Smart Contracts Photo: Shutterstock

 

This article is part of a monthly column from FinTech GC Ksenia Sussman examining how the legal profession should adapt to current, and future, changes in technology.

 

Headlines about the decline of the legal profession may generate lots of clicks and water cooler debates, but as evidenced by the steady growth of law firms around the world, they have yet to pan out. As the old saying goes, "Prediction is difficult, especially about the future."

In recent years, technology has been anointed as the new "Grim Reaper" standing ready to ring the death knell of the legal profession as we know it. From artificial intelligence to the blockchain, rapid technological advancements have prognosticators wringing their hands about whether high-priced lawyers will remain relevant in the not-too-distant future.

Smart contracts, in particular, are often pointed to as an example of a technology that will disrupt the role of business lawyers in myriad types of transactions. While smart contracts will undoubtedly change the way many business lawyers practice law, especially for those focused on the financial services industry, they will not displace the need for lawyers.

In fact, the mainstream emergence and application of smart contract technology in business transactions will allow lawyers to move past some of the mundanity that few of us relish in the practice of law, and on to more interesting and important legal work. To paraphrase Mark Twain, predictions about smart contract technology ushering in the demise of the legal profession are greatly exaggerated.

What are Smart Contracts?

Put simply, a "smart contract" is self-executing computer code. Smart contracts use blockchain or other technology to automatically enforce the conditions of an agreement. Once an agreement's conditions are met, the contract self-executes without the need for manual execution by the parties or a middleman such as a broker or escrow agent to ensure performance.

In this sense, smart contracts can and will obviate the need, at least to some extent, to have lawyers serve in an active oversight role during the entirety of the performance period for a transaction governed by a smart contract. When an agreement is clear, and the parties' intent is accurately reflected in code, computers can take things from there.

But there's the rub. A smart contract is only as "smart" as the code that it's built upon—which means that lawyers, and not merely computer programmers, must be integrally involved in the development of smart contracts.

Smart Contracts Require Smart Lawyers

In computer science, the term "garbage in, garbage out" refers to the notion that flawed input data results in flawed output data. In the context of smart contracts, this means that the contractual terms that form the basis of computer code must be clear, logical and enforceable in order for a smart contract to serve its intended purpose. Negotiating and drafting such terms is, and will remain, the job of a lawyer, not a computer programmer.

Smart contracts rely upon "if, then" logic. For example, if X happens, such as funds being paid into escrow, then Y happens, such as title to property being transferred from seller to buyer. The mechanics of such a transaction can be facilitated through smart contract computer code, but lawyers must still be involved to help negotiate the agreement between the parties and reduce the agreement into legally binding conditions. Lawyers must provide clear direction to coders, especially in instances where the terms of an agreement are complex.

Business lawyers are paid for their expertise, their judgment, and their ability to anticipate and mitigate risks. A good business lawyer draws upon his or her expertise to draft terms that make it clear to all parties to a transaction what their respective rights and obligations are under a contract. These same skills are valuable—indeed, necessary—in the formation of a smart contract. A computer coder must be able to define the "if, then" logic that will allow a smart contract to be self-executable, and that logic derives from a clearly and specifically documented agreement.

One factor that has limited the widespread use of smart contracts, particularly for complex transactions, is that it's difficult for computers to deal with many of the "soft standards" that are found in many contracts, such as terms that call for "reasonable efforts" or mandate that "time is of the essence." Computers are excellent at processing objective information, but don't deal with nuance very well. By understanding the way smart contracts work, and the technology that underpins them, lawyers can draft terms—which are ultimately reduced to code—that limit the need for subjective determinations and provide computers with the objective logic necessary to effectuate the contract.

In addition, like any contractual agreement, disputes may arise between the parties to a smart contract, and lawyers will continue to be relevant and necessary to help resolve such disputes. Even though smart contracts are intended to be objectively self-executable, one party to a contract may dispute a computer's determination of whether a condition has or has not been satisfied.

Counselor Not Computer Programmer

Now, and into the future, lawyers will play an important role in the formation and implementation of smart contracts across different types of business transactions. To perform this function, it's not necessary for lawyers to become computer programmers. But lawyers must gain an understanding of the underlying technology in order to negotiate and draft agreements that are capable of being translated by a programmer into smart contract language.

For example, to understand how a computer determines whether a smart contract condition has been satisfied, a lawyer must have at least a basic understanding of "oracles," which are data feeds from off-blockchain systems that provide information into blockchains that smart contracts may need in determining whether to execute an agreement. By staying abreast of the technology, a lawyer can remain relevant in a smart contract-world because her counsel will be contextualized and appropriate for how business is being done on the blockchain or another technology platform.

The real promise of smart contracts is that they will dramatically increase efficiencies and reduce costs in a wide variety of transactions. An inevitable result of realizing that promise will be the elimination of certain middlemen from the transaction process. Contrary to conventional wisdom, lawyers won't be displaced by smart contracts; rather, they will play an important role in ensuring smart contracts work the way they're supposed to. Perhaps most importantly, as computers take on more of the grunt work related to the execution of contracts, lawyers will be freed up to tackle more important and interesting work that only a human brain—and not a computer—can handle.

 

Ksenia Sussman is general counsel at digital asset advisory firm BitOoda.