'Smart Contracts' Demand Sharper Tech Skills From Lawyers, Experts Say

In December 2016, K6 Blog published this post instructing lawyers to "start thinking like developers" to remain relevant in the age of smart contracts. The following post appeared April 18, 2017 in the New Jersey Law Journal.

By Charles Toutant, New Jersey Law Journal

Lawyers who advise clients on "smart contracts" drawing on blockchain technology say some potential adopters liken them to a "magic pill" that will provide a cure to all their contract-related headaches.

But as "smart contracts" become more common in more sectors of the economy, lawyers will need to increase their technical know-how and renew their focus on counseling clients instead of ministerial work, according to specialists in this fast-evolving field.

While expectations should be tempered, experts said adoption of the new technology will bring changes to the practice of law.

Some boosters of the technology have expressed unbridled enthusiasm for blockchain technology's potential.

One website covering the blockchain industry, Blockgeeks.com, called smart contracts "the blockchain technology that will replace lawyers." But others disagree with that assessment, saying expectations should be tempered.

Experts tend to agree on at least one thing, however: adoption of the new technology will bring changes to the practice of law.

"Some enthusiasts are overly optimistic about smart contracts bringing a great reduction or elimination of the need for attorneys. It will be many years before that level of standardization is accepted widely by industry participants, and, importantly, by regulators," said Kari Larsen of Reed Smith in New York, who advises clients on blockchain technology. "Even if complex transactions are moved to a blockchain, they will require negotiated umbrella agreements or lawyers to negotiate the agreement before it is put into code, and people, being human, will continue to have disputes about terms. What the dispute is based upon may change but that will simply bring new challenges for attorneys," Larsen said.

Smart contract technology is still in its infancy but is advancing rapidly. First developed a decade ago as an accounting system for the digital currency bitcoin, blockchain technology is being adapted to a wide variety of business processes. Smart contracts are seen as secure, tamper-resistant, precise and economical, and pilot projects are exploring their use in areas ranging from auto insurance and health care to supply chain management.

A smart contract is a legally enforceable agreement written using blockchain technology. The term "smart contract" is a misnomer for an autonomous software program that can be used to create legal agreements, said Aaron Wright, an associate clinical professor of law at Benjamin N. Cardozo School of Law in New York. Blockchain is a database maintained by a peer-to-peer network and shared by multiple participants.

Smart contracts permit buyers to conduct transactions in a transparent manner, without avoiding the services of a middleman. They are often likened to a vending machine, which sells goods for a predetermined price.

"Smart contracts, as a broad concept, are increasingly going to be everywhere. The areas where it will hit first are where agreements are readily transformable into code and objectively verifiable," said Wright. As director of the Cardozo Blockchain Project, he explores legal questions surrounding blockchain technology, such as payment systems, corporate governance, property law, and intellectual property.

Financial companies are among the earliest adopters of smart contracts for such instruments as derivatives and interest rate swaps, because their routine nature lends themselves to smart contracts, said Wright. He cites the formation of a consortium of 70 financial institutions, including Citibank, J.P. Morgan and Bank of America, to develop technology for financial transactions. Some large law firms serving the financial industry have followed suit by developing the ability to advise clients on smart contracts, he said.

To the extent that smart contracts become more prevalent, lawyers will have less work drafting contracts but more work drafting smart contract templates.

But that task will require them to work closely with technology experts, said Wright, the Cardozo professor.

"I think, in general, lawyers need to understand technology at a deeper, deeper level. If you don't understand how [smart contracts] operate, it's problematic because clients increasingly want to use these types of agreements," Wright said.

Larsen said smart contracts are still in their "very early days," adding that most current or announced uses are "test cases or proofs of concept." But some companies have announced they expect to be moving to the implementation stage later this year, but "true acceptance and more common usage" still appears to be years away, she said. Still, lawyers will have to adjust if they are to prosper in the future, she said.

"It will become increasingly important for attorneys to understand technology and more likely that they will have to understand code or work more closely with computer engineers," she said.

Smart contracts have their limits, seeing the greatest application in circumstances that "lend themselves to binary solutions—if this, then that," while there are other situations with "complexity that's qualitative" that do not lend themselves to the new technology, said Lewis Cohen of Hogan Lovells in New York, who advises clients on blockchain technology. He sees smart contracts as an extension of the many techniques designed to reduce the need for lawyers. But Cohen sees the onset of new technology as a chance for lawyers to recommit to client service.

"The most crucial thing you can do as a lawyer is add value. If all you're doing is a routine thing that can be done by machine process, you do need to be worried. The lawyers that need to be concerned are the ones that aren't adding value," Cohen said. "If you're a partner at a large law firm and you sit on top of an army of people doing ministerial work, those partners should be worried, too. The lawyers that add value don't have to worry."

Contact the reporter at ctoutant@alm.com. On Twitter: @ctoutantnjlj.