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When is it Smart Not to be Smart?

Or: Musings on Blockchain, Distributed Ledger Technology, Cryptocurrencies and the wisdom of people in general.

What must be five or six years ago now, I sat through a speech given by the Headmaster of my sons’ former school in the course of a careers evening, held during that period between GCSEs and A Levels when ‘life choices’ become necessary.

“Our children,” he said, “Will grow up to have jobs that we don’t understand.”

This was greeted by a warm round of enthusiastic applause from the parents present.  We all then, irrespective of ethnic background, continued pushing our children towards nice, sensible careers in engineering, accountancy and (holy grail of all holy grails) medicine.

A few years later my son, now an Economics graduate, works for a business producing NFTs (‘non-fungible tokens’ also known as ‘crypto-art’) which seem, to my unlearned eye, to be just rather badly drawn electronic cartoons.  So the first part of his ex-headmaster’s vision has indeed come to pass.

What the headmaster failed to warn us about however was that the situation would arise some-time in the future where we would no longer be able to understand even our own jobs.  Which brings me, in a roundabout way, to the subject of this month’s report: the recently published second edition of the Law Society’s Legal & Regulatory Guidance on Blockchain.

In the email accompanying the Guidance and explaining why all lawyers need to read it LawSoc confidently states:

“Lawyers are increasingly assuming the role of project managers, working with various technological experts and specialists. Alongside well-known cryptoassets such as the cryptocurrency bitcoin, DLTs offer opportunities to build new platforms, products and protocols you need to be aware not only of how network technology and other code-based technologies operate, but how these technologies impact the wider areas of litigation. This includes how decentralisation and smart contracts are changing the way financial, property and legal services are carried out. As the complexity of DLT grows, so does the need for lawyers to understand it.  This guidance aims to provide a useful stepping-stone in this process.”

Not bad for an organisation putting itself forward as a champion of the use of plain English. (For the uninitiated amongst you: DLT stands for distributed ledger technology – don’t worry I had to Google it too – and for what that means I will have to refer you back to the Note itself…)

The Guidance Note runs to some 268 pages.

Of this the first 15 pages are an index, presidential foreword and list of abbreviations.   The remainder is however a densely packed read (and thrilling it is not).

Part 1 relates to developing technologies with sections dedicated to:

  1. An overview of DLT;
  2. Commercial applications;
  3. The regulation of crypto-assets;
  4. Types of crypto-assets;
  5. Non-fungible tokens (yes, NFTs! see above); and
  6. Social tokens;

Part 2 talks about impacts on the ‘wider landscape’ with sections dedicated to:

  1. Smart contracts (of which more later);
  2. Blockchain consortia;
  3. Data protection;
  4. Intellectual property;
  5. Dispute resolution;
  6. Competition;
  7. Tax; and
  8. Environmental, social and governance considerations (‘ESG’!)

As I have said, this is not (for me at least) an entertaining read and I shall probably have to read significant parts of the Guidance more than once.  On a quick skim however one section did particularly catch my eye: Part 2, Section 11, Part A (DLT and Litigation) ‘changes to the traditional risk landscape for lawyers.’

This provision states as follows:

As technology evolves, the need for lawyers to evolve with it increases. The traditional risk landscape (i.e. the way in which lawyers protect themselves against litigation) is evolving into something new that lawyers will need to be alive to. As discussed in previous sections, most often SLCs contain both natural language and code. This code can be further categorised as arising from two broad sources: i) the code that is drafted to create rights and obligations, and ii) the body of code that builds over time produced by the running of the SLC itself. A new issue that will impact disputes in using SLCs is that most lawyers do not know how to read or write code, and, on the current state of the technology, machines do not read natural language well for purposes of executing that natural language. This language impasse is a potential source for disputes, as the four walls of the legal contract may be uncertain. For example, if a client would like to contract using smart contract functionality, the code would need to be created. The lawyers involved are unlikely to be able to create the code themselves or be able to proof-check the developed code for a client to make sure it is fit for purpose. Lawyers might then be reliant on developers and programmers to be able to correctly produce or read the executed run code. What happens when something goes wrong, and the SLC is not fit for purpose or missing a key feature? Who is to blame in this situation? Are the lawyers liable for not checking that the code is correct, given that they have a duty of care to their clients, or is the developer liable? Or is this a non-issue that will be most easily solved by well-drafted boilerplate provisions as to whether and to what extent code is considered “in or out” of the legal contract, combined with the development and use of sophisticated “no code” SLC drafting tools that automate a neat digital twin of a party’s intended precedent automations.

Again for the uninitiated an SLC is a ‘Smart Legal Contract.’  Google (or more accurately Messrs White Case via Google) then define a Smart Legal Contract to be: a legally binding contract, in which some or all of the obligations are recorded in and/or performed automatically by a computer program. The key characteristic here is automaticity – i.e., performance (at least in part) is rendered automatically, without human involvement.

Through cases such as P&P Property Limited v Owen White & Caitlin LLP and Dreamvar v Mishcon de Reya the Courts have put the responsibility for underwriting client identity checks in property transactions onto Solicitors (and their insurers) who are perceived to have deep pockets and less to lose than their clients.   You do not have to be very old or very cynical (and I am, I am told, both) to foresee a situation where a similar outcome arises in relation to the use of ‘Smart’ Legal Contracts, with lawyers underwriting the ‘what happens when something goes wrong’ situation spoken of in the Note.

It has taken 63 tragic, unnecessary deaths in five years on a single 16 mile stretch of the M1 (together with other deaths elsewhere) and the heroic campaigns of people such as Clare Mercer, wife of the victim of one such incident (Smart Motorways Kill), to finally convince our legislators that simply calling something ‘smart’ does not in fact make it smart.  Let this also be a word of warning in relation to ‘Smart’ Legal Contracts.

S2 Law of Property Miscellaneous Provisions Act 1989 and other requirements for legal formality, already significantly watered down by recent Court decisions (see Reynolds Report December 2019), exist for a reason.  Are clients (be they companies or individuals) really saying that, when committing themselves to pay tens/hundreds of thousands of pounds in rent for the next ten years or deciding how to dispose of the wealth accumulated in an entire lifetime of work they do not have the time to get it all written down in natural language, run through it  and sign with the appropriate formalities?   Equally are solicitors currently doing so well financially that they can afford to be put into a position where they have to underwrite a whole new realm of risk?


Further Reading:

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