Trakti Smart "Legal" Contracts Blog

Smart Legal Contract

What are the benefits of Smart Legal Contracts for companies?

on December 2, 2020

Photo by Austin Distel,Tingey Injury Law Firm, Kelly Sikkema on Unsplash

We have reached the next stage in the expression of commercial arrangements. Blockchains are increasingly being used to foster and execute legal agreements, supporting a new generation of electronic contracts. Blockchain networks and computer programs called “smart contracts” enable parties to memorialise all or parts of legal agreements. By using this technology, contracting parties gain the ability to create arrangements that are hard to modify, dynamic, and potentially less ambiguous than traditional legal contracts. 

The capacity of blockchains to store tamper resilient, transparent and non-repudiable data make them suitable for far more than just maintaining records of digital currency transactions. Many other forms of information are also making their way to the blockchain and blockchain-based protocols layering additional technology to execute processes or ‘smart contracts’ are finding a wide array of applications. 

In many ways, legal agreements relying on smart contracts are no different than existing agreements. If parties choose to rely on a smart contract for purposes of a commercial relationship, they must first negotiate the terms of their agreement and ideally reach a “meeting of the minds.”Once such an agreement is reached, parties reduce their understanding to a writing, choosing either to rely exclusively on a smart contract or a hybrid agreement. If in the case of a dispute, parties will either renegotiate the underlying arrangement or seek redress from a court or an arbitration panel to revert the effects of a smart contract. 

The main difference between traditional legal agreements and Smart Legal Contracts is in the way smart contracts handle performance obligations. 

Unlike contracts that only rely on natural language provisions where each party to the contract is responsible for performing contractual obligations, with smart contracts performance obligations are recorded in code using a strict and formal programming language and executed by members of a blockchain-based network. 

As smart contracts operate autonomously by default, multiple parties on a blockchain-based network can execute the smart contract code by virtue of its distributed nature. In this way, the parties relying on the smart contract lack the ability to halt the smart contract’s execution unless provided for in the underlying code.  

To this effect, performance obligations programmed in a smart contract can be designed to be difficult to terminate. Parties can rely on a blockchain network, to gain a high degree of assurance that any contractual obligations using a smart contract will be performed. 

There are many implications stemming from the adoption of smart legal contracts. Most notably, relying on code that is potentially autonomous and difficult to terminate or change, parties can reduce their need to monitor performance obligations on an ongoing basis, particularly in comparison to a traditional contract. 

At Trakti, we work towards helping lawyers and companies navigate and establish open source techno-legal standards to facilitate the widespread adoption of smart legal contracts. We focus on developing a blockchain agnostic middleware layer that is interoperable with any distributed ledger, allowing smart legal contracts to operate both on-chain and off-chain.  

Have a chat with us in our home page! 

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