Smart Contracts and Legal Enforceability under English Law

Introduction

Smart contracts or self-executing agreements encoded on blockchain platforms are increasingly reshaping how transactions are conducted. By removing the need for intermediaries and relying on cryptographic trust mechanisms, they promise efficiency, transparency, and automation. However, this innovation challenges traditional legal doctrines, particularly in the context of contract formation, interpretation, and remedies. This article examines the enforceability of smart contracts under English law, focusing on how the classical principles of contract law apply to these novel instruments.

1. What Are Smart Contracts?

The term “smart contract” was first coined by computer scientist Nick Szabo in 1997, who described them as “a set of promises, specified in digital form, including protocols within which the parties perform on these promises.” Today, smart contracts are typically deployed on blockchain networks such as Ethereum and perform pre-coded instructions when certain conditions are met, e.g., releasing payment upon delivery confirmation.

Importantly, despite the name, smart contracts are not necessarily “smart” or even “contracts” in the legal sense. Rather, they are pieces of computer code that may or may not form a legally binding agreement.

2. Contract Formation under English Law

2.1 Offer, Acceptance, Consideration, and Intention

For a contract to be legally enforceable under English law, four essential elements must be satisfied:

1. Offer and acceptance – A clear offer followed by unconditional acceptance.
2. Consideration – A benefit or detriment exchanged between the parties.
3. Intention to create legal relations – An intention to be legally bound.
4. Certainty of terms – Terms must be sufficiently clear and certain.

Smart contracts typically fulfil these elements, albeit in a non-traditional form. For example, an offer and acceptance can occur through code deployment and execution, and consideration may be represented by cryptocurrency payments. The UK Jurisdiction Taskforce (UKJT) affirmed this in its Legal Statement on Cryptoassets and Smart Contracts (2019), stating that “smart contracts can meet the requirements for legal enforceability under English law.”

2.2 The Role of Code as Contract Language

One of the core debates is whether code can constitute the contract itself. In traditional settings, contracts are written in natural language, which allows for interpretation, nuance, and negotiation. In smart contracts, code is king. This raises questions about interpretation, particularly when disputes arise.

The UKJT suggests that English law is flexible enough to recognise code as either:

• The full expression of the contract, or
• A performance mechanism supplementing a natural language contract.

In AA v Persons Unknown [2019] EWHC 3556 (Comm), the court implicitly accepted the functionality of blockchain-based transactions as legally recognisable, though it did not directly address smart contracts.

3. Enforceability and Legal Classification

3.1 Express and Implied Terms

In English law, parties may agree to both express and implied terms. While express terms can be encoded directly into a smart contract, implied terms, such as duties of good faith or fitness for purpose are more challenging. English courts may imply terms based on business efficacy (The Moorcock (1889)) or where necessary to give effect to the parties’ intentions (Liverpool CC v Irwin [1977] AC 239).

However, implying terms into immutable code presents practical difficulties. Once deployed, a smart contract cannot be unilaterally altered. This inflexibility can result in unjust outcomes if, for example, a bug in the code produces unintended consequences. In such cases, equitable remedies may be necessary.

3.2 The Problem of Mistake

English law recognises several types of mistake common, mutual, and unilateral, which may render a contract void or voidable. If a smart contract performs an unintended action due to a coding error, the question arises whether this constitutes a legal mistake.

For example, in Cundy v Lindsay (1878), a contract was void for mistake as to identity. If a smart contract mistakenly transfers assets due to code failure, could it be voided on similar grounds? The UKJT posits that the doctrine of mistake can apply to smart contracts, but each case will depend on whether the parties genuinely shared an erroneous assumption.

4. Remedies and Dispute Resolution

4.1 Code as Law vs Court Intervention

A popular belief within blockchain communities is that “code is law”—i.e., that the execution of smart contracts is final and self-regulating. However, under English law, this principle holds no legal status. Parties remain subject to common law and equitable principles, and courts can intervene where a contract is found to be unlawful, void, or contrary to public policy.

The DAO hack of 2016, in which an attacker exploited a flaw in a smart contract to siphon funds, highlighted this tension. Though not litigated in English courts, it illustrates the risks of treating code execution as final. English courts would likely examine whether the actions, although technically permitted by the code, violated the underlying intention or public policy.

4.2 Specific Performance and Rescission

Smart contracts, by their nature, often execute automatically, making post-facto remedies like injunctions or specific performance moot. However, courts may still grant rescission or restitution where appropriate. For instance, if a contract executed under duress or fraud, English law allows unwinding of transactions and restoration of the original position.

5. Consumer Protection and Regulation

5.1 Asymmetric Bargaining Power

Many smart contract users are consumers who may lack technical understanding. English law provides various statutory protections under the Consumer Rights Act 2015, including rights to fairness, transparency, and redress. If a smart contract is offered by a business to a consumer, terms that are opaque or heavily weighted in the trader’s favour may be unenforceable under the Act.

In ParkingEye Ltd v Beavis [2015] UKSC 67, the court held that fairness under consumer law must be assessed in light of transparency and legitimate interest. The same principles may apply to smart contracts offered on digital platforms.

5.2 Financial Conduct Authority (FCA) Oversight

Where smart contracts involve regulated financial services (e.g., lending, derivatives), they may fall under the purview of the Financial Services and Markets Act 2000 (FSMA). The FCA has issued guidance on cryptoassets and stated that certain smart contract applications may amount to regulated activities.

Firms deploying smart contracts without appropriate authorisation could be in breach of FSMA, leading to civil or criminal penalties.

6. Future Legal Developments

6.1 Law Commission Reports

In 2021, the Law Commission launched a project examining the application of English contract law to smart contracts. Its 2022 report concluded that “the current legal framework is sufficiently robust and adaptable to accommodate smart legal contracts.”

However, it acknowledged potential gaps regarding jurisdiction, choice of law, and formalities. For example, some contracts require a “signature” or “writing”—terms that may not be fulfilled by code alone. In Neocleous v Rees [2019] EWHC 2462 (Ch), the court held that email footer signatures satisfied the requirement for a written and signed contract. Whether smart contract metadata could meet such requirements remains open to judicial interpretation.

6.2 Standardisation and Legal Design

To bridge the gap between code and law, some have advocated for “dual contracts”—combining natural language agreements with embedded code. Projects like the Accord Project aim to standardise legal smart contract templates, ensuring both legal enforceability and technical functionality.

Furthermore, new legal tools such as Ricardian contracts, which combine human-readable and machine-readable terms, may become pivotal in harmonising code with common law principles.

Conclusion

Smart contracts challenge traditional notions of agreement, performance, and remedy under English law. While English contract law remains fundamentally capable of accommodating this innovation, its application demands thoughtful consideration of interpretation, fairness, and flexibility. As smart contracts become more prevalent in commerce and finance, the courts, regulators, and legal practitioners must collaborate to ensure that the law evolves in tandem with technology. The guiding principle must be that technology should serve the law—not the other way around.

Bibliography

• AA v Persons Unknown [2019] EWHC 3556 (Comm).
• Cundy v Lindsay (1878) 3 App Cas 459.
• Financial Services and Markets Act 2000.
• Law Commission, Smart Legal Contracts: Advice to Government (2022).
• Liverpool City Council v Irwin [1977] AC 239.
• Moorcock (The) (1889) 14 PD 64.
• Neocleous v Rees [2019] EWHC 2462 (Ch).
• Nick Szabo, ‘Smart Contracts: Building Blocks for Digital Markets’ (1997).
• ParkingEye Ltd v Beavis [2015] UKSC 67.
• UK Jurisdiction Taskforce, Legal Statement on Cryptoassets and Smart Contracts (LawTech Delivery Panel, 2019).
• UK Parliament, Consumer Rights Act 2015.
• UK Parliament, Financial Services and Markets Act 2000.
• UK Parliament, Law Commission Projects on Digital Assets and Smart Contracts (2021).