Consider, for a moment, these two statements from the “Ultimate Guide to Understanding Blockchain Smart Contracts” on a well known Blockchain website:
1) Traditional Contracts
“Traditional physical contracts, such as those created by legal professionals today, contain legal language on a vast amounts of printed documents and heavily rely on third parties for enforcement. This type of enforcement is not only very time consuming, but also very ambiguous. If things go astray, contract parties often must rely on the public judicial system to remedy the situation, which can be very costly and time consuming.”
2) Smart Contracts
“Smart contracts, often created by computer programmers through the help of smart contract development tools, are entirely digital and written using programming code languages such as C++, Go, Python, Java. This code defines the rules and consequences in the same way that a traditional legal document would, stating the obligations, benefits and penalties which may be due to either party in various different circumstances. This code can then be automatically executed by a distributed ledger system.”
This is, of course, a logical fallacy, known by philosophers as a “False Equivalence” or comparing apples with oranges.
The first sentence does contain a modicum of truth - lawyers do love dense, impenetrable language and are paid by the sentence rather than the reduced sentence. But the claim implied by the second is – well how to put it – just plain silly.
The implications of smart contracts such as those described are interesting.
For example, next time: someone crashes into your car; or you divorce; buy a house; or sell a business product overseas, you do not have to dial 1-800-Dodgy Lawyer. No - what you have to do is get the kid next door to knock up a few lines of Java code on his/her smart-phone and problem solved!
In future, computer programmers without any training or expertise in the law will, according to this vision, write binding legal documents, called smart contracts, that will be executed automatically without any grownups being involved. What could possibly go wrong?
Now the Blockchain movement has been characterised as another example of the anti-establishment revenge of the plebs. But, in truth, the Blockchain bandwagon had been careening down this particularly slippery slope for a long time.
Smart contracts are seductive. If a few lines of computer code could rid the world of lawyers who wouldn’t be tempted?
But it’s not that easy. In order for this magic bullet to work, everyone has to sign up. One side cannot choose to have a smart contract while the other has a smart lawyer. It doesn’t work like that.
Like much of Blockchain, there is a whiff of absolutism about smart contracts. The geek speak is full of terms such as “immutable” and “unbreakable” – and who would not want certainty rather than legal waffle? Human variability and ever-changing laws to account for individual preferences and emerging technology have no part in this world.
If only we could start over again with a clean sheet of paper, all sorts of problems, like conveyancing property, would become simple overnight. Just hit the Enter key and, LOL, you have just bought a house or a boat or a pig in a poke.
As with Blockchain, smart contracts may have a limited role in automating specific, low level functions in finance. But it’s unlikely that banks and their customers will be prepared any time soon to entrust billions or even millions of dollars to coders, just out of school.
Lawyers should wake up to this threat, not that they are likely to be replaced anytime soon, but they should nip this potential threat in the bud sooner rather than later. A soupçon of scepticism may be in order.
Authors: Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie University