Smart Contracts: Transforming Governance by Automating Contractual Obligation Management

One of the repeated causes of failure of government projects and managing long term contracts or licenses, is the breakdown of relationships due to lack of trust. This lack of trust is not just between the vendors, ecosystem partners, and the government, but also between various groups within the government. Causes can often be traced to lack of transparency and lack of alignment of goals and interests and cascading effects of those down the chain.?

There is a significant lack of trust between vendors, ecosystem partners, and the Government even after engaging in a written contractual agreement. This lack of trust creates financial inefficiencies. Companies build risk reserves to deal with this – as much as 100% of the value of the actual contract. Some global companies refuse to do business with the government, citing potential for uncontrolled future risk. Corporate Governance is paramount is most trusted companies and if we want good companies to work with the Government, then the entire ecosystem needs to improve their own trust deficits with others within the ecosystem.?

The problem is not just one sided or limited to government contracts. Companies too expect to get paid without fulfilling their obligations. This sidestepping the process causes government, enforcement or regulator entities to look at all companies with suspicion. Obligations are the key part of any contract. Managing these obligations over a long period of time takes time and needs legal and financial experts who can interpret the contract. Managing these complex obligations over several years, where all signatories have changed (on both sides), requires systems that can enforce contractual obligations and alert authorities when violations are about to happen or have happened.

Can ‘Smart Contracts’ on Blockchain allow government organizations and their ecosystem partners to automate the management of Obligations? Can you improve the trust factor by guaranteeing that if work gets done, items are delivered, service-levels are met, then payment will be made? If payments are made, will licenses will be issued or benefit guarantees be extended? If Licenses are issued, then obligations under the licenses are monitored by all parties over the duration of the contract??

Can obligation monitoring be automated and not left to people without the organizational memory and adequate systems to manage complex contracts over long time periods??

One way to move to managing obligations is through a system of 'Smart Contracts'. 'Smart Contracts' are programs stored on a blockchain. These run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss. They can also automate a workflow, triggering the next action when conditions are met. Independent verifiers can be used to validate any aspect of the contract.?

Smart contracts work by following simple “if/when…then…” statements that are written into code on a blockchain. A network of stakeholders executes the actions?when predetermined conditions have been met and verified. These actions could include creating automated triggers or alerts for authority-confirmation to?release funds to the appropriate parties, registering a vehicle, sending notifications, or issuing a ticket. The blockchain is then updated when the transaction is completed. That means the transaction cannot be changed, and only parties who have been granted permission can see the results.

Within a smart contract, there can be as many stipulations as needed to satisfy the participants that the task will be completed satisfactorily. To establish the terms, participants must determine how transactions and their data are represented on the blockchain, agree on the “if/when...then…” rules that govern those transactions, explore all possible exceptions, and define a framework for resolving disputes.

Gaia’s?COMS (Contract Obligation Monitoring System) is 'first-of-a-kind' Blockchain Smart Contract Based application to automate longterm contractual obligation tracking.?

This concept has been used to manage contracts and bilateral obligations for the Railways and Indian Customs. Now it is possible to track the performance of a contractor in every train journey and not be blindsided by averages in the end of the month. For Indian Customs, every duty-free import by an exporter / manufacturer creates an obligation for export and this has to be managed over multiple transactions for multiple products over multiple years. The complexity can only be managed digitally and by using Blockchain, the system ensures multi-party trust and indelibility of the terms. Several schemes of the Government like EPCG (Export Promotion Capital Goods), Gold Bonds, EOU (Export Oriented Units), AA (Advanced Authorization) etc. are now going to be managed using DLT Distributed Ledger Technology.?Copies of the obligations can be distributed across the different organizations providing services to the company.

The application can be expended to manage License and Contract obligations from various ministries and their ecosystem partners. Large enterprises who are managing many suppliers do same or similar work across the country and can also use the system to manage their obligations. Rental agreements, Right-of-Way agreements, Supply Contracts, Revenue Share Contracts, or any two sided enforcement of obligations can be done through such a system.

Once processes are digitally transformed and new age systems using digitized data and immutable records are implemented, and payments start happening when work gets done, the trust will return on both sides.

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Mayuri Naik , Amrita Chowdhury , Nijesh Kadakia Rohit Nigam Dhruvi Sakariya Shreyash Ghag Gopalsingh Rawal