Will they rock my world? They probably already have, says Jeremy Duffy. Even if you are not a technophile whose job is to manage the performance of numerous complicated contractual transactions, your world has at least almost certainly already been made easier by digital, self-execution contracts (known colloquially as ‘smart contracts’) without you even knowing about it.

So, how smart are these smart contracts? What exactly are they? How can they help us?

[As a wise man recently said to me, hopefully all contracts that lawyers create are smart!  So, I will call them ‘digital contracts’.]

How and where do smart contracts or digital contracts work?

Before we explore the ‘what’s in it for me’ angle, let’s be clear about how digital contracts work. Digital contracts are written at least partly, possibly wholly, in programming code, meaning that they are in essence wholly or partly a computer program that automates the performance of various transactions within a contractual agreement.

Say you are an avocado farmer supplying to the manufacturer of a home brand guacamole. There are many people involved in the supply chain of that product, including:

  • you and other suppliers of the constituent parts of the guacamole;
  • the manufacturer;
  • the transporters;
  • the wholesaler;
  • the retailer; and
  • the customer.

Digital contracts are now regularly managing the performance of each player within such commercial dealings. Every time a party performs its contractual obligations, they will automatically be ‘rewarded’ with whatever benefit the digital contract has ascribed to that performance, such as a quality certification, a clearance to deliver goods or a payment for goods so delivered.

A failure to perform will likewise receive an automatic response, such as a default notice, the imposition of a penalty or the cancellation of an order.

The common thread is, little or no human interaction in the management of the many contractual arrangements that form the totality of this supply change process.

And it doesn’t stop there. Every time you buy that tub of guacamole, that sale is recorded in an automated inventory program, which informs an automated ordering system, which feeds back into the process referred to above.

There are many other examples of digital contracts that we daily come into contact with without realising it. A vending machine is a simple example. Feed in your money, pick out your product and the machine will complete the transaction (essentially a contract) automatically.

And what about Netflix, Stan or Prime? Complete an online form, including a payment process, and you will be then admitted into a world of seemingly endless entertainment delivered automatically to your device of choice. No wonder the days of physically joining up at your local Blockbuster to select CDs that you rent over the counter and then return late are long behind us.

Will my contracts ever be digital?

Digital contracts are already in place for major deals. The big question is, will smaller, less repetitive, bespoke contracts ever be capable of being digital?

The barrier to this happening to date has been the cost and practicality of creating self-executing contracts at this end of the market. It has not been an economically viable alternative to traditional contract management and execution processes, such as manual inspections, documentation and payments.

That is changing however with the advent of more sophisticated and powerful artificial intelligence software, such as ChatGPT, in conjunction with what is known as ‘lifecycle contract management software’. Such systems are now demonstrating an ability to not only assist with the automated production of traditional written word contracts, but also with the code required to automate the transactional aspects of those contracts in a digital environment.

When married up to enabling technologies such as the Ethereum blockchain, which provides the links to the tools that facilitate the automated responses to contract delivery or default, the essential elements are there to enable all contracts to eventually be self-executing to a greater or lesser degree.

So, how do we make this happen?

What is needed to make all this a practical reality?  At least the following:

  • Better AI programs. They are close, but not quite close enough. But we may be talking months, not years, before they are.
  • More widely available and easily accessible enabling technologies, preferably some that are not block-chain based (an issue for another article).
  • Critical engagement by important supporting players, such as governments, regulators, banks, suppliers and advisers.
  • Lawyers who are willing to engage with and invest in technology to provide better outcomes for their clients.
  • Clients who see the advantages and are prepared to take the time to understand the new options regarding contractual performance.

At Autonomy First Lawyers, we are committed to engaging with technology when doing so improves the affordability and quality of the outcomes we can deliver to our clients. We look forward to continuing our discussions with our clients on such matters.

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