ADOPTING SMART LEGAL CONTRACTS

Smart contracts have already received uptake in some industries and will soon find their way into others. The nature of smart contracts, particularly their immutability, transparency, and reduced reliance on intermediaries lends them to use cases with multiple actors and a need for decentralization. Smart contracts have already proven themselves as valuable tools for supply chain management, verifying the authenticity of copyrighted property, and currency transfer. Furthermore, with ongoing developments from companies like OpenLaw, which serve to make smart contracts more accessible to the general public, smart contracts may not be uncommon in the future.

TRANSITIONING TO SMART LEGAL CONTRACTS

How does a traditional contract get translated into smart legal contract terms?

A traditional, non-smart, or ‘legal’ contract, is an agreement between two or more parties characterized by mutual promises or obligations, and is enforceable by law. While regular contracts are written in natural language, smart contracts are written with execution mechanisms designed for a set of deterministic obligations (with the logic of “if x then y” conditions). Smart contracts are therefore based on software languages, or "codes". A code is the set of instructions forming the software which is executed by a computer in an abstract manner to produce real-world output.

In order to translate the actual contract terms into legal contract terms, lawyers and software developers will have to work together in order to convert natural language into technical, hard-wired, coding language. Just as lawyers will not be able to single handedly write the code of the contract terms, a software developer may leave out a lot of the important nuances that are written into laws and policies within the contract terms. For this reason, partnerships or multidisciplinary teams between law firms and IT companies may start to emerge as well as a higher demand in the legal field for lawyers who have a background in software development [18].

What types of terms are appropriate to be translated into smart terms?

When translating a traditional legal contract into software code, it is important to consider what types of terms you are working with. Any legal agreement may contain operational and non-operational clauses, each of which come with their own considerations for blockchain translation. Operational clauses — those that contain Boolean logic (if x happens, execute y) — are easily translatable into software code. For example, if property is transferred between parties, the blockchain releases a payment into the vendor’s account. Non-operational clauses present complications because they contain more subjective information about the context of the term and rely heavily on formal semantics. Terms that include phrases such as ‘to the best of their ability’ or ‘in good faith’ cannot be easily coded because they require subjective evaluation. While the use of smart contracts may encourage parties to iron out the details of these clauses and include fewer non-operational terms, they will not completely eliminate litigation. In these cases, a designated human oracle must be involved [19]. The main problem with merging software code and natural language is whether the natural language could even satisfy the requirements asked from it. More importantly is the question of whether the smart contract can even be valid as a mixture of both natural language and software code. An alternative approach would be for the smart contracts to include an “off ramp”, which would allow the contract to be governed by the natural language terms agreed between the parties instead of the code for those specifically abstract terms or sections of the contract that cannot be translated into code. Another alternative would be to only have coded transactional or obligatory terms within the contracts, where the terms could be autonomous in their execution.

What knowledge or skills are required to make this transition?

In most cases, coders will be required to convert legal contract terms into code. However, because they lack the legal knowledge necessary for understanding contract nuances, they cannot do the job alone [20]. Depending on the point at which blockchain is implemented, lawyers will be required to:

Draft contracts and software code: Lawyers will need to work closely with businesses and coders in order to draft a contract that accurately reflects the intentions of the parties.
Interpret contracts: The rule “code is law” is not foolproof; lawyers will need to be involved to deal with the grey areas and other complicated scenarios.
Structure transactions: Lawyers need to be on the lookout for contractual issues that may arise due to the automated nature of smart contracts, which may need subjective determination.
Interaction with regulators: Lawyers are tasked with other responsibilities such as mitigating risk management, mapping out a solution upon regulations, asking whether the solution poses any systemic risk, managing disasters, and double checking whether records are tamper proof. Interaction between lawyers and regulators will also help for managing and understanding cybersecurity risks.
Establish interpersonal relations with each party: human contact remains important in order to transition into new technologies amidst uncertainty and confusion.

As with the introduction of any new technology, it is important to know what one’s next steps should be in the case that an issue is caused and a dispute arises. Traditional courts of law will still be a viable avenue to resolve any disputes that arise in the execution of a smart contract. However, alternatively, both parties involved in the smart contract can use online court platforms such as Kleros or Aragon Court. These online courts use human oracles that act as juries to help make subjective decisions in the case of disputes.