Trakti Smart "Legal" Contracts Blog

Smart contract vs smart legal contract

on February 15, 2022

The concept of a ‘smart legal contract’ is an inseparable part of discussions about the future of legal practice. The offerings that technology can provide to streamline legal services for businesses are truly invaluable. 

The obvious question must be, what is the difference between a smart contract VS smart legal contract?

We will look into various aspects of smart contracts and smart legal contracts and try to reach a conclusion and hopefully, you would understand what the major differences are.

Exactly what a smart legal contract looks like, the nature of its capabilities and potential applications in practice have remained relatively obscure.  This article will revisit basic concepts of smart legal contracts, explore a current case study, acknowledge hurdles to wider use and address future possibilities.

Smart contract vs Smart legal contract

Smart legal contracts are different from the so-called “smart contracts”, which are self-executing scripts that necessarily operate on a blockchain system. Smart contracts may form part of a smart legal contract or smart document but do not represent the agreement in its entirety.

Fundamental to the concept of a smart contract, and the main driver of efficiency through faster processing times is the automatic performance of aspects of the contract without the need for human action or verification.  A foreseeable outcome of this is lower transaction and operating costs compared to traditional contracts.

However, it is not just about efficiency. Smart legal contracts can also provide greater certainty and trust between the parties, particularly when incorporating blockchain or other distributed ledger elements which ensure the immutability of input data.

Smart legal contracts contain natural language text with relevant provisions of the document drafted in machine-executable components, that is, programmable code. The programmable elements interface with external sources of data (so-called “oracles”) (such as Internet of Things device data) or other software systems.  The oracles drive the real-time status of the contract, for example, by enabling clauses to self-execute if the external data shows that specified contract conditions are met.  The contract sits in a real-time digital environment – a website, platform or app – that each party can log in to and view the current status of any relevant terms. 

The creation of smart legal contracts also requires a multi-disciplinary approach. Both lawyers and coders must understand and respect the other’s role and work collaboratively to achieve an effective design. 

Standards can also play an important role in promoting the uptake of innovative technologies and have a role to play with the adoption of smart legal contracts.

“Standards and other publications…can improve the reputation of innovative technologies and lead the way in describing best practice. Developing and setting standards requires consensus, which encourages an international community of experts to share, collaborate and agree.”

If we want to see wider adoption of smart contracts and smart legal contracts, we need an effective governance framework via the further development of international standards. Governments and companies have significant potential to grow awareness about, confidence in and legitimacy of smart contracts in both the public and private sectors. This is particularly the case given the cross border nature of smart legal contracts, which can make it difficult for sovereign legislators to regulate them.

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