Re-Envisioning the Law Firm: Smart Contracts

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While financial industry, power delivery businesses and telecommunications enterprises are digitized and already rely on the blockchain, the benefits for law firms using smart contracts may seem less obvious.
In this article, we’ll talk about how smart contracts shape the current jurisprudence landscape and offer some insights into law firms’ immediate future and the unique challenges they face.

How is blockchain technology transforming the legal profession?

Nowadays we are witnessing the ending of big data time in corporate consciousness. And as a recent analysis shows blockchain technology is hitting a high. That’s number one trend public corporate execs have on the brain.
The Law Firm Innovation Index is based on Google Advanced searches on law companies official web pages and analyzes law firm innovation. And blockchain measures how law firms are supporting emerging enterprise use cases.

law firm innovation index blockchain

This move is critical and indicates that legal professionals are poised to serve as catalysts for the blockchain technology.
As a result, speed-up innovation and quick mass technology adoption will cause legal-service delivery improvements and make legal services accessible to everyone.

The Enterprise Ethereum Alliance

The Enterprise Ethereum Alliance is the world’s largest Blockchain initiative which definitely shows how cryptocurrencies and blockchain technology are slowly becoming more and more mainstream.

ethereum alliance law firm

The EEA is a non-profit organization and connects Fortune 500 enterprises, startups, academics, and technology vendors with Ethereum subject matter experts. Since February, the alliance has grown to over 200 members – amongst those some big names.

ethereum alliance vision

In August 2017 ten law firms and four legal institutions that specialize in blockchain technology have joined the organization. Cooley, Debevoise & Plimpton, Hogan Lovells, Holland & Knight, Jones Day, Morrison Foerster, Perkins Coie, Shearman & Sterling and Cardozo Law School’s Blockchain Project are among the new members.

They’ve also joined the Legal industry Working Group. The Group focuses on the education of the legal industry on the potential benefits of blockchain technology. It stands for supporting the growth and acceptance of the private versions of Ethereum blockchain, and make implementation more profitable. The group aims to ensure that Ethereum smart contracts comply with regulatory requirements that work with this new technology. Undoubtedly, learning component is a great advantage for legal institutions. Law firms’ clients don’t want to pay for it but expect the lawyers to know, especially as state governments around the world continue to weigh in on blockchain (Japan, Australia, OAE, USA, EU etc). Attorneys need to know the difference between Ethereum, Bitcoin and provide their clients with relevant information.
This is a big deal, as it signifies Ethereum’s adoption by major law firms, and with it, the adoption of smart contracts.

However, legal interest in smart contracts goes beyond the EEA. According to Forbes, at a spring Seattle legal technology event, digital contracts were recommended as a focus for the future event.

Traditional law and smart contracts

Let’s examine smart contracts from a legal perspective.

To start with, let’s give a notion of what a contract is. Wikipedia describes it as an enforceable by law voluntary agreement between two or more parties. The process of a contract formation generally includes offer, acceptance, consideration and mutual intention for agreement. And not all agreements are necessarily contractual. Commonly, contracts are created through social institutions and/or government to regulate behavior.

szabo traditional law smart contract

Traditional contracts have a long history based on the practices that have been available for thousands of years. They shape relations in the context of law, whereas smart contracts are agreements created by the means of the cryptographic code similar to other programming languages. Smart contract code mainly deals with transactions between agents in a blockchain ecosystem. The basic idea of these digital agreements is that the majority of contractual cases can be embedded in the hardware and software we deal with.

Crucial differences between traditional contracts and smart contracts are that the logic in traditional law is based on the “subjective” interpretation of analogy. Traditional legal documents are complicated enough. They often require trained professionals to be understood correctly. The result is that a traditional law is relatively flexible, involving interpretation and judgment (and can, therefore, be corrupted). Interestingly, most commercial contracts are incomplete in the sense they do not specify what will happen in every future state, but rather leave that to be determined later. Economists and lawyers have come up with a number of reasons why incomplete contracts are so common. Perhaps, the most obvious reason is that it is often too costly to forecast and agree to unambiguous contractual terms.

The software version is rigid and predictable. While the traditional law is defined by state borders, blockchain-powered contract law has the potential to exist across borders.

Smart contracts benefits

Nowadays smart contracts gain more and more interest due to a range of benefits they offer. They give you:

  • autonomy (no need to rely on middlemen);
  • trust (docs are encrypted in a shared ledger);
  • backup (on the blockchain docs are duplicated many times over);
  • safety (due to cryptography);
  • speed (software code is used to automate tasks; thereby saving hours spent on paperwork);
  • savings (no presence of an intermediary);
  • accuracy (you avoid the errors that come from manually filling out forms).


Are smart contracts legally viable?

It is, however, undeniable, that smart contracts do not exist outside the legal system. Thus, smart contracts have to be classified as legally relevant behavior. They serve just as another tool to organize business relations. Schematically this relationship might look something like this:

legally relevant behavior

Best friends: lawyers and programmers

Such contracts will require a tighter relationship between lawyers, their clients, and computer programmers, tasked with writing digital agreements. Lawyers will become a bridge between traditional contracts and smart contracts and eliminate the gap, providing necessary professional expertise about the deal. The programmers think in terms of bits and bytes.

Smart contracts remain experimental in many companies, and traditional paper contracts seem to remain for years. Many traditional contracts aren’t actually executable, so there is no place for them among smart contracts.

In addition, many legal questions regarding smart contracts are yet to be solved or must be handled on a case-by-case basis. How are agreements enforced across different jurisdictions? How is specific data accessed and protected? On the other hand, finding the answers is very promising and will bring industry to the new level.

Publicity requires professionals with sufficient tech literacy. Technological competence in jurisdictions where this applies is a must if lawyers aim to continuously play a meaningful role. And modern educational institutions owe it to the legal industry.

Artificial intelligence enables new insights

When it goes about potential applications, hundreds of existing pilots and proof-of-concepts are only a top of the iceberg.

blockchain artificial intelligence

Blockchain and smart contracts make data sharing and processing more trustworthy and efficient. This is the basis that makes AI and machine learning awake their powers completely. A huge variety of applications from personalized, to virtual assistants, cybersecurity, and chatbots, etc.

In a long-term perspective, complex forms of agent-managed peer-to-peer automation – an Internet of Things (IoT) and the network of agents – are of greater interest.
To replace traditional paper-contracts, smart contracts and the processes they run have to be compliant with the next requirements.

Firstly, they should be legally viable. Smart contracts have to obtain a structure traditional contracts have and to include the description of an offer, its acceptance, and the mutual intent to be bound by its terms. That will serve as a proof of acceptance of certain conditions.

Second, smart contracts should be accessible for analysis by an AI agent. That’ll make users’ insights regarding their best course of action, the same way a professional attorney would do.

Then, the UI/UX of a smart contract web application should be simple and user-friendly, easy to understanding.

And lastly, smart contracts have to be open for management, adaptation, and renegotiation, thus, to be flexible and interactive. Smart contracts have to cover the entire contract life-cycle and allow running different scenarios according to the user demands. A possibility of confirmation/denying the fact of meeting obligations have to be provided. Other-way, they should be undeniable proof that specified obligations have been satisfied.

Surely, the rest of the 2010s likely will be a period of mastering.

Smart contracts: long-term visions

Traditional contracts depend on a legal system administered by the human institutions. They require trust. Not surprisingly, people are very enthusiastic about removing government from its important function. As bitcoin enthusiasts are excited about the possibility of currency without a government, smart contract envisioners are excited about the prospect of contracts without a government-run legal system.

Democracy on a blockchain/voting

Using blockchain code, constituents could cast votes via smartphone, tablet or computer, resulting in immediately verifiable results. Brazil may write new laws with data stored on the Ethereum blockchain. They are willing to use the Ethereum blockchain to prove that signatures collected for petitions to the Brazilian congress exist. Brazilian legislators now are turning to Ethereum to solve that issue in one of the first uses of a cryptocurrency by a political system.

Court decisions prediction

The recent study shows that computers can do a better job then legal scholars at predicting Supreme Court decisions, even with less information. Martin Katz explored judicial prediction from a variety of different angels and assumes there are three forms of legal prediction: experts, crowds, and algorithms. Forecasting presupposes a rigorous information and modeling environment – that is historically lacking for a question. Using smart contracts prevails.

Distributed autonomous government

Settlers of a previously uninhabited area code their own self-enforcing government services.

smart contracts law firm future insights

Moreover, dreamers of the blockchain technology imagine that not only organizations but some aspects of society could be automated. Groups of settlers from different areas establish self-enforcing trade agreements.

Future outlook

Most innovation in law started elsewhere.

But with buyers of legal services becoming more sophisticated, new providers entering the market, emerging technologies and growing pressure on fees, the market is striving for the innovation.

The world is transforming dynamically, and so the jurisprudence industry is. Smart contracts are offering a change. By embracing it the law firms will not only control the risk they face but also open the door to extraordinary opportunities.

A blockchain distributed ledger may not replace all layers, but this new technology could eliminate many of the manual steps typically needed to execute contracts.

Applicature invites you to stay in touch.

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