3 mins

Smart contracts and smart legal contracts do not have an innate intelligence, nor do they rely on machine learning or some form of general AI to ‘self-learn'. Rather, what is meant by ‘smart’ is that, once deployed, smart contract code is self-executing and enables terms to be performed automatically (within the parameters of the smart contract code).

Smart contracts can be, but are not always, legally enforceable (ultimately, this will depend on the rules of the relevant jurisdiction). As the UKJT Legal Statement confirmed, a smart contract is capable of satisfying the requirements under English law to create a legally enforceable contract. However, as with traditional forms of contracting, whether a smart contract satisfies those requirements will depend on the circumstances and conduct of the parties in any given case.

Smart contracts and smart legal contracts offer a range of benefits to businesses. By digitising contracts and automating the operational aspects of an agreement, parties may be able to save time, reduce costs and eliminate human error associated with contract management. Moreover, by automating performance, smart contracts and smart legal contracts help to reduce what Nick Szabo described as ‘mental’ transaction costs. That is, the pre and post-legal execution (signature) costs associated with anticipating, mitigating and monitoring for breach.

A smart legal contract is different to an electronic contract (sometimes referred to as a machine readable contract), which is a contract formed electronically e.g. online, due to its automation of performance and self-execution. Unlike an electronic contract, once executed and provided the predefined conditions have been satisfied, a smart legal contract will automatically perform the terms that have been represented in smart contract code. Indeed, it is this characteristic that renders a smart legal contract 'smart' (see FAQ 1).

Smart contracts and smart legal contracts are expected to have a significant impact on businesses that are increasingly looking to digitise their operations using technologies such as artificial intelligence, DLT, cloud and the Internet of Things (IoT). Smart contract code can integrate with these technologies and is likely to play a key role in breaking down data silos, supporting automaticity and allowing systems to connect in ways that might otherwise be very costly and time-consuming.

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