what was agreed between the parties. The court applies an objective test to identify the intention of the contracting parties. The court refers to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean” [21].

In all the 3 forms of a smart legal contract, computer codes have a role to play. Form 1 does not pose any issues as the code is used as a tool to assist the execution of the performance; it does not define the obligations between parties. As for the other two forms, an issue arises as to how to interpret the code that defines the contractual obligations between parties which are based on the intention of the parties at the time the contract was entered. As in the interpretation of the contractual terms in natural language, the Law Commission adopts the objective test. The question to ask is what the term would mean to a “reasonable coder”, a person with the knowledge and understanding of code at the time when the codes were written.

It should be noted that the “reasonable coder” approach is consistent with the current approach adopted by the courts to call expert evidence to assist on the meaning of contractual terms drafted in a foreign language. It is also observed that the reasonable coder approach is consistent with that taken by the courts in Quoine v B2C2, as discussed above.

3.3 Third-party coders

Forms 2 and 3 of the smart legal contracts require computer code input. The additional process of “translating” the intention of the parties by writing the terms and conditions of the agreement in computer code introduces a number of risk elements that require additional terms for parties to agree upon. It should be noted that the contractual relationship in a transaction extends beyond the parties themselves as they either jointly or independently instruct a third-party coder. The risks arising from the addition coder are:

• Loss in the “translation”. Errors are caused by the communication between the coder and the client because either the coder fails to understand the instructions from the parties, or the parties fail to provide clearly defined instructions.

• Errors in the data input or human intervention in the operation.

• Defective coding and software, there is no bug-free software.

• Events that are out of the control of the parties.

• Writing blockchain software that fits for purposes requires specialist skill, the exercise of which require reasonable skills and care. The coder could be negligent in undertaking the tasks.

• An obligation defined by the natural language narrative as well as by the computer code may be in conflict. A clause is required to stipulate which one takes precedent.

3.4 Oracles

The current status of smart legal contracts is that the percentage of forming and performing a contract purely using computer codes is low (i.e Form 3). For the other two forms, interaction with external sources is facilitated by using oracles to retrieve off-chain data and information and push them to the chain. For example, in a situation to decide whether a threshold of adverse weather condition is reached on a specific day in order to decide whether a contractual event is triggered. Data from the metrology office can be injected into the chain via the oracle.

Risks arise from a failure of the oracle or inputting incorrect data in their smart legal contract. Terms and conditions on the reliability, accuracy, and timing of the external data sources are required to be included in any contracts between the parties as users and the external data sources provider.

3.5 Self-execution nature and immutability

The superior ability of smart legal contracts is their self-execution and immutability. Once the chain is activated, the performance of the contracts is automatic without human intervention, and the records are immutable and permanent. This means that the coded terms cannot be changed once the smart contract has been entered into the distributed ledger on the blockchain platform. The implication is that it would be difficult to amend a smart legal contract should an error is found during the process. The high-speed ability powered by the computer processing power means that an error in one block could propagate to many subsequent transactions causing widespread disruptions. Parties are required to get it right the first time to avoid undesirable possible disastrous consequences.

3.6 Blockchain platform

Smart legal contracts run on a blockchain platform. The digital platform stores information and records transactions. It drives self-execution of the blocks and the distribution of ledgers to the users. Generally, blockchain platforms fall into two types of ecosystems, (a) open (public, permission) and (b) close (private, non-permission). Most business-to-business commercial transactions operate in a closed environment, where participants are joined using a private key 28 and all users can be identified. As in any shared access, users are operating on mutual trust and cooperative natures. It is well settled that under English law, obligations imposed by good faith are not enforceable. If the parties wish to impose such a duty, they must do so expressly [22].

To set out explicit contractual terms for the shared users of a platform, the starting point is to examine the arrangement of the organisations that develop and operate blockchain platforms. These organisations are separate entities. They joined together and formed a blockchain consortium. Currently, there are in general 3 types of consortia models (a) contractual consortium model, (b) joint venture model, and (c) developer agreement and participant agreement models. A comprehensive discussion on the advantages and disadvantages of the different business models for forming and operating a consortium is given in the Law Society for England and Wales’ guidance on blockchain [18]. It is concluded that there is no preferred model as the choice is subjective to the specific requirements and aspirations of the consortium members in a particular sector.

In using any of the models, contractual arrangements must be put in place to govern and regulate the obligations and commitment of all parties concerned in two generic groups: (a) amongst the consortium members regulating the structure and governing principles in the development and running of the platform - the consortium agreement, and (b) the participation agreement that regulates the rules of joining the platform in respect of the use of the platform.

The challenges and issues associated with the consortium governance and the participation agreements are of no difference to those that apply to a joint industry multi-stakeholder enterprise project. The current practice is that contractual arrangements are dealt with in the traditional way by a raft of natural language instruments, like formal contracts supplemented by protocols, policies, standards and regulations.

At the top level of the consortium governance, the key issues are decision-making authority, funding, costs, income allocation, legal entity structures, risk allocation, and identification and ownership of intellectual property. At the day-to-day operation level, issues of the duties and the identity of the information manager, the agreement with the software providers or developers regarding their obligations, the performance level, and availability of the network, and specification of the intellectual property ownership.

The participant agreement sets out the rules for joining the platform. Attention should be given to the allocation of responsibility for the operation of the platform and coordination of the data, allocation of liability, risk and responsibility for errors, access to data in the system, data privacy and cybersecurity.

3.7 Jurisdiction and governing law

The law that governs a contract determines its validity, effect and discharge, directly affecting the rights and obligations of the parties. As explained in Section 2.3 above, a country’s legal system is unique. The applicable law that governs a contract formed and performed in one country is not necessarily to be the same as that in another country.

Jurisdiction refers to the legal authority of a court or tribunal to exercise justice in matters. In other words, which court or tribunal has the power to hear and resolve disputes arising between the parties. Jurisdiction and governing law are usually discussed together in the context of cross-border transactions. They are related but governing law is not the same as jurisdiction. The legal system of a country (i.e., a jurisdiction) can apply the governing law of a different country.

In the absence of explicit provisions in a contract that stipulate the governing law and jurisdiction, the issues arising from the choice of law and jurisdiction are dealt with in accordance with the principles developed under the practice area of private international law. In the context of the smart legal contract, can the same principles apply to the traditional natural language contracts apply?

The Law Commission [14] identified certain jurisdictional issues unique to smart legal contracts, like the physical location of the defendant, the contract’s place of formation, the third-party coders who concluded the contracts on behalf of the parties, the facts need to be examined when determining the most significantly connected legal system, difficulty in locating the exact location where the breach concerning a digital asset rather than a physical asset in the real-world location. Further work is being commissioned by the Law Commission.

But one thing for sure is that the court will follow the explicit agreement between parties. To avoid future controversy, parties are well advised to include a governing law clause stating expressly the parties’ choice of law that applies. Likewise, the contract should contain a jurisdiction clause stating that the parties have agreed to the courts/tribunals of a named country taking jurisdiction over any disputes that may arise. However, parties must be careful in specifying which law of the country will apply with due consideration of the fact that the extent of recognition of smart legal contracts is not uniformly recognised in different jurisdictions.

3.8 Insurance

Parties can manage risk by seeking appropriate insurance to cover the possible consequences of the risks identified, including service interruption, loss of income, hardware damages, and reputational damage. The novel nature of legal risks emerging from smart legal contracts calls for specialised coverage to complement the traditional insurance policies. Many unusual or specialised threats are included as optional cover and parties must ensure they understand the insurance plan. Rather than relying on the insurance policy to cover all conceivable losses, parties should have their systems in place to mitigate risks to avoid monetary burden of premium.

4. Bespoke dispute resolution rules

4.1 Introduction

In a contracting life cycle, an important piece of the jigsaw is how to resolve disputes arising from the contract. The self-execution nature of blockchain technology means that the terms of an agreement can be automatically implemented, and their fulfilment can be automatically executed. In an ideal world, disputes could be avoided altogether. However, in day-to-day commercial transactions, it is common for disputes to occur.

In April 2021, on the premises of the recognition of smart contracts by the legal industry and they are firmly established as part of the English legal system, UKJT published its Digital Dispute Resolution Rules for matters of smart contracts, distributed ledger technology, and other digital assets, (“Rules”) [23]. This section examines the key features of this bespoke arbitration procedure for digital disputes like those generated from smart contracts.

4.2 The practices of arbitration

The standard process for resolving disputes between parties is through the national courts by way of litigation. The Rules specify disputes arising from smart legal contracts are to be resolved by arbitration. The use of arbitration as a dispute resolution mechanism alternative to court proceedings can be traced back to the 7th Century and international arbitration has been the preferred method of resolving cross-border disputes for years [24]. The arbitration rules and procedures are well-established.

In a nutshell, arbitration is a consensual process such that parties submit their disputes for settlement by an independent arbitral tribunal that has gone through a judicial process of hearing the evidence and arguments from both parties. The arbitral tribunal is usually made up of one or three arbitrators. Arbitrators are under a strict duty to act fairly and impartially between the parties. The award made by the arbitral tribunal is final and binding with limited grounds for appeal. In England, the basis of the appeal is either for reasons of improper administration of justice under s67 or s68 of the Arbitration Act 1996 or on a point of law under s69. The rate for a successful appeal is very low. Based on the court records between 2015 to 2018, the success rate was 0.02% during that period [25].

Through the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention), an award made in a signatory country is enforceable in all other participating states. As of December 2021, a total of 169 countries have signed up for the New York Convention [26]. This means an arbitral award made in one contracting state is recognised and enforceable in more than 85% of countries around the world. This is a particularly attractive feature of arbitration given the global nature of blockchain networks.

There are institutions located around the world that offer the administration of arbitration, for example maintaining a panel of arbitrators for the appointment, providing fee scale, and helping with the arrangement of the arbitration process. These institutions have their sets of procedural rules, which are revised from time to time ensuring their efficiency and effectiveness. For example, during the Covid_19 pandemic, rules were revised to allow ongoing proceedings to continue [27].

The current practice of arbitration with the involvement of technology is limited to using technology to aid procedural matters, like the electronic filing of notices and documents in the arbitration proceedings, and holding virtual and/or hybrid hearings.

4.3 The new rules

A distinct advantage of arbitration over litigation is its procedural flexibility which allows tailored modification for digital disputes matter. In this way, radical reform of the national court’s civil procedural rules can be avoided. The Rules aim to fill the gaps in the current practices of arbitration for resolving commercial disputes that involve novel digital technology like smart contracts. The unique features of the Rules include:

4.3.1 A rapid process

The default timeframe for the entire arbitration process is 30 days from the initiation of the arbitration proceedings to the issue of a binding decision. The procedure is designed to be short for efficiency, although the tribunal has the absolute power to modify it. The parties are not entitled to any oral hearings. The entire process can be completed on-chain, including the enforcement of the award.

4.3.2 Arbitration agreement

A cardinal principle of arbitration is that it is a consensual process - no arbitral agreement means no arbitration. The Rules provide a standard dispute resolution clause (which may be in electronic or encoded form) for parties to incorporate the Rules into a smart legal contract before a dispute has arisen. The agreed arbitration rules and procedures are stored in the block and activated if certain pre-defined events are triggered or at the request of a party.

An important consideration of using arbitration is the ability to enforce an award which is not given in the same jurisdiction via the New York Convention. However, care must be taken to comply with the requirements of the convention, one of which is that the arbitration clause must be in writing, see Article II(2) of the New York Convention 1958. To address this issue, parties should enter into a specific written agreement as in the conventional arbitration agreement.

4.3.3 The applicable law

Even if the agreement is silent on the choice of applicable law, the Rules specify that the law of England and Wales is the applicable law by default. This gives certainty and avoids controversy as to which is the governing law as discussed above.

4.3.4 Appointment of the arbitral tribunal

One feature of arbitration is that the arbitrators should be clear about the specific nature of the disputes with relevant knowledge and experience in the subject matter. Given the nascent state of smart legal contracts, an arbitrator who meets the requirements would be rare. The Rules name the Society for Computers and Law as the appointing body, but no detailed procedure for how an arbitrator is selected and appointed. So far, the appointing body does not maintain a panel of suitably qualified arbitrators. Parties can control the selection process by expressing preferences in advance as to their number, identity or qualifications but the final appointment is subject to the agreement with the appointing body. More information on the appointment of the arbitrators from the appointing body is needed to allow early adoption of the process by industry.

4.3.5 The power of the arbitral tribunal

Once the arbitral tribunal is formed, the tribunal has absolute authority over what procedure to adopt; the only restriction is that the tribunal must be sure the procedure is fair. The Rules allow for totally or partially off-chain arbitration as the tribunal sees fit.

The “off-chain” arbitration means that the dispute is to be resolved in a classic dispute resolution mechanism. As such, the arbitrator is given a private key to access the blockchain data, examine the evidence (documentary or oral hearings) and make decisions in the usual manner. It should be noted that the interplay of on-chain and off-chain arbitration requires the service of oracles, and the parties must allow for making such arrangements.

4.3.6 Implementation of a decision

The Rules allow the arbitral tribunal to implement its decision “on-chain” using a private key. This means the tribunal has the power to make changes to the smart contract as per its decision, which may reverse a transaction or allow the transaction to continue and makes changes to the digital assets. No additional steps are required to enforce the decision. Furthermore, the right to appeal under the Arbitration Act 1996 is specifically removed. It is debatable whether such a fast-track procedure with no appeal right meets the requirement of natural justices.

4.3.7 Enforcement of award

Given the applicable law is under English law, an award can be enforced through the court proceedings in England and Wales The multi-jurisdiction nature of blockchain makes the enforcement via the New York Convention attractive. However, the enforcement of a foreign award may be refused because the local legislation rules that matters relating to digital assets as illegal on the ground of public policy. Parties are advised to check the status of local law from time to time as a measure to manage such risks.

4.4 The way forward

To date, the Rules are untried with perceived uncertainties. It is only a matter of time before the first case is tested. This area of law will continue to develop, mature, and refine. The release of the Rules by UKJT, a UK government-backed body, represents the first significant step toward making progress in the resolution of digital disputes.

5. Concluding remarks

The legal professions are catching up with the advancement of technology behind smart legal contracts. Not long ago, smart contracts were considered the law of the future - it is now obsolete. The series of reports published by legislators, lawyers, and the judiciary in major jurisdictions around the world means that smart legal contracts are ready to be put into everyday use. Contracts written in computer codes are gradually becoming the norm. Businesses and individuals should be prepared for the next normal. The starting point must be to have an understanding of the development of smart legal contracts, which is explained in this chapter.

This nascent practice area generates novel legal issues. Key issues are identified in this chapter. Good practices to manage the threats from these risks are discussed. To complete the jigsaw of a contracting life cycle, a bespoke dispute resolution process for smart legal contracts is also examined.

The technology behind smart contracts inevitably continues to evolve, changing how smart contracts operate and pushing the boundaries of their applications. At the same time, novel legal issues emerge. The cycle of technological advancement, the discovery of legal issues, and overcoming them continues in the journey of revolutionising the contracting practice through smart legal contracts. The way forward must be to promote the crossflow of information and knowledge between the legal and technology professions to achieve optimum collaboration for future advancement. This book chapter is published with this spirit in mind.