The potential of Distributed Ledger Technology (DLT) reaches far beyond cryptocurrencies. One of its most promising applications is commonly referred to as “smart contracts”.
Smart contracts are misunderstood by their names. As a piece of code running on a blockchain, a smart contract is not a legally binding agreement. It may however become part of a legal agreement if it is used as a tool to automate the execution of pre-existing obligations. Smart contract code can be programmed to trigger the performance of an action (e.g. payment or penalty) when a predetermined real-world event occurs (e.g. respectively the delivery of goods or the failure to do so).
Computer code takes contract automation to a new level when powered by software enabled functionalities and connected to external sources of data.
An unlimited range of permutations is possible depending on the contractual clauses to be automated and the interaction between the text and the code.
The future of commercial agreements may lie in combined paper and code models, with computer code inserted in existing contracts. An unlimited range of permutations is possible depending on the contractual clauses to be automated and the interaction between the text and the code.
The use of on/off-chain computation functionalities achieves considerable efficiency and facilitates business transactions in a number of ways. These include:
1. Improving and reducing the high costs of contract management and execution by facilitating the monitoring and administration of agreements;
2. Improving real-time visibility of contractual performance;
3. Facilitating legal counsel’s risk analysis and mitigation;
4. Providing reliable transaction records. This is good practice in anticipation of any claims or litigation; and
5. Reducing transaction costs (arising out of e.g. contract storage, record management, search & retrieval, audit & reporting, etc.) by streamlining digitalized in-house business processes.
These operational benefits will lead to the creation of more data-driven contractual relationships.
In order to form legally binding and enforceable agreements, the use of smart contracts must take place within the existing legal framework. This means that the parties must respect the conditions for contract formation in a given jurisdiction and that their lawyers must be ready to advise on a number of issues taking into account the use of computer programming.
Consenting to the use of code may be more difficult than it seems, especially if the terms are deemed onerous or unusual.
For example, depending on the applicable law and who the parties are, using computer code may create a significant imbalance in a contractual relationship and affect party agreement. Consenting to the use of code may be more difficult than it seems, especially if the terms are deemed onerous or unusual. Indeed, both parties cannot reasonably be expected to be able to read and fully understand coded language. Also, have the (coded) terms been sufficiently brought to the parties’ attention? Would a contract be validly formed if a party waived the opportunity to get knowledge of the code? Would a court accept that one has received adequate notice of the terms when it would require an expert in software engineering, with specific knowledge of the language used, to explain the functioning of the code used in the agreement?
The role of the lawyer will change drastically in the coming years, to the extent that some lawyers may be pulled towards becoming legal technologists – if not transactional engineers. Aside from ensuring that the conditions of contract formation are met, lawyers will be expected to perform a number of new and increasingly technical tasks, including:
1. Determining the most suitable form for the paper and code contract;
2. Identifying provisions suitable for automation;
3. Defining the terms of automatic execution;
4. Ensuring compliance between the legal text and its coded counterpart;
5. Defining the scope of the code;
6. Advising on the applicable law, jurisdiction and dispute resolution mechanisms;
7. Ensuring compliance with legal requirements and the regulatory framework;
8. Anticipating and providing for changes in factual circumstances; and
9. Advising on liability for code drafting/engineering.
Businesses also struggle with the shift in liability, governance, risk and compliance caused by the removal of intermediaries.
The use of programming logic may lead to overperformance because its binary character does not allow for human interpretation, partial performance or variations.
Disputes lawyers will not be spared. While disputes are less likely to arise out of unilateral changes to the smart contract code and underperformance, the use of programming logic may lead to overperformance because its binary character does not allow for human interpretation, partial performance or variations. This may give rise to disputes of a different and highly technological nature.
In the years to come, digital transformation will impact lawyers just as much as it will impact their clients. It is expected of legal practitioners to be proactive, acquire the technical skills and stand ready to provide the required technological solutions in this new era of the digital age.