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Smart contracts: a beginner's guide

Smart contracts: a beginner's guide

Charlotte Lear

15/04/2022

Reading time: four minutes

Welcome to the next topic in this series, where I attempt to make commercial awareness content for non-law students like myself.

Visit LawCareers.Net’s non-law student hub for key information for non-law students.

Commercial awareness can be an overwhelming responsibility if you’re used to having your nose in a book of poetry as your degree. I’ve found that breaking commercial news into bitesize chunks can be super helpful.

So, here’s the next instalment: smart contracts! Disclaimer, I’m in no way a tech wizz – this is the information I’ve gathered from thorough research.

LCN has recently launched the Commercial Connect newsletter that connects you to the business world. Register for a free MyLCN account to ensure you don’t miss out!

What is a smart contract?

Fundamentally, a smart contract is a computer code that helps to automate and enforce legal agreements. Here returns our good friend: the blockchain. The code that forms the contract is mapped onto the blockchain including the various clauses and outcomes of that contract.

Read this LCN Blog: ‘Smart contracts and English law’ to discover more about smart contracts.

Benefits of smart contracts

Firstly, automated contracts can save vast amounts of time in preparation and administrative tasks carried out by legal professionals. We’ve seen this a lot by increasing legal tech departments in firms that carry out product development in-house to make the legal process more efficient for clients – take Linklaters LLP CreateiQ, for example. 

By reducing time on administrative tasks, the cost is often kept down for clients and legal professionals (especially those more junior) are given more opportunities to take leadership roles in transactions.

Secondly, blockchain technology benefits from being decentralised, meaning that third parties don’t have any control over the contract which virtually eliminates the risk element of a transaction. The fact that the entire history of the transaction is recorded is particularly helpful for measuring triggering events such as the receipt of notice.

If the receipt is recorded on a decentralised ledger, a party cannot argue that it didn’t receive notice or confirmation of an event.

To find out the link between smart contracts and blockchain, read this Commercial Question by Michelmores LLP: ‘Can Blockchain revolutionise real estate transactions?’.

What’s the catch?

By nature of the immutable nature of blockchain technology, smart contracts are completely unmodifiable. Now this can be taken for both a positive and a negative but, on the negative side of things, a transaction cannot be reversed or specific elements of that transaction declared void. This means that if any part of the transaction were to be retrospectively negotiated or was no longer feasible, it cannot be edited.

Also, smart contracts cannot include deliberate ambiguity or possess any wriggle room for contractual interpretation. Therefore, it can leave lawyers stuck when they want to introduce clauses that include terms like “so far as is reasonable to do so”.

Ambiguity in contracts can sometimes be advantageous in litigation particularly. However, this means that they’re not very well suited to contracts that are used in our daily lives – the ones that don’t require third party intervention.

Automation

The automated side of smart contracts can also be adapted to suit the transaction and normalise their implementation. Automation is measured on a sliding scale as there are different forms of smart legal contract. Yes, there is the extreme where the entire contract is written and performed solely by code but there are more flexible arrangements where the contract is negotiated and written in natural language with the performance of it being recorded in code.

Conclusion

As it stands, the Law Commission has concluded that there’s little need for statutory reform for smart contracts to be compatible with the legal framework in England and Wales. They have, however, decided that the common law should be developed incrementally to normalise the use of smart contracts in daily life. This means that smart contracts are inevitably going to become more common.

With magic circle firms like Linklaters at the helm of their development, smart contracts could revolutionise the role of a lawyer in the future – gone will be the days of trawling through pages and pages of legal jargon to understand the risks and opportunities of a transaction (we can hope!).