Blockchain consortium R3 has contracted global law firm Norton Rose Fulbright to determine whether smart contracts have contractual effect and their enforceability.
The law firm has undertaken global research into the question of whether, or in what circumstances, smart contacts have legally binding contractual effect, are enforceable and whether disputes arising from smart contracts can be resolved by an automated resolution process built into a smart contract.
Todd McDonald, co-founder and COO of R3, says: “The past few years have seen a great deal of talk about distributed ledger technologies given the profound impact they will have on the future of financial services. In order to fully realise the benefits of the technology, it is essential that we design smart contracts that are legally enforceable. Working with our partners at Norton Rose Fulbright, we're exploring various ways to ensure smart contracts meet that threshold.”
R3 announced in July that is was working with Barclays Bank, Isda and legal and academic bodies to explore the development of a repository of master templates for smart contracts when trading and managing securities on distributed and shared ledgers.
Norton Rose Fulbright has now published its findings from across multiple jurisdictions in a white paper
that addresses a number of key variables:
- Does the model of smart contract deployed affect whether it gives rise to a legally binding contract?
- Are there other variables that determine the legally binding nature and enforceability of such agreements?
- Does the answer vary country by country, or are there some common principles?
- Can a dispute resolution mechanism address enforceability and country variations and, if so, how would it work?
Sean Murphy, global head of blockchain and distributed ledgers at Norton Rose Fulbright comments: “The industry has been grappling with the issue of whether or in what circumstances a smart contract gives rise to a legally binding contract. Through our research and analysis, we have concluded that the answer can vary according to, among other things, the smart contract model used. The answer can also vary by country because of differences in local law. Inserting a dispute resolution mechanism into a smart contract could provide a potential solution to the question of enforceability, and in the paper we examine how such a mechanism would operate.”