The impact of smart contracts for legal professionals in the future

Kit Burden, partner and global co-head of technology sector at DLA Piper, explores the impact of smart contracts for legal professionals in the future and discusses what precautions can be put in place to protect against things that may go wrong.

Who will create contracts in the future?

From one perspective, smart contracts are not ‘new’ in the sense that straight-through processing of transactions (ie automated triggers of activity) has been around for a long time, and particularly in the financial services and logistics sectors. However, what is new is the introduction of distributed ledger/blockchain technologies, such that the scope and sophistication of such systems and processes can potentially be significantly expanded.

Perhaps most significantly, therefore, the smart contracts of the future (or at least the immediate future) will likely be created by programmers and designers, rather than lawyers. They will be the people who will be thinking ‘what do I need to achieve?’ and then ‘what needs to happen for us to get there?’, but potentially in quite simplistic terms, ie without necessarily asking what would happen if things did not go as smoothly as might be ideal.

For the larger and more commercially significant endeavours (including some of the key pilots for smart contracts and blockchain-based networks in the financial services sector) if the lawyers are not actually creating the new smart contracts, they are at least heavily engaged in their formation.

What happens if it goes wrong? Can precautions be put in place to protect against that eventuality?

This is the historical province of the lawyer, ie to ask the ‘what if…’ question, and then craft the contract terms to try to deal with it.

Depending on the nature of the smart contract in question, this will still be the case. For example, in a system, there will likely be a set of contract terms or ‘participation rules’ created as between the participants, which can then set out in advance what is to happen in the event of problems or disputes arising in future.

Despite this, if blockchain-based technologies were to develop as some claim to become all pervasive, then it is likely that there will be far more potential conflicts and ambiguities, eg as to different jurisdictions, regulatory regimes and/or impacted parties who have not signed up in advance to any particular terms of engagement.

For the more significant and B2B-focused smart contract regimes, therefore, there will be an imperative for the lawyers to be involved at an early stage, so that they can fully consider the workings of the proposed regime and highlight the points of potential legal challenge (eg as to the intended points of binding contract formation, the ownership of newly created rights, use of data, governing laws and dispute forums, etc).

Will more smart contracts in the legal profession further commoditise the nature of legal work?

This is nigh on inevitable. Technology is disrupting the legal sector just as it is all others. The ability to tie up blockchain-based smart contracts with ever more sophisticated forms of AI/automation has the potential to dramatically speed up this process. Conveyancing would seem ripe for rendering into a new digital form, while ownership and exploitation of various forms of IP rights would likely be equally open to disruption.

Going forward, however, the ability of AI to not just process data but also to progressively interpret it and make rules-based judgements based upon such interpretations will mean that a much greater pool of potential legal work will fall within the potential remit of smart contracts.

What are the opportunities for legal professionals in this space?

Lawyers cannot adopt the King Cnut approach to the encroaching tide of technology. The choice is to either disrupt or be disrupted. Lawyers should accordingly be reviewing their practice areas and considering what functions or transactions (or parts of transactions) could be simplified or commoditised so as to be rendered into a blockchain-friendly form. They should then be reaching out proactively to their clients to see whether their thinking is going down the same lines. This will require lawyers to be more tech savvy but, perhaps equally importantly, they will need to be even closer to the workings of their clients’ business, so that they are better able to look down the length of a particular chain of interactions or processes and appreciate what the possibilities for automation may be, and in turn identify the potential legal issues arising.

Further Reading

For more information on smart contracts and further expert views from the legal industry, you can read our free report here or click on the image below.

Interviewed by Hannah Thompson. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.