Law and Tech: Will Smart Contracts Revolutionise the Legal World?

This article was written by Rik Mukherji, who participated in qLegal as part of his Commercial and Corporate Laws Masters studies at Queen Mary University of London. He is a Bronze Award Winner of qLegal’s Blog Writing Competition 2021–2022. The content of this article does not constitute legal advice and should not be relied upon as a source of legal advice. **

Technology went through a rapid development since Thomas Edison invented the phonograph in the 1870s. (Please scroll down to learn more about the timeline of legal technology.) However, it happened only in the late 2000s when case management systems underwent modification, and started leveraging many of today’s modern tech tools that help lawyers remotely manage client matters and get the information they need. For example, today’s case management systems track case-related emails and other communications between lawyers and clients.

So, which are some of the most common tools utilised by legal professionals?

· Tasks and calendars — Electronic calendars and planners are some of the most powerful tools. A modern case management system links calendars to relevant matters, allows lawyers to easily schedule appointments related to a case and even assign tasks to another colleague.

· Document management and assembly — Case management systems often allow law firms to create document templates for client information. The administration staff can enter client data once, and relevant information will get autofilled into documents with just one or two clicks saving lawyers hundreds of hours.

· Client matter database — One of the biggest challenges faced by law firms historically was keeping a working database of client information. The modern case management systems make it easier to store client data related to their cases in one place which enable lawyers to access data even through a mobile phone or tablet.

· Time and expense tracking — Traditionally, law firms manually tracked the time spent on a matter. This could lead to inaccuracy in the records which had the potential to damage the clients’ trust. One of the biggest advancements of the modern case management systems allow lawyers to record their time more accurately and seamlessly. In many cases, the tracking does not require extra work as the case management systems automatically track how much time a lawyer spends on a matter. It also allows partners to easily check the productivity of lawyers in real time.

These were beneficial advancements in legal tech; however, many people think, the most amazing tech tool that will revolutionise the legal world are Smart Contracts.

How can Smart Contracts revolutionise the legal world?

The Smart Contract (also called self-executing contract, blockchain contract or digital contract) was invented in 1994 by Nick Szabo, a legal scholar and cryptographer. He realised that the blockchain technology could be successfully used for Smart Contracts.

They are self-executing, meaning that the terms are written in code and programmed to execute actions upon completion of certain criteria. They can help with exchanging money, property, shares, or anything of value while avoiding the services of a middleman. Smart Contracts define the rules and penalties around an agreement the same way a traditional contract does and automatically enforce those obligations.

Vending machines are good examples of the everyday use of Smart Contracts.

However, we need to distinguish between Smart Contracts and Smart Legal Contracts, as they are not the same. Smart Contracts are used extensively within the ‘decentralised finance’ (Defi) space which helps to reduce or eliminate counterparty risk in transactions between pseudo-anonymous actors. However, they rarely form a legally binding relationship. Their technologies are built because computer codes running on Distributed Ledger Technology (DLT) environments are the first and last lines of defence.

Source of picture: Smart Legal Contracts: Summary

On the other hand, Smart Legal Contracts (SLC) are specific types of Smart Contracts that use DLT to create trustworthy, legally enforceable obligations with counterparty-neutral contract automation embedded in the legal agreement. SLC is divided into three primary types:

· Legal agreement expressed entirely in code;

· Legal agreement comprising a hybrid of natural language sections in combination with self-executing code; and

· Legal agreement entirely based on natural language with configurable technology assistance associated with its natural language terms.

Is it legal to use Smart Legal Contracts (SLCs) in the UK?

The Law Commission confirmed the general compatibility of the SLC technology with the UK Law while identifying five key areas of potential conflict that could render a particular SLC.

1) Formation — The concern of the Law Commission relates to the extent to which SLCs raise uncertainties in applying the requirements for the formation of a legally binding contract. The requirements include agreement (offer and acceptance), consideration, certainty and completeness, and intention to create legal relations. This relates primarily to instances where the SLC is rendered all or mostly in code and is not preceded by natural language communications that clarify the parties’ intentions. For example, the review and signature processes would be the same as one find in today’s use of digital signatures. Furthermore, terms and conditions contained in the natural language text of an SLC may use the same conventions, structure, and approach as today’s static legal agreements.

2) Interpretation — This consideration involves instances where a dispute arises, and a court is asked to interpret the legal agreement. The Law Commission notes that interpretation issues are less likely to arise as the natural language contract is treated as containing the terms agreed upon by the parties. In addition, the transition to natural language SLCs can increase the ease of interpretation as the inclusion of embedded technological assistance in the agreement itself provides an adjudicator with additional information concerning the parties’ intentions.

3) Remedies — The question is how SLC technology may impact remedies that the parties seek and how a court might award those remedies if problems arise. Whether SLCs should be paused, rectified, or remedied by their parties or by a court of law is a critical technological question. SLC technologies that impart the fatalism found in Defi oriented Smart Contracts will render the agreements they record incompatible under law. Underscoring the importance of this key consideration, researchers found a pervasive belief amongst legal practitioners that DLT-based SLC technologies produced legal agreements could not be stopped or changed once they had been set in motion.

Purpose built SLC technology platforms such as Hunt’s platform allow for SLC elements such as ‘Force Majeure’ relief, the rectification of a faulty SLC, and the use of human confirmation of critical steps in the automation of SLC’s (e.g., payment of funds). Therefore, a multi-endpoint SLC presents a path to the technification of agreement remedies by containing pre-planned solutions executed when specific types of breaches occur.

4) Consumer Protection — The Law Commission expresses concern over the interaction between SLCs and existing consumer law protections, namely: transparency and fairness requirements. However, the partially code based SLCs face the biggest challenges. At the same time, the use of natural language based SLCs eliminates or greatly reduces issues concerning transparency and information rights, which hinge upon the consumer’s ability to understand the nature of the agreement they are entering into. In addition, the ability of SLC technology to give consumers the right to withdraw or cancel certain types of contracts is closely related to the technology’s ability to remedy or rectify SLCs after they have entered into force.

5) Jurisdiction — This area involves the question of the SLC’s jurisdiction. It is concerning when parties have not included a choice-of-court clause in cross-border contracts, determining the jurisdiction in which parties’ claims should be heard and judged. In such cases, the fault is apportioned to the drafting lawyer, not the medium through which the agreement was recorded. For example, a cross border dispute arises in an SLC that fails to address jurisdiction adequately, in that case, using a technologically enhanced natural language agreement between identified counterparties allows a court to apply the same processes for determining the agreement’s geographic centre of activity.

Similarly, the use of SLC technology hardly impacts the so-called ‘jurisdiction shopping’ that occurs in international disputes today. However, jurisdictional issues present a technological hurdle for providers of SLC technology platforms. This is because SLC automation must be structured according to the regulatory framework of the agreement’s selected jurisdiction.

After testing the types of contracts over six international territories, it was determined that natural language and technology assisted SLCs represent the optimal modality for introducing SLC technology to the practising legal sector, its clients, courts, and alternative dispute resolution (ADR) platforms.

How do you prepare/use a Smart Contract?

SLCs, as specific types of Smart Contracts are created similarly to Smart Contracts. As discussed above, in Smart Contracts:

· The contract terms are established by the parties and translated into code.

· When the event specified in the contract occurs, the code automatically executes.

· Once the event is executed, the contract transfers the value to the relevant parties.

· The transfer gets recorded on the blockchain.

The below picture shows some of the benefits of Smart Contracts:

Smart Contracts are still a futuristic concept in the legal world, so it is reasonable that there are certain limitations. The below table summarises our current understanding of the main benefits and limitations of SCs.

Although benefits seem to outweigh the limitations in number, it is still a question for the future whether Smart Contracts will revolutionise the legal world or something else.

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