Will smart contracts finally rid the world of lawyers?

Originally published by Brett Cenkus on February 2nd 2018 2,212 reads

@bcenkusBrett Cenkus

In 1995, I was accepted to law school. Only one week earlier, I was offered a promotion at my current job. When I told the hiring manager I was declining the offer and leaving to attend Harvard Law, she said, “You’re leaving here to become a lawyer? That’s crazy. There’s no future in law.”

I suspect she knew what she was saying was ridiculous, but felt obligated to take her best shot at keeping me around. Who knows, though, perhaps she really thought law was a dying profession. She wouldn’t have been the only one. That was a well-circulated position back then. I recall a close, concerned friend warning me away from law school with a story about a recent law school grad she knew who was making minimum wage at the local library.

My point is that I’ve heard about the death of the legal profession for 20+ years. And, while it’s changing quickly, there is no less opportunity in law than there was 20, 50 or 100 years ago. Granted, that opportunity looks different today. It requires more adaptability. I’d argue there’s a little more risk, not because of less opportunity overall, but rather because income is distributed less evenly across the profession. I think there is more reason today to carefully consider where you go to school and what exactly you want to get from the degree, compared to years ago when you could more confidently trust that the degree would pay off in some manner. Overall, though, the law school path still affords a tremendous amount of career opportunity. Yet, claims that law is a dying profession persist. Recently, many of those claims take support from a nifty little thing called a smart contract.

A quick note, throughout this article, I mainly use the term, “smart contract.” When I do that, I’m referring to a smart legal contract — a legally-binding contract between two or more contracting parties, albeit in a new medium we’ll dive into shortly.

With growing public attention on cryptocurrencies and blockchain technology (even my mother has now heard of Bitcoin), there are currently few words more buzzworthy than blockchain. Blockchain technology is expected to radically transform many social and economic structures by removing the need for trusted middlemen and flattening organizations. Compared to intermediaries, a blockchain creates trust through distributed consensus and the security of its code (among other features), which brings us to the main attraction of this article — smart contracts. As interest in blockchain waxes, so does interest in smart contracts. Among other predictions, there’s a ton of buzz around the ability of smart contracts to optimize cross-border and high frequency financial transactions.

Both blockchain and smart contracts have great potential, no doubt. Although, there is always reason with new technologies to question if they will live up to their hype. For every one innovation that turns out to be the internet, there are countless Google Glasses or “IT” (the mysterious patent that was guaranteed to change the world in ’01, turned out to be a scooter) or other inventions that fall far short of their initial promise. I’m not criticizing, but, with so much hype, a skeptical eye is a rational one. Not every innovation can change the world.

That said, the question today is whether blockchain and smart contracts will get there — will they fundamentally change our world, our societal structures. Specifically, how much will they change my world as a business lawyer who makes a living drafting contracts? Will they disrupt the legal profession to the degree many are currently predicting? Are they capable of replacing business lawyers and traditional paper contracts and contracting processes?

Before we jump in, it’s only fair to acknowledge my obvious bias. I make my living as a lawyer. No one would like to see the profession disappear more than me. There are many other things I’d like to do. 😄

A quick note about this article: by now, there are plenty of explanations of blockchain and smart contracts. So, I’ve omitted those details included in my original article, which you can find here. If you need clarity on the subject, check out the full article. Otherwise, keep reading 📖.

Why Business Lawyers Won’t Be Replaced by Smart Contracts

Blockchain and smart contracts will fundamentally change our societal systems and structures. They will significantly redistribute power and wealth. That’s the decentralizing function of blockchain. Few industries will be untouched. And, yes, even contract lawyers (a.k.a. corporate lawyers or business lawyers) will be impacted.

Business attorneys (this one included) will need to adapt our roles as smart legal contracts become more prevalent in the business world. This will create friction and turnover, driving certain lawyers out of the business. The internet did that, as well. That’s what change does. It clears out the stale and stalled, ushering in the new. What it won’t do, at least not in my lifetime, is significantly change the overall opportunity in law as a profession. Different, yes. Reduced, not much. Let me offer up some reasons why.

1. Someone needs to create (draft) the contract terms.

A smart contract is, by definition, a contract. Contracts are legally-binding documents. A smart contract can only execute what it is coded to execute. Someone needs to take the “deal” and convert it into legally binding principles. There’s a reason business lawyers do that today — because contract lawyers are trained in law and they are experts at stating things in specific terms. We are trained to anticipate what arguments the other side can make if things go wrong. We study court cases where things go wrong. I’ve been doing this for 20 years and I learn things every day. Clear, tight contract drafting is not an easily developed skill.

That’s not to say LegalZoom isn’t the right tool for the right context (generally low budget and extremely simple). At times, it may be. Although, LegalZoom hasn’t replaced me in the offline world today, and LegalZoom is essentially coded legal terms, same as a smart contract. Why should we expect my role to radically change going forward?

How exactly will this all unfold? Will law firm IT departments balloon in size? Will lawyers all learn to code? I’m fairly sure no and no are the answers there. However, corporate lawyers and programmers will be cozying up a bit more going forward. Ultimately, the legal language needs to make its way into executable code. For that, a smart contract attorney (or a corporate lawyer with a strong understanding of technology) and the coder will be equally critical.

2. Not everything clients want to put into contracts is legal or enforceable.

A lot of my role as a business lawyer is to advise clients regarding what’s legal and what isn’t, or, even if something is legal, if it’s likely to be enforceable or not. For example, you can go online and buy a promissory note template from LegalZoom. You won’t necessarily know the rate you can charge to your friend in Texas or Delaware or wherever to borrow money — the maximum rate that doesn’t violate usury laws, whether charging a late fee is considered interest, if it’s acceptable to have a prepayment penalty, why you might want to consider including a provision that’s not very common (and, therefore, didn’t make the cut for the template, which is meant to be a fairly standard agreement), and how to properly identify collateral if the loan is secured. Make some of these decisions incorrectly and your agreement may not hold up. It’s even riskier if you’re selling stock to that friend. Securities law is one of the most confusing areas of law and the stakes are often very high. Not every context represents high risk, although many do.

Speaking of enforceability, there is a lot of discussion about whether smart contracts are actually enforceable today. This isn’t a super difficult or complex question. They are enforceable, provided they meet the required elements of a contract — offer, acceptance, consideration, and a handful of other things. Many lawyers like to speculate and debate and find little possible .001% outcomes and blow them up and present them as daunting risks. It’s an occupational hazard. There appears to be a lot of that going on with the discussions around the enforceability of smart contracts.

In fairness, there are things that need to happen to give everyone certainty that a smart contract will be enforceable entirely on its own accord and for every context in which you’d need to enforce them. One of those is getting clarity that cryptographically “signed” smart contracts are evidence of intent to be bound by the terms of the smart contract. For now, to be ultra-safe, you’d want a written agreement supporting the transaction, which references the smart contract. And, no, having an old fashioned contract doesn’t undermine the point of a smart contract. In the short to mid-term, as you will read below, smart contracts will rarely exist 100% on their own anyway. They’ll be components of larger contractual transactions. This will be a process and there’s no reason, for the time being, not to make it clear in a supporting document that the smart contract is a piece of an otherwise clearly enforceable contract. Also, there may be some growing pains with evidentiary issues — proving what the smart contract did or did not do, that type of thing.

These concerns don’t strike me, in most contexts I’m seeing so far, as massive risks. So, are there things to consider from a legal validity and enforceability standpoint when using a smart contract? Yes. Are those reasons to fear using them? No.

3. A large part of a corporate lawyer’s job is custom contract drafting.

Most of the use cases I see these days for smart legal contracts address basic transactions, such as serving as a replacement for an escrow agent. Party A agrees to do X. Party B puts money into escrow. If A does X, the money is released to A. If A doesn’t do X, the money stays in escrow, eventually released back to B.

Some of what I do is that type of thing — simple, routine legal transactions. Some contracts are hardly customized at all. However, the vast majority of my work with business contracts is highly custom contract drafting.

For instance, I do a lot of mergers and acquisitions work — helping companies with the legal aspects of buying and selling each other. These situations are always unique. I can’t recall starting with a blank piece of paper to draft a contract ever. Corporate lawyers always find a good starting form (prior transaction document) or two, although in the M&A context, my original form isn’t ever recognizable when it goes out the door. That’s a highly specific transaction.

Businesses aren’t commodities. Even small ones require thinking about what really matters to my client, what risks they fear, what risks the particular business presents. There’s no one-size-fits-all in this world. In fact, the number of moving parts you witness will rival the finest of watches. Actually, I suppose with very small deals, such as the purchase for $50,000 of an online business, they may get done with standard fill-in-the-blank forms. A lot of that M&A work gets done through escrow agents and business brokers who aren’t lawyers at all and who make no changes to the documents. In most cases, that likely makes sense given the size of the deal. If you purchase a $5 million business and use a standard fill-in-the-blank form, you should have your head examined. It would be crazy not to spend time with someone like me to make that deal fit exactly what you need. A lot of this is a function of budget, which is driven by the size of the deal. Larger deals will always call for bespoke lawyering — it’s a simple decision when weighing the cost vs. benefit of getting professional advice and services.

Another context where the stakes are high is drafting partner and founder agreements. If everything goes 100% perfectly, those agreements may never be dusted off. In the real world, though, few things go perfectly. Partner and founder relationships are highly unique. They don’t generally fit neatly into someone’s decision about the “ideal” template contract.

You could still take all the unique aspects of a custom, higher value transaction and distill them into code, although why would you do that? Perhaps a sliver of the deal. If there’s a seller financing note on a business acquisition, perhaps one day that will be “outsourced” to a smart contract, but the rest of the stock or asset purchase agreement would take a long time to translate to code, and for what benefit? Frankly, AI (artificial intelligence) currently presents a larger threat to this world than blockchain at the moment.

4. Contracts are intentionally full of subjective determinations.

Read any business contract and you will quickly realize that corporate lawyers are smitten with the word “reasonable.” One of the most common phrases in a contract is “not to be unreasonably withheld,” as in, a party to the contract has the right to approve a certain action, although they need to say yes unless there’s a valid reason to say no. What happens if that party says no unreasonably? In the offline world, the other party would likely stop its performance (perhaps not authorized per the contract, although oftentimes the most effective tool for bringing a contract counterparty around to what’s fair) and work things out.

Other common subjective measurements include “best efforts,” “commercially reasonable efforts,” and “good faith.” This use of subjective language is intentional.

It’s rarely possible to identify every situation or exception or reason to itemize might constitute reasonable behavior or, in our earlier example, a reasonable justification to not approve a certain action.

And, many contracts are more relational than transactional. Relationships evolve and contracts often need some room to evolve with them. Standards, like “reasonableness,” offer that flexibility in a way that concrete rules or metrics would not.

Additionally, deciding if a party’s actions are appropriate for a particular contract are highly contextual decisions. A clause in a contract that says, “time is of the essence” means that the parties must perform on time or they are in breach of the contract. If a contract doesn’t have such a clause, the law generally gives them a little bit of flexibility. Exactly how much flexibility they should get may depend highly on the repercussions — of their late action and of labeling that late action a breach. Absent a “time is of the essence” clause, no judge or jury will let a party deem a contract breached where a counterparty performs one day late if the consequences to the counterparty are severe. A phrase like, “within a reasonable time” is meant to capture this reality.

Meanwhile, the world of computer code is a world of logic that doesn’t deal well in the qualitative or the subjective. Oracles are often noted as the solution to the separation between the real world and the conditional data operated on by smart contract code, although there will be lots of situations where a decision needs to be made about whether or not to consult an oracle in the first place. Or, decisions that oracles aren’t equipped to make because they require judgment calls. The fact is contracts are replete with subjective determinations. The provisions of any business contract that are truly objective in nature are dwarfed by the ones that require judgment calls to analyze performance during the term of the contract. In most cases, the parties make those calls themselves — they aren’t predetermined in any manner that could be recorded into a smart contract or outsourced to an oracle.

5. Sometimes new situations arise that no one was thinking about while the contract was being negotiated.

It is normal for transacting parties to negotiate again even after the contract has already been made and signed. For paper contracts, this poses no problem as the parties only need to make amendments — only a few additional pieces of paper and a quick DocuSign. However, since the blockchain is permanent, amending smart contracts that are not programmed for pre-established modifications could be significantly more challenging than it currently is in the offline world.

6. Conflict is inevitable.

If all parties to a smart contract abide by its terms and complete all contractual performance without dispute, things will move smoothly on the blockchain. But, what happens when one of the parties doesn’t follow the terms of the contract? Or, what happens when one party thinks they have fully and properly performed and the other party disagrees? As an example in the case of an escrow smart contract, what happens if the item sent to you is broken on arrival? Uh-oh, your smart contract just got dumb.

7. Smart contracts have their own risks.

While not without its vulnerabilities or risks, blockchain technology is capable of being as secure and immutable as anything we know. To be that, the supporting blockchain needs to be coded flawlessly. That goes for the smart contract code, as well.

In 2016, an organization called The DAO was hacked due to a vulnerability in its foundational smart contract. The DAO was a digital investing organization (in the form of a decentralized autonomous organization) formed with the idea of disrupting the hierarchical structure seen in traditional organizations. The quorum of DAO token holders had voting rights on the investment activity of the organization as a whole. The tokens were issued, as many decentralized applications today, on the Ethereum blockchain. They raised about $150 million, but more than $50 million was siphoned to the hacker capitalizing on a vulnerability of the smart contract code.

The problem in that case was not the Ethereum blockchain upon which The DAO was built, but rather the code of the smart contract that framed the organization. The smart contract was written in such a way that made the DAO itself vulnerable to its fatal attacker.

While The DAO wasn’t technically a smart legal contract, its exploited vulnerabilities highlight the problem of relying solely on development efforts to compose legally enforceable contracts on the blockchain. There were some highly intelligent minds involved with The DAO, and I’m fairly certain the code was thoroughly audited. Yet, the vulnerability remained.

Bearing this painful lesson in mind, the future of smart legal contracts will require a blend of specialties — the expertise of developers and the experience of attorneys — to avoid the potential exploitation of loopholes with the potential to do even more catastrophic damage to traditional institutions that will eventually rely on smart contract technology.

And, there will always be clients who don’t trust the technology, people for whom it only takes one incident like The DAO every few years to reinforce their belief that the technology itself is the biggest risk in the equation. For them, a physical or electronic (of the Word type, not smart contracts) will be the tool of choice for a long time.

8. The value of a business lawyer isn’t in the paper, it’s in the advice.

In the end, my value isn’t emailing pieces of paper to people. It’s providing well-considered advice specifically tailored to my client’s unique circumstances. This is true for me as a technology and business lawyer and I’m sure it holds for most other niches in law. If they have routine transactions where a smart contract works without any of my input, great! I don’t need to be an impediment to the process.

When I create a custom customer contract for a client, I bracket and highlight the things that need to change in the future, so they can easily use it without me. There is so much other work out there that I’ve never been threatened by the DIY approach. In the end, not having to ask me to prepare a form contract saves my clients a few dollars, which likely means they make a few more dollars and, in the process, generate new legal questions and issues. Ultimately, it’s tough for me to imagine the percentage of GDP that flows to the legal profession through businesses being any different than it is today. The work will be different, although the view of business owners as to the need for quality legal representation won’t change. There will always be allocated budget for that.

The Evolving Role of Business Attorneys

If it’s not clear from earlier statements I made in this article, I’m highly bullish on blockchain technology and smart contracts generally. We haven’t begun to see the extent of the impact they’ll have on our current systems. At the same, we don’t yet know how these technologies will actually be implemented in specific contexts. So far, a lot of the talk has been more theoretical than practical.

One thing that’s nearly certain is that business lawyers and other legal providers will need to take steps to educate themselves and become experts on these technological innovations, and likely work closely with developers to craft customized smart legal contracts for clients who would benefit from doing business on the blockchain.

Lawyers gathered to discuss this new blockchain environment — its implications for the current legal system and how it will affect the future — in the American Bar Association conference in April 2017. And guess what they determined? Lawyers are still irreplaceable, even with smart contracts soon to be conveniently within the grasp of many of the largest corporations. Maybe one day this will change.

For More Information or to Talk With Me

I’m excited and welcome these technological changes. The efficiency, automation and reduced costs that smart contracts have the potential to deliver means that businesses can compete more effectively. This is good for everyone.

If you have questions about blockchain, smart contracts, Bitcoin, other cryptocurrencies and you think a lawyer who specializes in these areas can help, or if you have questions about other aspects of technology-related law, feel free to call me at 512.829.3779 or visit my business law firm website. I have offices in Austin and Houston, Texas, although I have clients all over.