Legal drafting is changing.
Smart contracts and legal design have marked the transition to an approach that conceives the contract not more as a means of defense but as a functional one, as a means for achieving the purpose; in short, a result-based approach. So how we can use legal design principles to organize our templates for smart legal contract adoption. Let’s have a look!
Drawing up your templates in preparation for smart contracts
Smart contracts are changing how legal matters are drafted, moving to an outcome-based approach incentivizes logic to perform better. To do so, a comprehensive and clear picture of the business and operational practices for involved parties is necessary when defining and agreeing on terms to automate contracts.
Legal drafting is changing for the better
Smart contracts require accurate and specific data. The operational clauses of a contract that can be codified and automatically executed impose the use of precise and logical language. We speak of “plain language”, no longer of “legalese”: the language is based not more on abstraction.
Redundant phrases, ambiguity and vague terms disappear. Values, parameters, metrics are introduced.
Operational clauses and non-operational clauses
The agreement is formed by two types of clauses: operational clauses and non-operational clauses The latter do not involve code; they define rights and obligations of the parties, the intentions of the parties, the way disputes should be handled; however, this does not mean they could not be expressed in some more formal manner that would allow computer software to interact with them in a useful manner (i.e., by creating interface).
Embedding a smart contract into a legal contract template requires following some rules while drafting the clauses:
- Imprecise data does not compute
The smart contract code is aligned and derived from legal documentation (the smart legal agreement) and performs some or all of the provisions of the contract.
The provisions of the contract will no longer be able to accommodate vagaries, redundancies, or ambiguity; clauses, in this case, require a plain language, a logical approach in writing.
It is necessary to write the clause making explicit the process of the action that the party has to perform: instructions, action, consequences, conditions must be clear and expressed.
Participants need to agree on “specific data”.
2. Identifying logic parameters
All parameters should be identified within the legal prose. The identification of a parameter entails identification of its name, value, type.
The execution parameters are extracted from the legal prose and passed to the smart contract code that provides automated execution.
For example, a smart contract for recurring payments requires to insert in the clause the following parameters:
- Amount of the rate/instalment;
- Time of the payment ;
- Who has to make the payment;
- Who receives the payment.
3. Implementing the Wallet ID
The identification of the parties requires, among the classical information (Company name, registration number, Country of incorporation…) one more parameter: the Wallet ID.
The wallet allows the party to send or receive tokens in case of crypto payments.
4. Responsibility for coding
Delineate the roles of the parties regarding the coding and deployment of the smart contract. The parties should clearly define coding standards, review and testing procedures, and how the parties will agree when the code is ready to deploy, as well as who will bear any transaction costs of running the smart contract on the applicable blockchain (have a look here ).
5. Hierarchical order between smart legal contract and smart contract
Parties should specify in the traditional contract that its terms will control over any conflicting term or outcome of the smart contract.
6. Remedies in case of bugs or failure
Parties should delineate how a problem with a smart contract deployed under the traditional contract will be remedied.
Legal drafting is changing but the change does not derive from changes to the legal points or conclusions reached: it comes from changes to the communicative and thinking approach, and to the form, rather than the substance.
To dig more download our whitepaper on How to Create Flexible Smart Contracts or Contact us