As you know, I believe one of the key things missing from contractual relationships is trust. The prevailing view is that smart contracts will assist with that. But is that really true?
Trust in digital
In my digital-first survey, trust with contracting partners was most closely associated with companies the respondents have done business before. So trust existed independently from the terms of the contract. It had been built through experience.
A practice note on smart contracts from a leading legal platform suggests that
instead of having to trust each other, the contracting parties can rely on the automatic execution of the code
But this runs counter to what we know about technology. We know about unexpected bugs and errors in programs… we are also increasingly aware of coded bias, malicious hacking, exploitable bugs and risks related to the blockchain. So trust is not automatically created with a smart contract, it has to be earned.
Trust is, according to Stephen MR Covey, a combination of character and competence, or as this article says, the ability and intention of the coders of a smart contract. We will need to depend on their skills to translate natural language contracts into code. I’m not sure many lawyers are entirely comfortable with spreadsheets, legal design or simplification… never mind having their contracts translated into a form they no longer understand.
We will also need to consider the elements of our contracts that contracting parties want or need to be automated. Companies would all love to be paid quicker and guaranteed for their services, but in many payment regimes there an element which is a judgment decision.
Should we seek to automate all processes, or just those that do not involve discretion?
As well as payment, many clauses are ones which the parties can choose to enforce eg a right to issue a change, to suspend or to terminate; there are processes which depend on the subjective opinion of a moderator such as a right to extra time or money on a construction project; and some remedies such as relief from penalties which is based on factors outside the parties’ control and not even listed in the original plan.
Once the code is created, there is little or no discretion for the automated elements of the contract. Once a smart contract is set in motion, especially if it uses distributed ledger technology, it is almost impossible to modify or stop.
In my specialist area of expertise – construction and engineering – most contracts are performed over many months or years. This means they have to take into account uncertainties such as cost increases, supply shortages, restrictions on labour, changes in statutory regimes, and so on.
Often the precise words of the contract are not adhered to, although the spirit is. For example, UK the government called on the construction sector to take a flexible approach to their strict contractual rights during the 2020 pandemic, companies had relief from certain insolvency proceedings, and tenants had relief from forfeiture. None of these could have been foreseen in 2019.
What should you do?
The purported benefits of smart contracts include simpler contract management, reduced costs, and minimising human errors during performance. But aren’t we merely transposing contract management into other aspects of the contracting process eg more complex contract languages, increased costs of creation and execution, and human errors during coding?
Do smart contracts really build trust?