Smart contracts

Digital disruption has eclipsed the legal profession, ushering in a new era of practice for lawyers and their clients alike. With the unprecedented growth of blockchain technology in particular, smart contracts have come to be the subject of great speculation.

 

On one hand, the use of smart contracts has already proven revolutionary in driving efficiencies in certain types of legal work. On the other, the potential they possess begs the question as to whether they will ultimately replace conventional contracts in the long run and, in turn, remove the need for lawyers at all. It may seem far-fetched, but to many lawyers, the arrival of smart contracts is a genuine cause for concern. To debunk this myth and understand the role smart contracts will play in the future of the profession, let’s take a closer look at the tool itself and the technology behind it.

 

In 2016, the Chamber of Digital Commerce (the “Chamber”) launched the Smart Contracts Alliance (the “SCA”) to promote the adoption and widespread use of smart contract technologies to enhance operational efficiency across industries. In the SCA’s view, smart contracts can be described as:

 

Computer code that, upon the occurance of a specified condition or conditions, is capable of running automatically according to prespecified functions. The code can be stored and processed on a distributed ledger and would write any resulting change into the distributed ledger.

 

In other words, the smart contract is a piece of code that executes on the terms of a contract on its own. Of course, the concept of a self-executing contract is nothing new – just take the vending machine as an example. Once the machine has verified that sufficient funds have been entered, it dispenses your order without the help of a human. Thus, the theory goes that smart contracts can be used to perform transactions independently of a lawyer. Of course, legal agreements are a little more complex than ordering a pack of Doritos from a vending machine.

 

The true appeal of this tool lies in their deployment on a decentralised blockchain. Since the code of a smart contract on a blockchain is public, any smart contract user can examine the raw code to verify that the transaction will happen as stated. Once deployed, the code is immutable,  which means one only needs to trust the code to perform as it is programmed to do so without the need for any tampering from a smart contract programmer. In this scenario, intermediaries are theoretically unnecessary.

 

In practice, it’s unlikely that we will see code become law: not only are there issues arising from the fact that smart contracts use code instead of natural language, but there are practical limitations in their inability to enforce contracts where the performance is tied to a subjective standard.

 

While a smart contract will rely on precise logic and mathematical instructions, commercial contracts often use terms specifically to provide some flexibility. Such terms cannot be reduced to a string of code or simplified down into a mathematical instruction. As long as parties involved in legal agreements demand a certain amount of “wiggle room” or flexibility, we are unlikely to see smart contracts completely replace conventional ones. While code generally has to be in a “yes or no” format, lawyers know that reality has more shades of grey to be assessed.

 

What’s more, the introduction of smart contracts in practice will likely offer new opportunities for the legal profession rather than replacing their role in business. Computer coders will inevitably require legal guidance on how to code contracts in order for them to be legally compliant, while contract interpretation will rely on the expertise of skilled commercial lawyers when something goes wrong.

 

For more information on smart contracts or for specialist assistance on drafting and interpreting commercial contracts, get in touch with our team today.