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AI will prompt new contract law, says Supreme Court judge

Contract law will need to be updated, and new civil liability rules considered, to account for the use of artificial intelligence (AI) in financial services, a senior UK judge has said.

In a speech delivered in China (18-page / 201KB PDF) late last week, UK Supreme Court judge Lord Hodge highlighted the potential of AI to "optimise the arrangements between contracting parties on the occurrence of contingencies" and said "contract law will have to be developed to address this".

The judge, speaking on the topic of fintech and the opportunities and challenges it poses to law and regulation, said the legal system "has not been adapted to accommodate the novel forms of transacting which financial technology offers".

On the topic of AI, he said it is to be determined how the law will attribute decisions taken by machines independently "to the intention of the contracting parties".

According to Lord Hodge, the use of AI could also require new civil liability rules to be drawn up.

"AI may also come to have many uses in financial systems such as the optimisation of the balance between assets and liabilities, portfolio management, the execution of trades and the detection of fraud," Lord Hodge said. "In the law of tort or delict, liability can result from the combination of a wrongful intention to harm another or foresight of harm to another and a causal link between the individual’s action (or inaction) and the harm which the other suffers."

"If an adverse outcome is the result of a decision by a computer, to whom will the law attribute fault? How will the law see a causal connection between a human individual’s acts and that outcome? Who is to be responsible for the machines’ decisions? Will there have to be legislation to impose liability on the developer of AI devices in fintech as one might in relation to the manufacturer of driverless cars? Or should legislation impose liability on those who choose to use such devices? These are matters which need to be addressed as the practicable uses of fintech become clearer," he said.

In his speech, Lord Hodge also addressed the use of 'smart contracts' in financial services, which he defined as "contracts whose terms are recorded in a computer language and which are automatically executed by a computing system". He suggested existing law on unjust enrichment could provide a remedy in cases where 'smart contracts' are in use but "contractual consent has been vitiated, for example, by misrepresentation or fraud".

Lord Hodge said: "Smart contracts are self-executing as the terms of the agreement between a buyer and a seller are written into lines of code which exist in a blockchain. When the coded conditions are met, a product is released or a payment made. No-one, including a court, can stop the performance of a smart contract. The courts will not be able to cancel the performance of the contract. But a remedy may lie in the law of unjust enrichment in both common law and civil law jurisdictions to compel the parties to re-transfer the property or money which was the subject of the transaction."

Questions of property law will also need to be clarified to account for the use of blockchain technology, the judge said.

Lord Hodge said: "For example, if digital currencies are developed and become widely used in cross-border commercial transactions, it will be necessary to achieve a degree of international legal consensus on their nature as property rights. Should such currencies, if they were to achieve a stability so far absent and were accepted widely in exchange for goods and services, be regarded as money or are they to be seen as securities and regulated as such? If computers using AI generate intellectual property, who owns that property? Rules will be required to define the nature of assets held on distributed ledgers and to identify when such property passes from one owner to another."

Lord Hodge also said that greater harmonisation in the law is needed across the world if fintech is to "contribute significantly to international commerce and financial services".

"It is a fact that many distributed ledger structures operate across borders," he said. "This gives rise to uncertainty as to the governing law in relation to contracts executed and property held in the distributed ledger."

"There needs also to be agreement on jurisdiction and enforcement to enable court judgments and arbitration awards to be enforced in several jurisdictions as the nodes controlling such a distributed ledger will operate in several jurisdictions. The Standing International Forum of Commercial Courts, in which both the United Kingdom and China participate, is working on enforcement of commercial judgments for money and might be a suitable body to seek agreement on rules of jurisdiction and enforcement in fintech," he said.

The judge further backed international cooperation between regulators on the regulation of fintech and the internationalising of fintech laws.

"If we were to develop internationally accepted laws on those fintech operations which can promote international trade in goods and services, so as to make the consequences of those operations as familiar as those of a bill of lading or a banker’s letter of credit, we would enhance the prospect of spreading the gains of the new technology to benefit more people internationally," Lord Hodge said.

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