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We live in a world that is digitised and, increasingly, automated. As a result, every industry looks exponentially different than it did a decade ago. Today, a doctor in Germany can perform heart surgery remotely on a patient in Nepal. A car can drive with no human assistance. Soon, the internet of things will enable physical objects to connect to the internet and send information to each other. So, if everything can be automated and digitised, then why not the performance of contracts? This is what smart legal contracts offer to do.

In this article, we discuss smart legal contracts and how they work. We cover the type of contractual obligations that you can automate and the technology that will enable the development of smart legal contracts. 

What is a Smart Legal Contract?

A smart legal contract is a valid and binding legal agreement with some or all its terms expressed in a machine-readable language (or code). The coded terms can self-execute upon meeting certain predetermined conditions. This automates the performance of that term and delivers the benefits of the contract to the contracting parties without human input.

Smart legal contracts offer many benefits, including:

  • reducing the number of breaches under a contract because of the automatic performance;
  • increasing the speed of contract performance; and 
  • reducing the administrative cost of managing and complying with contracts. 

One of the most significant features of a smart legal contract is its ability to determine whether the predetermined conditions have been met. The predetermined conditions could be as simple as the passage of time. For example, a smart legal contract could automate the delivery of certain notices under the contract once a month. So, the predetermined condition is the passage of time. Once time passes, a notice is created and issued without human input. 

However, the real potential of smart legal contracts lies in the possibility of collecting data from the natural world and using this to determine whether predetermined conditions are met. This will require smart legal contracts to speak to things, like vehicles and thermometers, and receive information. Communication between smart legal contracts and things can be possible through a technology known as the internet of things. The internet of things can enable things in the natural world to connect to the internet and send information to each other. The internet will then connect these objects to the performance of smart contracts.

An Example of a Smart Legal Contract

Imagine you run a chain of 50 gourmet grocery stores around Australia. You purchase most of your meat from Meat Co Pty Ltd, which delivers frozen meat to 40 of your stores every three days. You agree that you will pay the contract price for the meat within three days of delivery, provided:

  • they deliver the correct quantity of meat
  • the meat remained below 4 degrees all times, including during the drive from the Meat Co Pty Ltd’s Warehouse to your store; and
  • they deliver before 6 am.  

You can automate the payment of the contract price as stipulated above in a smart legal contract. 

Code can allow for automatic payment on the performance of the contract. In this instance, the data the smart legal contract receives must show that:

  • Meat Co Pty Ltd delivery truck and warehouse stored the meat below 4 degrees;
  • the delivery truck must have entered the store’s loading zone at or before 6.00 am; and 
  • your employees must input data that you delivered the correct quantity of meat. 

The contract releases the payment if Meat Co Pty Ltd meets all of the conditions.

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What Terms Can I Automate into a Smart Legal Contract?

You cannot automate all terms into a smart legal contract. Contracts are complex documents and almost always includes ambiguous terms. For example, the terms that require the parties to act reasonably or perform their obligations in good faith are ambiguous. These terms are difficult to automate and need human input and judgement to assess whether the parties have complied with them.  The terms that are best for automation are those that are clear, unambiguous, and follow boolean logic. 

Boolean logic involves simple lines of logic where each statement involved are true or false. These statements often include words like “if”, “and”, “then” and “or”. 

Let us use the meat delivery example above and express the obligation to pay Meat Co Pty Ltd in boolean logic, which you can translate into code to automate the process: 

If Condition A, Condition B and Condition C are satisfied, then make payment to Meat Co Pty Ltd.

Condition A

The Meat Co Pty Ltd delivery truck and warehouse data show they stored the meat below 4 degrees.

Condition B

The truck entered the loading zone at or before 6.00 am.

Condition C

Your business management software confirms that Meat Co Pty Ltd delivered the correct quantity of meat. 

The statement here is either true or false. Either Meat Co Pty Ltd met all three conditions, or they did not. There is no ambiguity, so these conditions are ideal for smart legal contracts.

Will Smart Legal Contracts Be Widespread?

There appears to be consensus in the market that we will most likely develop smart legal contracts through smart contracts. Although the names are very similar, they are different concepts. Smart legal contracts, as mentioned above, are legally binding agreements, which has some or all the terms automated. Smart contracts are computing programs that automatically self-execute code. These computing programs are stored with blockchain technology, another innovative technological development for the law. It is smart contracts that enable the automation of a term in a smart legal contract. Thus, despite having ‘contract’ in its name, smart contracts are not contracts in a legal sense.

Key Takeaways

Smart legal contracts are legal agreements with some or all its terms expressed in a machine-readable language. The coded terms can self-execute themselves. This automates the performance of that contractual term once parties meet their conditions. However, you can automate only unambiguous terms of a contract in a smart legal contract.  If you have any questions about smart legal contracts or how you can implement them within your business, contact LegalVision’s Legal Transformation lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

How can smart legal contracts simplify my business operations?

Smart legal contracts are automated. This makes the process faster. Your business will not need to spend as much time ensuring payment is completed and managing the contract, as the code will determine whether the terms have been completed.

How widespread are smart legal contracts in the legal field?

At the moment, smart legal contracts are a new development. However, as regulation increases, they may become a significant part of the legal landscape in the near future.

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