By Jack Savage

Advances in technology are affecting all aspects of business. It is has created significant developments in productivity, efficiency, and innovation. Inevitably, the question must be asked as to whether new technologies should be integrated into the relationship between law and business. Law and particularly contract law plays a foundational role in all business transactions. Can smart contracts enhance current legal practice, does the potential to remove third parties from contracting individuals exist and at what cost?

What is a Smart Contract?

A smart contract is a self-executing, self-enforcing, blockchain contract in digital form. The agreement is written in code across a distributed, decentralised blockchain network. Transactions are transparent, traceable and irreversible.

How does it work?

The agreement is written in code across a distributed, decentralised blockchain network. Both lawyers and programmers are required to create a smart contract. “Logic 1 ” is input to the code, which then acts in a pre-defined manner. The contract operates based upon IF THEN Conditional Computer Programming Statements.

How do you enter a Smart Contract?

An encrypted code is sent to the other parties through a distributed network of ledgers (a “DLT”). The code is received by computers in the DLT and individually make an agreement on the results of the code of execution. The agreement is self-executed and recorded as the network updates the DLT. The execution is not controlled by an individual party and cannot be independently modified.

Potential Benefits

Efficiency and reliability are increased substantially when a process is automated and the need for a human input is removed. Eliminating the intermediary significantly reduces transactional costs.

Limitations

Although some contracts can be expressed by computers, limitations exist when performance is dependent on a subjective standard. Smart contracts are not effective at expressing or construing non-binary clauses such are “satisfaction” and “reasonable effort” clauses, which are a regular and necessary feature of contracts. These clauses allow scope for the unexpected. When such an intention is expressed in a self-executing smart contract the intention of the parties may not be realised. A smart contract can only be understood literally, an interpretative approach seeking to capture the “intent of the contract” is not possible. A human element allows the flexibility needed to capture human intention.

Shortcomings

A more technical point is the requirement of certainty of terms for a contract to be legally binding. It is not possible to identify the legal parties in an agreement in a smart contract. Smart contracts use public addresses (“Address”), which directs to a wallet, to form the agreement. Information extrinsic to the agreement is required to identify the parties. Smart contracts can participate with other smart transactions. This means that the address may direct to another smart contract. This creates a multi-wallet address controlled by various addresses. This multi-wallet address can then enter contract itself. Therefore, it is not possible to definitively state that a certain public address relates to a wallet and a particular owner.

Smart contracts are unable to access information outside of the blockchain. Information is verified and sent by Oracles. However, centralised oracles are vulnerable to being hacked as they are single points of failure. Oracles can malfunction and feed false information to the blockchain. Congestion can result in transaction delays. Although these risks can be mitigated by decentralisation, it is impossible to eliminate them. As smart contracts become more complex the inherent risks increase.

Opportunity

Smart contracts will disrupt a number of existing industries that exist in different regulatory frameworks. A consequence of this disruption will inevitably be the need for legal advice on regulatory compliance. Smart contracts will require legal counsel to ensure that any projects stay within the applicable regulatory parameters across the jurisdictions in which it operates.

The Future of Law

It is unlikely smart contracts will replace written contracts due to their inherent limitations and current shortcomings. However, smart contracts offer a number of clear advantages to written contracts. It is likely that a hybrid model smart contract which acts in tandem with written contracts will prevail. In the future lawyers may learn how to code smart contracts in order to draft both elements of agreements. Presently, it is likely that products and services will develop facilitating lawyers to draft enhanced agreements using both legal expertise and blockchain.

Blockchain eventually may provide a secure, efficient and fast platform for storing, accessing, and authenticating data, in addition to streamlining labour intensive legal processes like discovery.

Whilst Smart Contract and blockchain may change how law is currently practiced what resources are allocated. It is likely that the legal practice will be enhanced rather than diminished.