Smart contracts: Coming soon to a law firm near you

  • February 26, 2018
  • Ann Macaulay

Blockchain purists imagine a world that eventually has no banks or insurers as we currently know them, one in which lawyers operate in a different way, says Usman Sheikh of Gowling WLG in Toronto.

The disruptive potential of blockchain “will change the fabric of our society,” and create significant upheaval in the legal profession, says Sheikh, describing the potential impact on lawyers as revolutionary.

Blockchain technology is “one of the most disruptive, impactful technologies to have been invented, some say since the early days of the Internet,” says Sheikh, who heads his firm’s Blockchain & Smart Contracts Group, although how things will evolve remains uncertain.

Complex, mysterious and difficult for most non-programmers to understand, blockchain was invented in 2008 for use in the cryptocurrency bitcoin. Blockchain technology allows digital information to be distributed, not copied, and can permanently record transactions between parties. Wikipedia describes a blockchain as “a continuously growing list of records, called blocks, which are linked and secured using cryptography.”

The term “blockchain smart contracts,” however, means different things to different people. To those in the blockchain community, a smart contract is not a contract at all, it’s simply digital code that is being effected on a platform, says Sheikh. The smart contracts that lawyers are mostly concerned about are those living off blockchain networks, which essentially operationalize contracts entirely or in part through code.

The Ethereum blockchain platform was built to create smart contracts, which, simply put, are programmable and capable of automatically enforcing themselves when predefined conditions are met. Sheikh describes them as “digitally signed promises, which are executed automatically by software code built on blockchain technology.”

The concept of a “smart contract” was originally developed in 1994 by computer scientist, legal scholar and cryptographer Nick Szabo, who described it as “a computerized transaction protocol that executes the terms of a contract.” Its objective is to carry out common contractual conditions, minimize malicious and accidental exceptions and minimize the need for trusted intermediaries.

Indeed, it’s the removal of intermediaries, including banks, stock exchanges and insurers, that is considered one of this technology’s key threats. Many other parties will potentially be disrupted by this technology as well, says Sheikh, which is “why we’re seeing so much excitement and enthusiasm and also concern with the technology around the world, given the potential impact it might have in terms of reconfiguring our fundamental fabric that we have in so many different areas and industries.”

Lawyers’ traditional role as trusted intermediaries will also be affected by blockchain smart contracts, which will likely lead to the emergence of new business models for law firms, says Sheikh, who adds that there are already references to “smart law firms” or “smart real-estate lawyers” who do real-estate transactions through smart contracts. Some law firms have already started to accept cryptocurrencies.

Sheikh believes “we’ll see multidisciplinary teams at law firms where lawyers will be hand-in-hand with software developers and coders and programmers, or at least themselves having to have a basic understanding of coding.”

The legal issues that will arise as a result of smart contracts are still unknown, says Sheikh, since “we’re still in the very early days of this.” For starters, how would electronic blockchain records be entered in court? What are the jurisdictional issues when a contract is executed in multiple jurisdictions—where does the dispute arise and whose law will prevail?

Sheikh says that his firm considers a background in coding an asset when hiring new lawyers. Assuming that smart contracts get up and running the way many think they will, “lawyers will have to understand not only how to read and probably prepare written contracts but also be able to understand the coding that is affecting those contracts to make sure that they are expressing the black and white text of the written contract itself.” He adds that some smart contracts will be effected without any written contract, in which case lawyers will have to understand the coding behind that contract itself.

Companies have already begun to jump on the smart contract bandwagon. ConsenSys Media’s OpenLaw bills itself as the first project to comprehensively stitch together traditional legal agreements with blockchain-based smart contracts in a user-friendly and legally compliant manner. It has designed an employment agreement in which the signature triggers automatic payments in Ethereum.

On its website, OpenLaw argues that the way legal contracts are created and generated has not significantly changed and that “lawyers have failed to take advantage of advances in computing to streamline and simplify their work.” Agreements are not programmable and the “fractured and insecure” way valuable legal agreements are stored makes them a target for hackers.

OpenLaw promises to build a simple employee offer letter that can pay an employee in real time, every minute, eliminating the “payroll processor or other intermediary intimately involved in the creation and execution of the agreement.”

Blockchain’s biggest selling point is that “it’s supposed to be trustless,” says Xavier Beauchamp-Tremblay, the CEO of CanLii in Ottawa. “So you don’t need to trust or know the other party, there’s no centralized player that actually handles all of the payments between the players. This is where the magic is.”

Beauchamp-Tremblay urges lawyers to have sufficient technological literacy in order to play a meaningful role in developing blockchain-based technologies. Although technological change is happening, adds Beauchamp-Tremblay, he doesn’t believe lawyers will actually program smart contracts.

He also doesn’t foresee blockchain putting the legal profession out of business in the next few years. His message to lawyers is to learn as much as possible about technology “because it’s going to come. You need to get ready but you don’t need to fear for your income tomorrow.”

Sheikh describes the change that’s coming as a result of smart contracts as a paradigm shift but he is philosophical about the future. “It’s not a positive thing, it’s not a negative thing. This is innovation. Innovation is good and shows the health of our society when new things are produced like the Internet or the combustion engine or whatever it may be.”

But, he adds, innovation also “has a way to fundamentally reconfigure our society and how we operate.”

Ann Macaulay is a frequent contributor to PracticeLink.