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Smart Contracts and Their Relevance in The Legal Profession
If it keeps up, man will atrophy all his limbs but the push-button finger.
Frank Lloyd Wright
New ways of formalising relationships between stakeholders and parties have been made possible by the ongoing digital revolution. The inefficiencies of inanimate paper based contracts well with the time-log as well as real-time presence requirement may spell the need for faster, more accurate and efficient alternatives. Smart contracts essentially work on block-chain or other distributed ledger technology which forms a decentralised system involving only the permitted parties hence eliminating the middleman. Banks, governments and other institutions are noticeably turning towards blockchain technology as it offers an undeniably faster, cheaper and relatively more secure performance.
To simplify, all parts of an agreement would be stored on a blockchain based platform and relevant computer code would ensure that all parts of the agreement are automatically executed.
- Smart contracts are written as code and committed to the blockchain. The code and conditions of the contracts are publicly available on the ledger.
- When an event outlined in the contract is triggered, like an expiration date or an asset’s target price is reached - the code executes.
- Regulators can watch contract activity on the blockchain to understand the market while still maintaining the privacy of individual actors. (1)
Some Case History:
- Barclays Corporate Bank had implemented smart contracts to log changes of ownership so that payments could automatically be transferred to financial institutions upon arrival.
- The Depository Trust and Clearing Corp. incorporated approximately 345 million transactions worth more than $1.5 quadrillion and processed them using a block chain ledger - proving its cost and time efficiency.
With current developments, smart contracts are best suited to execute contracts which (i) involve ensuring payment of funds upon certain triggering events and (ii) imposing financial penalties if certain objective conditions are not satisfied (2). Additionally, reservations about smart contracts exist due to the inability of contracting parties to comprehend the necessary code for a smart contract and to that extent, debate arises as to wether the programmer should be versed with the law in order to accurate capture the legal aspects of what the parties intend to formalise. A non-lawyer may still be able to understand the basics of most agreements, contracts and legal provisions but a non-programmer would be at a significant disadvantage to understand the code behind even the most basic smart contract. (3)
Smart contracts have the potential of revolutionising the transactional sphere of the corporate world as well as performance of civil agreements between individuals. To a large extent, it creates more autonomy for the parties to make the agreement and ensures execution as it is managed automatically by a network instead of potentially biased individuals. The possibility of converting paper-text based contracts into blockchain based executable code makes Smart Contracts a viable tool which could be adopted globally. Although, smart contracts would inevitably require to evolve before they are adopted in commercial relationships, if adopted globally parties may be using them across far more jurisdictions than might exist in the case of text-based contracts. (4)
References:
- Corpgov.law.harvard.edu. (2019). An Introduction to Smart Contracts and Their Potential and Inherent Limitations. [online] Available at: https://corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and-inherent-limitations/ [Accessed 19 Dec. 2019].
- Rosic, A. (2019). Smart Contracts: The Blockchain Technology That Will Replace Lawyers. [online] Blockgeeks. Available at: https://blockgeeks.com/guides/smart-contracts/ [Accessed 19 Dec. 2019].
- Corpgov.law.harvard.edu. (2019). An Introduction to Smart Contracts and Their Potential and Inherent Limitations. [online] Available at: https://corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and-inherent-limitations/ [Accessed 19 Dec. 2019].
- Corpgov.law.harvard.edu. (2019). An Introduction to Smart Contracts and Their Potential and Inherent Limitations. [online] Available at: https://corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and-inherent-limitations/ [Accessed 19 Dec. 2019].
