New age contracts
By Monisha Prem
Disruptive innovation displaces old systems, products and technology. It is the radical changes in industry that often result from technical advancements such as automation — in other words, turning tradition on its head.
Uber and Airbnb are prime examples of companies who have disrupted their respective traditional industries by providing modern, easy and cost-effective solutions. Even with no assets to speak of, these companies are worth billions of US dollars.
A critical component of disruption is the social ease of accessing traditionally inaccessible products and experiences. The financial sector, for example, is experiencing disruptive innovation in the form of FinTech or crowdfunding (online lending or investing without traditional financial systems) and Bitcoin (cryptocurrencies).
How does disruptive innovation impact the legal industry?
According to the techies, the technology behind Bitcoin is blockchain, an unending and continuously growing record system. Not only does the software programme allow legal contracts, referred to as ‘smart contracts’, to be prepared digitally, but also to be executed, implemented and actively managed online and digitally. This enables a digital legal system that will police, enforce and manage compliance in all aspects of lives through the Internet of everything.
Disruption in the legal industry
Smart contracts (or cryptocontracts) represent a disruption to a number of industries, including the financial and legal sectors. By simplifying various transactions and legal contracts, the need for professional services are arguably both disrupted and rendered redundant.
It is also contended (mostly by lawyers) that smart contracts cannot replace contract, commercial and corporate law. Many contracts require specific or specialised conditions and clauses that would be incredibly difficult, if not impossible, to regulate exclusively by blockchain and coding. While disruption is inevitable, many rely on timing; claiming that smart contracts may not be a replacement for lawyers for many years to come. Regardless, an impending shift of our legal system is unavoidable.
What are smart contracts and how will they impact business?
Picture this scenario. You input all the terms of agreement of a loan to your best friend Tommy into computer software. The computer software, considering all possible scenarios and history of the parties generates the perfect agreement quickly and cheaply. The software then executes the agreement through access to Tommy’s bank account, ensuring payment is made to you on time and without breach until the loan is repaid in full, applying securities and penalties where necessary.
Smart contracts are essentially automated contracts written as computer programmes. These contracts are able to enforce themselves when certain conditions are met, eliminating the need to check compliance or requiring enforcement by business owners or lawyers.
What are the consequences of smart contracts for business?
- Smart contracts may find application in the finance industry, regulating either in part or in full.
- Smart contracts make real estate transactions more efficient, allowing a simpler and faster transfer of property.
- Smart contracts are useful in supply chain-based delivery businesses, with transfer of value only occurring once certain conditions have been met.
- Smart contracts may also restrict poor business practices and help enforce compliance as certain conditions must be met. Smart contracts allow for real-time risk assessment and auditing.
- In short, smart contracts can make business more effective and bring about a more efficient and just legal system.
Smart contracts, as a disruption similar to Uber and Airbnb, is evolving faster than our traditional legislative regimes. As a result, new ideas and legislation are in conflict with each other, necessitating a change in regulation and protective measures in transactions. Consumer protection will also need to be developed more comprehensively to include smart contract transactions.
A futurist may consider blockchain and smart contracts to be equally significant as the introduction of the World Wide Web or email. However, due consideration is to be applied to the laws of commerce, deal-making, jurisdiction and above all, human nature.