Innovation and development are major drivers of companies, searching for ways to stand out from competitors. It has become crucial to increase the speed and output of work, while minimizing mistakes. Tools to improve efficiency and accuracy, such as smart legal contracts, have recently been introduced in the business world. This article will explore the use and application of smart legal contracts, to help you determine whether they are a solution for your company.
CONTRACT VS SMART CONTRACT VS SMART LEGAL CONTRACT
Contracts, as we know them, have several distinguishable elements: offer, negotiation, agreement and execution. Individuals make an offer that needs to be accepted by the counter party, and once accepted, a contract will be established creating a source of accountability to fulfil the agreed upon terms. The traditional way of signing a contract may encounter various inefficiencies, mistakes or is simply a hassle when modifying any aspect of the agreement. Smart contracts maintain the elements of a traditional contract, while providing a solution for said inefficiencies. Using IoT and Blockchain technology, a self-executing contract can be developed, saving valuable time for companies by eliminating the need for human review.
Firstly, it is necessary to distinguish between the types of smart contracts currently available.
There are smart contracts and smart legal contracts, which can have a different impact when executed.
A smart contract is a program that automates the execution of contract terms through sensors or other indicative measures. If you instruct the software to perform an act under a particular circumstance, it will perform a term of the contract automatically. Smart contracts enable machine-to-machine commerce, without the need for legal entities to enforce the contract. They can be summarized as self-executing scripts based on the information introduced by the parties.
Smart legal contracts, on the other hand, are legally binding agreements that do not need human review to execute the contract. Using machine reading, the digital contract connects the terms and the performance of its obligations to external sources of data and software systems.
HOW THEY FUNCTION
Smart legal contracts contain text that is compatible with a programmable code. The programmable elements use oracles (information sources) to maintain the contract in real-time (example: by enabling clauses to self-execute if the external data shows that specified contract conditions are met). The oracles indicate if the action has been completed. Moreover, the contract exists in a real-time digital environment where each party can log into and view the agreed upon terms of the contract. An example of a smart legal contract is a programmed contract set to automatically initiate payment once a service has been delivered and the parties to the contract can see the progress of completed tasks.
In order to implement a smart legal contract, the parties must first agree to the programmable elements. This means the parties to the agreement need to determine the deliverable tasks and the outcome upon completion of the tasks. Then, the programmable elements are amenable as they are simply code, giving the parties much more flexibility versus a traditional pen-and-paper contract.
TRUST / LEGAL CERTAINTY
Between the trading parties, smart legal contracts can improve the level of trust. Trust is vital when working and collaborating with others. Meaningful innovation projects depend on the two parties coordinating together and relying on each other. Since the software is programmed to execute tasks automatically, need for trust is ultimately eliminated from the equation. Contracts will automatically be enforced.
SPEED / EFFICIENCY
Smart legal contracts allow business to happen faster. The fact that the contract is live allows for constant updates to be made. For example, upon the completion of a task, the smart legal contract is able to execute transactions immediately upon the recognition of a completed activity. This in turn permits greater efficiency as there is no need for a person to register that information, and the possibility of having more value generating transactions.
As smart legal contracts are based on a blockchain system, there is a high level of data encryption. In turn, keeping the information stored in the contract safer and less prone to hacking. To access the contract or amend the contract, acceptance of both key holders (parties to the contract) is required. As blockchain is not controlled by a single party, participating computers hold a copy of the blockchain database that can never be removed. Each update to the contract within the blockchain system is cryptographically secured, rejecting attempts to edit, distribute or copy the information unless the editor is the owner.
Viewed as both an advantage and a disadvantage in respect to legal contracts. Given the need to program precise terms corresponding to particular tasks, it is no longer possible to maintain ambiguity. Sometimes, leaving room for interpretation allows a certain level of flexibility when negotiating a contract, but the programmable elements no longer allow for this flexibility. There is no discretion given to contracts dependent on particular circumstances.
Just like any other program, human error can occur. Bugs could be left in the software resulting in incorrect execution of a contract. However, in the hands of a good coder, issues such as these can be avoided!
Comparison of Features between available platforms
|Platform||Overview of Product||Trial Period||Users||Templates|
|CERTIMINT||CertiMint enables everyone to prove the existence, integrity and signature of any document or data, which is powered by Blockchain. The use of this platform allows users to certify documents and prove ownership in a time stamped and notarized manner.||✓||Unlimited||✓|
|SEIF||Pre-programmed and compliant smart contracts templates using blockchain ecosystem. Also allows you to build your own private blockchain.||✓||Depending on service||✓|
|OPENLAW||Creates agreements quickly, allowing parties to collaborate on the agreements. This platform is specifically designed for law firms.||✓||✓|
|CLAUSE||Makes contracts and the data within them machine-readable. Clause makes contract data organized and easily accessible for use by enterprise systems. Validate, enforce, query, and analyze contract data. Structured contract data is automatically sent to back-office systems.||✓||Pay per each user||✓|
Smart legal contracts are a fantastic tool to implement into your company if you are looking to improve efficiency. They can eliminate the repetitive work, saving valuable time! With smart legal contracts, there are two routes to take. Firstly, you can develop them yourself, requiring some knowledge of coding. Creating your own source allows you to have the flexibility in regards to which elements of the contract you want to be amenable and adjust it to your companies’ necessities. Alternatively, it is possible to contract a service to develop the contract using templates that are customised to your needs.