The History and Future of Smart Legal Contracts
The world is finally moving toward true Smart Legal Contracts. Let’s trace through the history of digital contracts and see where they’re headed.
This article was originally published on our own blog at INDUSTRIA.tech. We’ve decided to move all our content to Medium to reach a broader audience and engage in a more dynamic discussion. Thank you for following our journey and we hope you continue to find value in our insights here.
The relationship between technology and law is one-sided at best — technology leads and the law follows.
This was the case with digital media, it’s been the case with data privacy and DeFi regulation, and it’s likely to continue being the case for the foreseeable future. The bureaucratic and sometimes convoluted approach to law is at odds with emerging tech’s “move fast, break things” mad dash towards innovation at all costs.
Previous estimates have positioned legislation as being at least five years behind technology, but in an age of constant disruption and innovation, the risk is now higher than ever that this gap can quickly snowball into a chasm.
So the question becomes, can tech bring the law into its domain for good?
CommerceNet, Mosaic, and the Origins of Secure Transactions
In 1994, Amdahl, Apple Computer, Intel, National Semiconductor, Sun Microsystems and others backed a brand new (at the time) B2B network moderately called CommerceNet.
The novel concept behind CommerceNet seems pretty straightforward now — create a network where both businesses and their employees can buy and sell goods and collaborate on engineering projects. A sort of Silicon Valley ARPANET, if you will.
CommerceNet used Mosaic, a pioneering browser that was most notable for being the first to use a graphical user interface.
Further improvements were made to Mosaic through a collaboration with RSA Data Security, creators of the RSA public-key cryptographic system, the first public system of its kind.
While relatively primitive by today’s standards, the technology performed admirably for its time and, more importantly, made others aware of the potential of transaction protocols.
Nick Szabo and the Foundational Principles of Smart Contracts
Later that same year, computer scientist and Satoshi Nakamoto runner-up Nick Szabo coined the term “smart contract” in his paper of the same name.
He would revisit the topic two more times, once in 1996 in “Smart Contracts: Building Blocks for Digital Markets”, and in 1997 in “Formalizing and securing Relationships on Public Networks”, all of which merit a read and are still as relevant today as they were almost three decades ago.
In “Building Blocks for Digital Markets”, he would define smart contracts as “a set of promises, specified in digital form, including protocols within which the parties perform on these promises.”
He goes on to describe the four objectives of contract design.
- Observability: participants’ ability to observe each other’s performance on a contract.
- Verifiability: participants’ or arbitrators’ ability to validate whether a contract has been performed or breached.
- Privity: the ability for a contract’s details to be accessible only to those who need to know it, when they need to know it.
- Enforceability: the ability for a contract to be legally binding in all future legal contexts.
While Nick Szabo’s concept of a smart contract was still theoretical at this point, it set the stage for how the technology would be used in the future. And it’s that last point, ‘enforceability,’ that has proven to be an issue regarding smart contracts’ full legal equivalency.
Ian Grigg and Ricardian Contracts
While contributing to Ricardo, an early payment system developed by Systemics Ltd., Ian Grigg came up with a different concept, something he tackled in his seminal 1996 paper “The Ricardian Contract.” Both the system and the contract design pattern were named after prolific British political economist David Ricardo.
How does it differ from smart contracts? In a 2015 revisit of this concept in “On the intersection of Ricardian and Smart Contracts”, Ian Grigg provides us with an answer:
“A big part of this confusion is an overloading of the term contract. In the Ricardian case, the thing in question is a document. In the smart case, it is a machine to organise and control the arrival of events and initiation of actions.”
In essence, while a smart contract is code that emulates a contract’s functionality, a Ricardian contract starts as a fully legal document that is then digitised to be both human and machine-readable. Smart contracts perform, Ricardian contracts codify.
So, which one do we need to modernise law? Both. But that won’t happen for another 20 years.
James Hazard and CommonAccord’s Call for Global Codification
When Brown University and Cornell Law School alumni James Hazard was sent to France on a transaction, he decided to stay.
While in Paris, James, who already had an interest in legal tech, began noticing the different ways coders handle text compared to how lawyers handled text.
For him, the coders had it right, so in his own practice, James began to experiment with Word macros, which allowed him to set up letters and, eventually, document assembly. He soon realised that the actual value is not in the assembly mechanism itself but in the clause library.
If people had access to a public clause library, both lawyers and clients could get out of what he calls “document ping pong.”
Becoming public in 2000, the James Hazard-founded CommonAccord was built with this exact goal in mind — to create a free and open-source clause library that could codify and automate contracts, permits, organisational documents, consents, and all other manners of legal documents.
From CommonAccord’s call for the Global Codification of Legal Documents:
“Inefficient legal document practices are responsible for a very large part of the cost of doing business, the opacity of governments, systemic risks and the economic trend toward gigantism and winner-take-most. Nearly all of the inefficiency and opacity of forming and managing legal relationships can be eliminated by adopting a “knowledge graph” model and document practices from the open source community. Software engineers have perfected these methods for their own use; lawyers can adopt and adapt them.”
The way CommonAccord is currently doing this is through what they call “Prose Objects” — codified legal documents, forms, and widgets. You can browse their library here.
If you’d like to learn even more about James Hazard and CommonAccord’s mission, you can check out the interview we recently had with him over on our Clubhouse page.
While different intersections of law and technology were starting to take shape, something else happened in 2008 that you might’ve heard about.
The Birth of Blockchain and the Resurgence of Smart Contracts
It would be unfair to credit Satoshi Nakamoto with the invention of blockchain — that effort goes back to David Chaum’s 1982 dissertation “Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups.”
But it would also be inappropriate to deny that their work was the paradigm shift needed to introduce the concept to the world and spark mass adoption among every business, trade, and field imaginable.
With this, smart contracts were finally a realistic prospect, and the industry wasted no time in adopting them.
The classic analogy given by Nick Szabo is entirely valid in this new context, too — that of a vending machine.
You put money in the vending machine, interact with its interface, and get your drink. You might even get some change out of it, too. But the main characteristic to consider in this scenario is that this process does not develop in real time — every last detail, down to the amount of change you get, has been predefined.
It’s an oversimplification, of course, but it’s essentially how modern digital smart contracts work, too.
Similarly to the blockchain, this technology has since been used across the entire business spectrum — finance, healthcare, real estate, gaming — a significant portion of these industries is already being transformed by smart contracts.
The sky is truly the limit.
But for legal purposes, current smart contracts share the same weakness as their original 1994 counterpart — executable code, as efficient and powerful as it is, is not the same as an actual, legally verified contract.
For that, INDUSTRIA and others are working on smart legal contracts — emphasis on “legal.”
Smart Legal Contracts and the Future
To boil it down further, smart contracts contain two main ingredients — data and logic. The former holds all necessary information — who the participants are, what the agreement is, etc. The latter is the executable software.
Smart Legal Contracts add a third element to the equation — legal text. One way is to simply add the legal text as a basic guideline explaining what the code does and why it’s doing it and providing context for its operations. Another is to go further and bake certain legal principles within the code itself.
OpenLaw.io co-founder Aaron Wright and Blockchain researcher Primavera de Filippi second this approach.
From their 2015 paper “Decentralized Blockchain Technology and the Rise of Lex Cryptographia”:
“[Through] the deployment of increasingly complex systems of smart contracts and decentralized organizations, the technology can be used to establish rules and structures for organizations, formal entities, and potentially even governmental bodies. If designed to capture human input, the technology can be used to reflect community values and social norms, automatically enforced through self-executing code. Smart contracts may even re-write or bypass some of the most basic tenets of property law, effectively turning property or even constitutional rights into a subset of contract law.
Judicial enforcement of law could also be displaced by blockchain technology. Smart contracts can be made to rely on a certain degree of human judgment at any point during the contract’s execution. For instance, in order to determine whether or not certain contractual conditions have been met, contractual conditions could be made dependent on the judgment of one or more external parties (so-called “Oracles”). Of course, one of these parties could be the judiciary, but it could also be a panel of independent arbitrators, or a jury summoned from around the Internet, selected and paid based on their track record of deciding earlier disputes. These decentralized judiciaries can expand dispute resolution procedures, narrowing the role of centralized judicial bodies.”
In 2021, the UK Law Commission came out with a report detailing its findings and views on various aspects of smart legal contracts. The report shows that there are already ways to treat SLCs as legal documents, and any issues that still need to be solved — such as geolocating breaches or making sure that contracting parties are fully informed — should have technical solutions.
Ultimately, their conclusion was that the “flexibility of our common law means that the jurisdiction of England and Wales provides an ideal platform for business and innovation, without the need for statutory law reform.”
INDUSTRIA’s Smart Legal Contract Solutions
Integration with CommonAccord
We are very happy to be partnering with industry leaders Trowers and Hamlins LLP as well as AG Midgley Ltd. and James Hazard (the founder of Common Accord) to build a solution for the use of Smart Legal Contracts and Corda DLT in the UK’s construction industry sector. Stay tuned, we will have an announcement very soon.
Integration with the Accord Project
INDUSTRIA develops its approach to Smart Legal Contract using R3’s Corda Enterprise Blockchain and builds on the open-source aspects of the Accord Project. The Accord Project comprises three main tools — Cicero, a Smart Legal Contract templating system, Ergo, a domain-specific language for legal logic, and Concerto, a data model manager for domains, business processes, clauses, and more.
We use these technologies to build truly smart, efficient, and infinitely scalable contracts for businesses with a wide variety of needs. INDUSTRIA’s Smart Legal Contracts are fully legally binding — the underlying logic adjusts to business events in real-time, continuously updating with information from external systems and databases or user input. It can then intelligently and automatically react to what’s happening and initiate necessary actions to continue and finalise processes.
On top of this, we build and implement new tools that allow both legal professionals and software engineers to draft digitised contracts.
In this way, our Smart Legal Contracts solutions are completely integratable into your system. They work just like the real thing — only faster, safer, and more manageable, making for a significantly more efficient workflow in the short term and unmatched value in the long.
Conclusion
Contracts are the very foundation of a free-market economy, and they’ve served civilisation well. But if we are to move to a truly digital, open and fair society, then we need to streamline and improve not only our finances, transportation, and energy but the very tenets our markets and culture are built on.
While there are numerous ways to go about this, the groundwork has been laid for decades. With both the technology and the philosophy behind the digitisation of law now starting to mature, the path ahead is beginning to make itself known.
Going through traditional legal documents and codifying them in a way that makes them digitally viable as a data model is likely a necessary step to find the best practices we need to move forward.
Using smart contract technology, meanwhile, can potentially clean up and boil down laws and regulations to their most essential elements, letting executable, automated code take care of every process that doesn’t require direct human interaction, making the entire process safer, faster, cheaper, and easier.
And with the advent of Smart Legal Contracts, we’re now seeing a marriage of both technologies into a decisively better whole.
About INDUSTRIA
INDUSTRIA is a global technology consulting, development, and ventures company with expertise in the field of enterprise blockchain, confidential computing, process automation, and digital experience. As one of the official partners of R3, we are implementing cutting-edge blockchain technologies and reshaping the fintech world.
At INDUSTRIA, we are focused on providing permissioned blockchain solutions, such as Central Bank Digital Currencies, Electronic Bill of Lading, and Smart Legal Contracts. Our solutions apply to a wide range of industries and use cases to empower and modernise society.
Let’s talk about making your idea a reality — contact us at hello@industria.tech!
