Smart Contracts & Blockchain

Legal contracts will soon see a major change in how they are written, monitored and executed. As paper contracts begin to give way to digital “smart contracts” legal specificity will be combined with embedded triggering, tracking and reporting mechanisms covering a full range of business transactions. This article follows on from a conversation between Legadex Co-Founder Luc van Daele and Alex Dowdalls and Olivier Rikken of legal technology specialist firm Axveco.

Photos Geert Snoeijer

“Contracts are starting to be prepared both in written language and code,” said Alex Dowdalls, Managing Director of Axveco, Legadex’s specialist partner which specializes in emerging business and legal technologies. “This is new ground for the legal profession as legal people tend not to be familiar with programming, but the benefits to the legal profession and to its clients will likely be very far-reaching.”

In simple terms, smart contracts are pieces of software programmed to incorporate the legal terms and conditions of a given agreement, with embedded triggers that mark completion of specific provisions and the ability to monitor and verify them. They are based on “blockchain” technology –using embedded, standardized ledgers which, while changeable, retain records of any changes.

A simple comparison of paper and smart contracts:

Paper Contracts Smart Contracts
Physical Check Digital check
Static Changeable but all changes traceable in a permanent record
Changes in status actioned manually Changes in status and essential financial transactions can be actioned manually or digitally
Paper Code - could be referenced via external label (RFID) or other readable apparatus

Noting that large companies often have tens of thousands of contracts to manage, Luc sees immediate opportunity for smart contracts to facilitate greater efficiency when used internally within organizations.

“On the purely legal side,” according to Luc van Daele, “a switch to smart contract applications could alleviate contract lifecycle issues: registration, parties, validities, authority to execute and the oversight, management and tracking of current and completed contracts. Rights and responsibilities can also be embedded.”

It will be some time until the point where common infrastructure and business processes will be in place to allow smart contracts to facilitate agreements and transactions between different organizations. But smart contracts are also in the early stage of being used for internal financial transactions, increasing transparency and, streamlining activities and reducing costs.

The convergence of law, finance and programming

The broad adoption of smart contracts will have broad implications not only for the legal profession, but for businesses and the processes they use on a day-to-day basis.

“We will move to the point where contracts are written directly to code,” adds Axveco’s Director of Blockchain & Smart Contracts Olivier Rikken. “That will create a real growth area for people with the required legal and technical training to do this.”  There will be no need for “translation” if contracts are written first to code and then spelled out in written language, though agreements written first on paper can then be converted to code.  “Guaranteeing confidence in the stability of the code is an issue that will need to be handled.”

Common financial transactions are among the most likely to see broad smart contract adoption, with value-added tax (VAT) handling seen as an early candidate. “In the Middle East, where a number of countries are implementing VAT for the first time, governments are showing a real interest in smart contracts that involve the application of specific VAT rates and enable direct execution of payments and refunds.”

Health care is also seen as a potential area where a sufficient ecosystem could be developed to allow smart contracts to cover the execution of services. One example is how the prescription of physiotherapy sessions under a smart contract would differ from the current approach:

Paper Smart
Doctor prescribes physio visits Doctor prescribes physio visits, triggering creation of smart contract
Doctor sends invoice to insurer Physio receives contract
Physio instructed to deliver X number of sessions Pulse survey sent to patient after each session to record that session took place, capture client satisfaction as a registration of service quality and trigger payment for the session
Physio sends invoice for X number of sessions Prescription concludes and payment executed for last session
Insurer receives invoice and has to manually relate to patient and therapy  
Payment made to physio, or quality and fraud concerns checked manually if suspected. Checks may then result in delayed payment to physio  

Real benefits of smart contracts

“A real benefit of smart contracts is that they offer substantial opportunities to reduce fraud and increase transparency in monitoring the execution of transactions. In the case of the physio visits, the physio would only get paid if there was proof of the transaction – such as the pulse survey for the patients. At the same time, the smart contract could also enable immediate payment for completed sessions and would include a built-in audit trail.”

Preparing for the future

Gaining the familiarity required to be agile in proposing and executing smart contracts for clients is a high priority of Legadex, whose staff are being trained by Axveco as the technology develops.

Luc added: “We see the convergence of technology and law as the future – a future that is much closer than many in our profession think. We also see how it is applicable to business leaders, and especially to General Counsels for whom this can be a major opportunity to establish themselves further as ‘team players’ driving efficiency more deeply into business and organizational processes to a far greater extent than ever before.”

Legadex intends to be the bridge between people processes, technologies and content to make smart contracts usable to the organizations who see their potential. Luc adds: “The key here is that even though common acceptance for commercial transactions between parties is some time away, there are internal opportunities that make smart contracts a smart option for businesses that want to seize the initiative. The opportunity is here to define the process, rather than to be defined by it.”