Ricardian Contracts 101

If you’ve been checking out Contract Vault over the past few days, you’ll have heard us occasionally talk about Ricardian Contracts, so we thought it would be worth a few words on what they are and where they fit into our view of the future of the law. And we can stamp on some myths along the way.

Because, like everything else in the Blockchain world, there’s plenty of misunderstanding and confusion.

Let’s dive in.

At its heart, a Ricardian Contract is a wrapper in which you will find:

· A legal contract: a plain English contract — the sort of thing which a lawyer can easily read, and even you and I can have a pretty good go at understanding

· A machine-readable contract: a set of terms which outline an agreement in ways that can be understood by computers.

This form of contract has been around since the mid 1990s (and refined over the years too, so it’s pretty resilient).

Thanks to the Blockchain and Smart Contract platforms, we also now have a pretty good architecture for the implementation of Ricardian Contracts: they can be signed, hashed, and the whole record stored as an effective ‘one version of the truth’.

Plus, for certain types of mathematically definable activities (for example, allocating shares), we can use the Blockchain to completely account for transactions pursuant and subsequent to a Ricardian Contract.

But why would we bung a legal contract and a machine-readable contract side-by-side?

Well, most importantly it marries legal weight with technological resilience: it makes the legally-enforceable transfer of rights and physical assets possible on the Blockchain, with all the authority that a distributed ledger confers on the strength of the agreement.

Then, it can save time, effort and the cost of disputes. It can save time because when machines can understand contracts, there is less need for revisiting by lawyers (after all, how many of our legal needs actually amount to “getting someone skilled to interpret a document you last read 15 years ago”).

It can save effort, because machine-readable contracts are more rigidly coded than your local lawyer’s prose. Machine-readable code will ultimately amount to templates; which is why a SmartTemplate marketplace is central to the Contract Vault offer. In the near future, contracts will be a simple case of drag’n’drop.

And they will cut the cost of disputes, because instead of being incentivised to “have a go”, litigious folks will instead be better served by following the clear flow-chart defined by the contract. Only truly contentious issues will go before lawyers or courts — indeed arbitration methodologies will be included in most Ricardian contracts, so a court appearance should be the exception, not the rule.

Smart Contracts

So what about Smart Contracts? Ricardian Contracts are Smart Contracts, right? Well, kinda…

The specification for machine readability certainly supports smart contracts, but a Ricardian Contract is just the first step. A Ricardian Contract is an agreement, and as such, it’s a moment in time.

Agreements, for example, include:

· Parties: who is doing the agreeing

· A time element (perhaps forever), for example, that a deal has to be reached within six months

· Exceptions e.g. “unless my partner should die first, in which case…”

· And any number of other conditionalities, contingencies, exceptions (basically, if/then clauses)

All of these represent an agreement at one moment in time.

Smart Contracts are without doubt the most useful application of the Ricardian structure, but you must understand that they are a dramatic advance in contracts, because a Smart Contract is active — it creates change on the basis of the agreement embedded within.

Because Ricardian Contracts can include Smart Contract code, they can use ‘oracles’ to interface easily with other systems: oracles are trusted data feeds that send information into the Smart Contract which finds facts or statuses in the outside world. For example, a contract to buy a car will be able to include a clause like “Ensure that the seller is the owner of the vehicle by interrogating the relevant car registration authority”. This will be a simple building-block of code, rather than requiring phone calls or indeed any human effort. (And the outcome of that interrogation will be embedded in the latest version of the contract, on the Blockchain).

But in making that connection, a condition of the agreement can be confirmed. It moves the agreement further towards a specific outcome. And that’s a big change. At Contract Vault, we support the Ricardian Contract architecture precisely because they will unlock the power of smart contracts.

So, the story so far:

· A Ricardian Contract aligns legal contracts with machine readable code

· Thanks to Blockchain technology, we can witness/notarise such contracts, store them securely and maintain a constant and complete reference of the matter

· And where automations are possible, Smart Contract functionality can be invoked to get things done; again all validated by the Blockchain.

Tomorrow’s law — and why decentralisation is overrated

All of this suggests that we can all write contracts for everything with a spring in our step. But remember, Ricardian Contracts are only an agreement. And there are still plenty of issues that can see an agreement go off track — issues which no amount of digital augmentation will fix.

That’s why one of the components of any Ricardian Contract should be an agreement as to what form of arbitration should be invoked in the event of a dispute. In a traditional legal contract, one clause (usually the final one — because it’s so critical!) will be a phrase like “This contract will be governed by and construed in accordance with the laws of the United Kingdom. This contract will be interpreted subject to British law”; effecting an agreement that both parties submit to the final judgement of a particular form of arbitration. This could be legal system, it could be an organisation or institution, it could be a company or even a family friend. But someone needs to play judge.

One key area where such disputes might occur is in the code which makes up the machine-readable or active component of the contract. After all, ordinary people find legal prose hard enough to read. They certainly won’t be able to read reams of complex code. That’s why Contract Vault is working with an increasing network of the world’s best independent validation specialists, who can check code to ensure that it will do what it says it will do and make a fair and impartial job of ensuring that the code matches the prose (which, incidentally is not always 100% possible — another source of disputes). It’s also why our template marketplace will surface the most effective contracts and show ratings for each one.

Other disputes may occur around identity: in complex digital transactions, it is essential that the parties to an agreement can prove who they actually are. We anticipate organisations specialising in identity management and Know Your Customer (KYC) to be an essential part of the Ricardian and Smart contracts ecosystem.

Now you can see the true value of Ricardian and Smart contracts. They will indeed change the world with the democratisation of agreements and the comfort of agreements available on tap. We even intend to open source our implementation of Ricardian contracts, to give the benefit to as broad a community of users and applications as possible. They will save time, effort and money by standardising and then automating contractual processes.

But the idea that Ricardian and Smart Contracts will mean the end of lawyers, because they decentralise or disintermediate the process… is rubbish. Laws stand because they are enforceable. Disputes are solved because they are arbitrated.

At Contract Vault, we want everyone to have access to the confidence and certainty that comes with agreements, and we think that a whole ecosystem of legal professionals, arbitrating organisations, technologists and notaries will be part of that future. We’re delighted to be the platform at the heart of it, too.

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