Smart Contracts…. Is It A Smart Way Forward?

Introduction

Smart contracts help you exchange money, property, shares, or anything of value in a transparent, conflict-free way while avoiding the services of a middleman.

The best way to describe smart contracts is to compare the technology to a vending machine. Ordinarily, you would go to a lawyer or a notary, pay them, and wait while you get the document. With smart contracts, you simply drop a bitcoin into the vending machine (i.e. ledger), and your escrow, driver’s license, or whatever drops into your account. 

More so, smart contracts not only define the rules and penalties around an agreement in the same way that a traditional contract does, but also automatically enforce those obligations.

Key Features

The key properties of smart contracts are:

? Autonomy

? Decentralization

? Auto-sufficiency

Autonomy implies that after a smart contact launches, the deal initiator does not have to participate any more in the process. Smart contracts are not focused on one central server but are distributed by various network points so they can be referred to as being decentralized. 

Disadvantages

Like any other technology, smart contracts have their own disadvantages:

? The consumers are quite suspicious because it is a new technology and they do not understand it yet.

? Making changes. For example, you may change your mind about renting an apartment, but the data is already registered and it is technically difficult to make corrections. This may bring mistakes into the system and make it less safe.

? One can keep and save data in smart contracts safely and it is void of any distortions, only if the code is written perfectly and precisely. Humans can be tired or make clerical errors and thus the whole system is endangered.

? The third party agents do not disappear but start playing a different role. The need for lawyers experienced in IT increases in the future because the programmers of smart contracts will need consultations for making new kinds of contracts.

The impact on lawyers

Lawyers realize that smart contract technology will be an unstoppable disruptive force for the profession. However unlikely to replace lawyer for the following reasons:

1.    Someone needs to create (draft) the contract terms.

A smart contract is, by definition, a contract. Contracts are legally-binding documents. A smart contract can only execute what it is coded to execute. Someone needs to take the “deal” and convert it into legally binding principles. There’s a reason business lawyers do that today — because contract lawyers are trained in law and they are experts at stating things in specific terms. Lawyers are trained to anticipate what arguments the other side can make if things go wrong. Very difficult to achieve this is smart contracts.

2.    Not everything clients want to put into contracts is legal or enforceable.

A business lawyer is required to advise clients regarding what’s legal and what isn’t, or, even if something is legal, if it’s likely to be enforceable or not.  So, are there things to consider from a legal validity and enforceability which could be over looked by smart contracts

3.     A large part of a corporate lawyer’s job is custom contract drafting.

Businesses aren’t commodities. Even small ones require thinking about what really matters to the clients, what risks they fear, what risks the particular business presents. There’s no one-size-fits-all in this world. In fact, the number of moving parts one witness will rival the finest of watches.

 Another context where the stakes are high is drafting partner and founder agreements. If everything goes 100% perfectly, those agreements may never be dusted off. In the real world, though, few things go perfectly. Partner and founder relationships are highly unique. They don’t generally fit neatly into someone’s decision about the “ideal” template contract.

4.    Contracts are intentionally full of subjective determinations.

Oracles are often noted as the solution to the separation between the real world and the conditional data operated on by smart contract code, although there will be lots of situations where a decision needs to be made about whether or not to consult an oracle in the first place. Or, decisions that oracles aren’t equipped to make because they require judgment calls. The fact is contracts are replete with subjective determinations. The provisions of any business contract that are truly objective in nature are dwarfed by the ones that require judgment calls to analyze performance during the term of the contract. In most cases, the parties make those calls themselves — they aren’t predetermined in any manner that could be recorded into a smart contract or outsourced to an oracle.

5.    Sometimes new situations arise that no one was thinking about while the contract was being negotiated.

It is normal for transacting parties to negotiate again even after the contract has already been made and signed. For paper contracts, this poses no problem as the parties only need to make amendments — only a few additional pieces of paper and a quick DocuSign. However, since the blockchain is permanent, amending smart contracts that are not programmed for pre-established modifications could be significantly more challenging than it currently is in the offline world.

6.    Conflict is inevitable.

If all parties to a smart contract abide by its terms and complete all contractual performance without dispute, things will move smoothly on the blockchain. But, what happens when one of the parties doesn’t follow the terms of the contract? Or, what happens when one party thinks they have fully and properly performed and the other party disagrees? As an example in the case of an escrow smart contract, what happens if the item sent to you is broken on arrival? smart contract will fail to protect the aggrieved party.7.    Smart contracts have their own risks.

7. Smart contracts have their own risks

While not without its vulnerabilities or risks, blockchain technology is capable of being as secure and immutable as anything we know. To be that, the supporting blockchain needs to be coded flawlessly. That goes for the smart contract code, as well.

In 2016, an organization called The DAO was hacked due to a vulnerability in its foundational smart contract. The DAO was a digital investing organization (in the form of a decentralized autonomous organization) formed with the idea of disrupting the hierarchical structure seen in traditional organizations. And, there will always be clients who don’t trust the technology, people for whom it only takes one incident like The DAO every few years to reinforce their belief that the technology itself is the biggest risk in the equation. For them, a physical or electronic (of the Word type, not smart contracts) will be the tool of choice for a long time.

8.    The value of a business lawyer isn’t in the paper, it’s in the advice.

In the end, thevalue isn’t emailing pieces of paper to people. It’s providing well-considered advice specifically tailored to the client’s unique circumstances. This is true for most technology and business lawyers and it holds for most other niches in law. If they have routine transactions lawyers where a smart contract works without any of my input, great! we don’t need to be an impediment to the proces