The Story of
Smart Legal Contracts
Legal contracts are the basic framework for modern society. They enable all commerce and finance. A nation’s constitution is a contract with its citizens.
The world has digitalised, but despite their importance, legal contracts have not. They remain analogue records of obligations and participants are left on their own to figure out how to fulfill them. Most often, the solution is a large amount of manual tasks. These create cost, risk and the likelihood of error. The World Commerce and Contracting Association estimates that the average company fails to capture nearly 10% of the value of their legal contracts. At a global level, this represents $2.5T of unrealized GDP.
Digital platforms are helping, but not changing, the analogue agreement
Even if these core problems remain, legal contracting is steadily improving. Sophisticated software helps analogue contracts be drafted, reviewed, negotiated and signed. These systems can also take information from analogue contracts and push it into a company’s business systems, such as ERP, CRM, payment, billing and client support platforms.
These capabilities help, but do not change, the analogue nature of the legal contract.
Contract management systems typically require significant investment, limiting their use to large enterprises, and only serve to improve the internal performance of one party. Unfortunately, their counter-party may simply have Post-it notes stuck to a computer monitor. Value generated by a legal relationship depends on how well both parties perform it and complex contract management systems are regularly undermined by counterparties that perform their obligations manually and inaccurately. After all, the number one system for managing legal documents is still the email inbox.
Unilateral contract management systems have the wrong goal
Contract management is holding back a golden age of commerce
Despite being seen as helpful, these contract management systems are actually holding back global commerce by providing a crutch for the analogue agreement to lean on, delaying a transformation that promises a golden age of business and finance. They function like life support for an ill patient, but do not cure the disease.
Its time to stop asking how to make contracts ‘less bad’. They can and should be a vital tool in creating and capturing business value.
Contract-Embedded Automation is different because it places automation directly inside the legal contract itself, making it part of the overall binding agreement signed between parties. It represents a new class of both legal agreements and business automation. Contract-Embedded Automation sits 'upstream' of current business automation systems, which work on behalf of one party and must be configured (manually, by a contract life cycle management system, or both) based on the signed agreement. Contract-Embedded Automation is bi-lateral, working on behalf of the legal contract and not a particular party’s business systems. It is also indelible and legally certain. Once an agreement is signed, it takes actions, assures outcomes, and creates records until it has come to term, the parties have agreed to amend or terminate, or a court has ordered its suspension. The new class of agreements that use Contract-Embedded Automation are known as Smart Legal Contracts (SLCs).
SLCs represent a new set of rails for global business. They assure that legal relationships are functioning as their participants intend and frees them to focus on delivering the core value of a business. They enhance trust, enable fast and accurate business, and remove the friction that limits commerce or transactions.
Smart Legal Contracts use Contract-Embedded Automation to create a new set of rails for global commerce
Contract-Embedded Automation creates active legal agreements
Controls payments: Calculate how much is due for payment and receive, process or send those payments
Handles subjective decisions: Ask individuals such shareholders for the decisions that direct the legal agreement’s subsequent actions
Organises processes and communication: Remind, receive and relay important documents or notices required in an agreement
Connects to external data: Connect to external sources, like key interest rates or registries, to trigger next steps or take follow-up action
Eliminates the operational penalty of bespoke terms: Contract-Embedded Automation works equally well whether its in 10,000 copies of an agreement or just 1
Creates an indelible, single source of truth: Immutable records create transparency about the state of a legal relationship and collect all records related to a specific agreement in one place, replacing fragmented or ad hoc archives
Contract-Embedded Automation enables business model innovation
Individually, the capabilities of Contract-Embedded Automation add value to any organisation where business success is tied to the performance of legal obligations. When these benefits are combined, it enables innovation within existing business models and unlocks entirely new ones that are simply not viable using today’s analogue legal architecture.
Smart Legal Contracts based on Contract-Embedded Automation:
Shared Perspective: SLCs are designed to be shared between parties, allowing all involved to have the same view and understanding of the contract and its state.
Trust: As the contract is shared and its clauses self-executing, it fosters trust between the parties. Both sides can be confident that the contract will be executed as agreed, reducing the potential for disputes.
Mutual Execution: All parties can monitor and validate the execution of clauses in real-time. This collaborative aspect ensures transparency and joint decision-making.
Contract management (CM) tools:
Single Party Control: CM tools are generally used by one party to manage its contracts, and the system's view and data might not be shared with the other contracting party.
Focus on Management: The primary goal of CM tools is to streamline the management of contracts for the organization that owns the tool, without necessarily involving the other party in the process.
Potential for Discrepancies: As CM tools are unilateral, there could be discrepancies between how one party perceives the contract and its obligations versus the other party.
The bilateral nature of SLCs promotes transparency, trust, and collaboration between contracting parties. In contrast, CM tools are primarily designed for the administrative and managerial needs of a single party.
CM tools are about the management of analogue contracts throughout their lifecycle. Contract-Embedded Automation is about making contracts active and responsive.