Smart LEGAL Contracts 101

The foundations for commerce, and arguably civilization, are contracts. Contracts mediate the exchange of value between humans, and increasingly machines.

I will sell you 6 eggs in exchange for a pint of beer.

Contract exchanges presumably pre-date Homo Sapiens. Without enforceable contracts, we’d live in tyranny, where the strong can always exploit the weak.

As the world becomes more digital it is no surprise that contracts must also be digitized. Some examples:

  • You sign a delivery driver’s signature pad to acknowledge receipt of your new TV. The digital signature automatically activates the 5-year warranty contract, debiting your account every year to pay for the warranty. The signature also triggers a payment to the driver based on his employment contract.
  • A UK supermarket needs to order 3,000 kg of avocados from Mexico. The avocados must be shipped in temperature and humidity controlled shipping containers (reefers). Any mechanical issue with the reefer that causes the temperature and humidity of the cargo to breach the terms of the contract triggers an automatic penalty payment from the shipping company to the supermarket. The shipping company automatically activates their marine insurance contract.

At Clause, we call these Connected Contracts (or data-driven contracts). Contracts move from paper (or PDF) to active participants in the overall IT system; listening to and responding to events, making payments, creating invoices, warning humans when breach conditions may occur.

Blockchain has put the spotlight on Smart Contracts, as people redesign the exchange of assets across business networks using distributed ledger technology. Very quickly, however, engineers are confronted by the legal ramifications of the work they are doing: for an asset exchange to be legal, there must be a governing legal contract, and an established process to deal with disputes.

Clause is a founding member of the Accord Project, which also counts most of the leading international law firms as members. The Accord Project is building legal consensus on these new digital contracts, creating standards, and building an Open Source implementation that can be used across all blockchain (and non-blockchain) execution environments.