Self Aware Contracts enabled by Ledger Technology (or Smart Contracts on Blockchain)

On 17 July Estonian legal tech Agrello went public with a cryptocurrency-based crowdfunding campaign structured as a token sale. Leaving aside the issues raised by token sales which will the the subject of a separate post, it is interesting to explore the value proposition of Agrello’s business, which is a legal tech aiming to change the market of commercial contracts.

Agrello was founded by a team of Estonian lawyers, academics, and information technology experts, with the vision of creating digital contracts that will change the way contractual parties interact with each other and interface with legal authorities.

Agrello-framework proposes what it defines as “blockchain-driven self aware agents-assisted contracts for a decentralized peer to peer economy”.

In plain words, smart contracts.

Agrello’s proposition is that while the traditional understanding of conventional contracts is an exchange of commitments by identified parties that are enforceable by law, formalized by a written document as evidence, when the commitments formalized under the contract are performed, the status of such commitments changes overtime and the agreement needs to be constantly updated to keep track of the evolving relationship between the parties, in particular whether the parties have or not complied with their obligations under the contract.

A blockchain based system would instead allow for an intelligent contract, which can keep track of the parties’ commitments and evolve over time. The blockchain is a ledger based technology which enables a trustworthy collaborative process because no single entity is in control and information is recorded through a programming language in an irreversible manner and confirmed once it is recorded in a number of different locations.

The parties would record their interactions as they progress all through the phases of negotiation and conclusion of the contract, performance and eventually termination of the contract – for example in the case of a tenancy agreement or a services agreement.

The idea is enticing and a few law firms have already signed up for the beta version of the technology.  The project is ambitious not only because it is new both from a technology and cultural point of view, but especially because it aims to bridge a large and perilous language gap: that between the traditional legal industry and the cutting edge blockchain technology.

Also the technology would certainly be beneficial from certain points of view but it also will need to address a number of difficult issues.

Benefits:

• proof of action, in that the ledger can keep proof of payments made, actions taken, however only if they are digitally recordable
• in traditional contracts, lawyers need to review the contract to check if an obligation was not performed, eg a deadline was missed. With a smart contract, the contracting parties and the lawyers no longer need to read and interpret the contract as the software agent transforms the contract obligations into logical machine readable obligations
• permanent archive accessible by the parties without the need to refer to physical archives or an individual’s memory
• information about payments can be cross referenced directly into other relevant ledgers, such as the company’s financial records
• no need for intermediaries in the management of the contract (provided that the contracting parties can use the technology)

Issues:

• monitoring of communications and keeping a ledger of interactions might make the relationship more crystallized and create further problems in contexts where a fluid relationship
• the creation of smart contracts involves the use of a programming language (at this time the language used for programming contracts is Solidity) which legal professionals do not understand. And at the same time programmers do not understand legal language. It will therefore be very difficult to translate legal concepts into a programming language, also it will be difficult to litigate the contracts in front of a court, or even an arbitrator, as the programming language used does not allow for articulate language or nuances of expression.
• the program risks becoming the judge of the contract and not only the keeper of the contract
• the absence of nuances creates a crystallized relationship with no scope for human intervention in facilitating a soft resolution of problems

Other benefits and issues for sure will arise with adoption of the technology. Certainly, blockchain ledgers applied to contracts have the potential to lower costs and time spent on creation, update and archive of relevant information.  Automation also has a huge benefit in facilitating legal interactions and transparency, as information would be more easily available to interested agents eg tax authorities.   The risks are those generally explored of the limits of artificial intelligence, and the boundaries over which interactions facilitated exclusively by artificial intelligence can replace human judgment and human negotiation. The UK experiment of establishing online courts will run concurrently with smart contracts technology in verifying the limits of artificial intelligence applied to a legal context.

© Stefania Lucchetti 2017. For further information Contact the Author

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