Smart + Digital Contracts: What Are The Use Cases?

LawtechUK, the taxpayer-funded legal tech group, is asking for market feedback on what are the use cases for ‘smart’ and digital contracts. The call for input is part of an ongoing project to help bring the technology into real world use.

As the group explained in a statement: ‘Digital and smart contracts continue to receive significant attention across a broad range of industry sectors, but uptake is small and largely siloed, nationally and globally. Concerted effort is required to make paper agreements digital and, ultimately, to make them smart.’

They go on to say: ‘Contracts sit at the heart of transactions entered into across all sectors and play a critical role in trade and commerce. Yet we still approach contracts in much the same way as we have done for thousands of years – creating and managing them in paper form. Decades old technology such as PDF and Word continues to be widely used to write agreements in text and store them in a digital format, but does not render them to be truly digital in form.’

‘Contracting in this analogue way today has fundamental weaknesses and does not take advantage of the available technology to improve the contracting process, to make it fit for today’s commercial purposes and reality.’

So far, so good, and few would disagree with the core ideas here that if we are all contracting in a digital world, then the data in those contracts should be machine readable and accessible through that same digital environment. (Although, this is easier to say than actually do….)

It is indeed a strange state of affairs that every law firm and business trades digital copies of contracts, but then finds it hard to extract key data from them without resorting to good old eyeballs to do all the hard work.

NLP tools have come into play across a range of use cases to help here, and developments around extracting key data at the point of document creation have also started to grow. But, largely, reading all that unstructured legal data, i.e. text in a contract, remains an analogue, inefficient, and manual domain.

Then LawtechUK goes up a level of complexity and here is perhaps where the wheels start to wobble.

The group continues: ‘The benefits of digital contracts can be extended by the incorporation of self-executing code that automates specified actions within a document, creating a ‘smart legal contract’ or ‘smart contract’ which may be integrated with blockchain technologies to transform it into a live digital tool that connects to real world events and responds to them in real time. Whether it is appropriate or useful to include self-executing code within a digital contract will depend on the context.’

So, there you go.

It has to be said that smart contracts don’t have to be self-executing, they just have to have ‘linked data’. I.e. a contract could have a clause in it that details payment terms, this can be linked digitally to a company’s finance department, perhaps even directly to a bank, so the contract and the company’s accounts are synched up.

That could be very handy – and one could say we have something a bit like that already now with some of the better accounting software systems that link invoices to your accounts and to your bank. So, this is already tried and tested technology.

Then things get tricky, and that is the whole self-executing bit, i.e. where a clause that impacts the parties to the contract makes something happen digitally all by itself. That is, not just link its data to another data silo, but actively push something to happen, whether that may be terminating a part of the agreement, levying a penalty, sending a notice, or changing the overall output of the terms of that contract.

But making clauses, or parts of them, self-executing creates a whole range of problems. Legal issues aside (such as how do you deal with the subjectivity of language?), they demand a level of acceptance across a company and its counter-parties that may be hard to achieve, as the impact of something activating itself based on certain trigger data could affect multiple departments in a business and have unpredictable financial consequences.

Linking data, so that for example the finance or sales team can immediately see how a new contract adds to its annual revenue stream, would be very useful. But, a contract that started ‘just doing stuff’, to put it prosaically, is something one can envisage many inhouse teams, whose job it is to crush risk, would not want to have running inside their legal function or be responsible for.

Now, that’s not to say self-executing clauses cannot be used safely. The old classic of using them in shipping and logistics where the price of perishable food can be legally changed in the agreement based on the ongoing state of the goods, does make some sense. Although, again, taking humans out of the loop here and then depending wholly on automation does open companies up to some interesting challenges, e.g. ‘We don’t think the data sent to the contract was right and so you should not have let the contract tweak the price.’

Now you have to go back to the IoT sensors that were measuring humidity and temperature and have a fight over that. Then, maybe the humidity change wasn’t the supplier’s fault. Now we have to bring in other parties.

Making legal agreements dependent upon external data feeds doesn’t necessarily make them simpler, it just adds a new level of complexity into them that will have to be (legally) dealt with.

Clearly the aim of tech should be to try not to create new problems – and when it does, which is very often – to make sure the new problems are as minimal as possible – see below.

The other issue for this site is the mention of blockchain. In a world where most inhouse legal teams still don’t even have a DMS in good working order, let alone an entire CLM system that the company actually uses, the idea of throwing a new layer of tech at this – which also has its own problems – seems to be unrealistic and will just put people off before even engaging with the subject. Or it will only attract crypto fans and that’s not going to help with the thorny issues of contracting either.

So, machine readable digital contracts where you can easily extract key data: yes, great, let’s do this.

‘Smart contracts’ where the data is linked perhaps to other data repositories across a business to improve legal KM and operational KM search: also yes, better data architecture has got to help.

‘Smart contracts’ that can self-execute: clearly some use cases here, but the real question is how we can ensure 1) humans in the loop, 2) this doesn’t just make life more complicated.

And, ‘Smart contracts’ connected to a blockchain network: please, no.

As mentioned, most businesses are struggling just to stay on top of day to day KM, chucking blockchain into the mix is really not going to help right now, nor likely is it even necessary. Ultimately, if the focus ends up on this then the project’s potential output will likely be a white elephant.

Any road, to conclude, the group wants your views. They add: ‘At LawtechUK we want to demonstrate the benefits that technology can bring to the contracting process for the legal sector, for business and for wider society.

‘We will be collating and building the use cases from October to December 2021. If you have ideas for or are interested in collaborating on a use case, we would welcome hearing from you.’

You can get in touch with the LawtechUK team here and find more info on the project here.

1 Comment

  1. Funnily enough, a huge use case of smart contract is already clearly in operation with the use of non-fungible tokens (NFTs) for digital art.

    Whilst not necessarily drafted up by lawyers (and perhaps with little consideration of the underlying legality and / or regulatory challenges!), the tech community has gone ahead and created a number of standard contracts (see, for example which provide for royalties to be automatically be paid back to the original creator of a piece of art, each time that piece is bought and sold on the open market.

    This happens automatically, in a trustless way, between unknown individuals. A self-executing provision that brings value to the original creator, in ways that they may have struggled to achieve in a traditional, paper-based environment.

    Similar use cases are being explored with regards to – for example – the automatic distribution of royalties relating to music tracks (check out, for example: The use of decentralised oracle platforms such as Chainlink – as you note – allow real world data to be brought into these contracts, and have bearing on how they operate.

    I can only imagine that as time goes on, more and more of these potential use cases will surface and – in my mind – will eventually lead us to marvel at quite how inefficient our current, non-automated practices really are!

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