A "smart contract" is a legally binding contract in which some or all of the contractual obligations are recorded in or performed automatically by a computer program deployed on a "distributed ledger". Distributed ledger technology is a method of recording and sharing information across a computer network in a way that makes it very difficult to amend.

Smart contracting could increase business efficiency and certainty, reduce costs and minimise fraud risks. However, the legal issues involved are wide-ranging: When is a smart contract formed and legally binding? What if the smart contract doesn't perform as the parties intended or the coding is recorded incorrectly? How do judges interpret a smart contract and what if it does not contain a jurisdiction clause?

The Law Commission recently consulted* on these definitions and other issues as part of its review of how England and Wales' legal framework could facilitate smart contracting. It is expected to scope out the legal reforms necessary to enable this technology to thrive in late 2021.

While the construction industry is fast adapting to digital technologies (e.g. BIM), smart contracting technology remains a mystery to many, but then - so was sending an email 25 years ago. Long-term, the Commission's work will enable parties to enter smart contracts knowing that their legal rights are clear and protected. Shorter-term, expect hybrid, i.e. partially smart, construction contracts, where, for example, only the payment provisions are encoded.

Read the consultation summary or the full call for evidence for insight on the smart, new world ahead.

Note: this consultation ended on 31 March 2021.

This article was published by Construction law here on 1 April 2021, alongside the State of Play table number 258. You can sign up to Construction Law's newsletter here.

To read more of our updates relevant to construction, see our Summary of new and proposed legislation, (UK construction focus).