You could be excused for thinking that there is not much left to discuss when it comes to properly executing contracts. But you would be wrong. A recent case in the High Court considered the witness requirements when executing a contract as a deed. Almost simultaneously a panel of legal experts was publishing its findings on how smart contracts could be executed and whether they would be binding under English law.
Smart Contracts
While smart contracts are notoriously difficult to define, they are generally described as lines of computer code that can automatically execute, observe and enforce a legal agreement. Smart contracts have for a number of years been touted as part of the digital revolution which it is claimed will streamline aspects of the construction industry. They have the potential to reduce the time, energy and associated costs of managing and recording many on-site events. Their potential applications are numerous. For example, they could:
- be synchronised with BIM to create a digital twin of a construction site where works programmes are automatically varied and updated according to weather events
- pave the way for the supply chain to be paid based on automated certification.
One potential hurdle to overcome if the full benefits of increased contract automation are to be realised is whether or not such smart contracts are enforceable under English law. This point was recently considered by the UK Jurisdiction Taskforce (UKJT), one of six taskforces of the LawTech Delivery Panel (1). On 18 November 2019 the UKJT published a statement which provides some useful definitions and concepts regarding smart contracts. The statement accepts that whilst smart contracts are as a concept difficult to define, they do have one common characteristic, which is automaticity. It explains that a smart contract is generally performed without the need for and in some cases without the possibility of, direct human intervention.
UKJT believes that the statutory signature requirement is highly likely to be capable of being met for smart contracts by means of a private key, being a digital signature that only that party could make. 'The key question is not what the signature looks like, but whether or not it is clear that the party intended to authenticate the full terms of the document'.
Smart deeds
A further snag, and one that the UKJT did not specifically address, is how these principles would apply if the contract was to be executed as a deed. Put another way, would smart deeds also be enforceable? It is very common for contracts in the construction industry to be executed as deeds but for them to be binding certain additional legal requirements must be satisfied. These include how the document is executed. There are numerous permutations but the ones that are most commonly seen in construction are:
- Execution by an individual – document must be signed by the individual in the presence of a witness
- Execution by a company – document must be signed by two authorised signatories (either two directors or one director and company secretary) or signed by one director in the presence of a witness
The additional difficulties that these requirements may pose for smart deeds is illustrated by considering a recent case that looked in detail at witness formalities.
Past (and present)
Wood v Commercial First (2) in part concerned the alleged forgery of a mortgage deed. The claimant’s case was that whilst she had signed the mortgage deed in the presence of a witness, the witness had only added its signature at a later date. The Court accepted that the witness had not signed the deed in the claimant’s presence but held that this was not necessary. The Court’s reasoning was that the drafters of the relevant legislation (3) had not felt the need to include wording requiring witnesses to sign in the presence of the executing party, only that the executing party had to sign in the presence of the witness.
Future
The decision in Wood regarding when a witness can append its signature may, in conjunction with the UKJT’s conclusions, help to pave the way for the execution of smart deeds.
Potential solutions include:
- Avoid the use of witnesses (for companies) – if a smart contract executed by a private key is capable of being enforced then, presumably, it logically follows that a smart deed executed with two private keys for each executing party (representing two directors or a director and company secretary) should satisfy the deed execution requirements.
- Where witnesses are required (for individuals and companies that prefer to execute using only one director) could a witness be nothing more than an additional line of code added to a digital ledger (blockchain verifies transactions via independent peer to peer network so could be construed as doing so)? Would blockchain satisfy the witness requirement to be 'in the presence of' the executing party?
These are issues that the UKJT may wish to address in the future. However, as the UKJT’s statement summarises, the great advantage of the English legal system is its inherent flexibility and so with some judicial creativity there should be no reason why smart contracts cannot be executed as deeds and pave the way for wholesale adoption within the construction industry.
This article was written by Alistair Russell and Norris Riley.
- LawTech is a team of industry experts and members from the government and judiciary formed to help the UK legal sector grow and fulfil its potential.
- Frances Elizabeth Wood v Commercial First Business Limited (In Liquidation), Business Mortgage Finance 5 Plc, Business Mortgage Finance 7 Plc [2019] EWHC 2205 (Ch)
- Law of Property (Miscellaneous Provisions) Act 1989