Smart Contracts, and smart technology applied to contracts

Transcription

1 Smart Contracts, and smart technology applied to contracts Dr. Joel E. Henry Attorney

2 Smart Contracts are Scary or a godsend? Smart technology applied to contract? Executable software hidden in documents? The here-and-now or the future? Answers should be based on Pain points and inefficiencies of the process Understanding the technology Application of technology to these points and inefficiencies One step at a time how could technology be applied to contracts?

3 Smart technology underlying contracts Contract creation software Rely on templates and user inputs Cover the basic clauses contracts need But match the legal process very poorly (actually in no way whatsoever) Natural language processing can help here Contract software should serve the parties, not the lawyers Serves a gap in the contracting continuum here is why:

4 Contracting Cost & Complexity Legal Zoom Legal Team

5 Smart technology applied to contracts There exist smart technologies for contracts but not concept driven Active identification of a base set of clauses (expert classifies) Passive identification of clauses in unreviewed or revised contracts (software identifies) Smart Contract technology should Become smarter every day Note important differences in contracts and versions of contracts Ignore boilerplate, inconsequential, and non-binding language Focus the reviewer on the important points not the difference in language

6 Smart technology underlying contracts Track changes in revised contracts couldn t more inefficient Identifying the change becomes increasingly difficult Understanding the significance of the change can be expensive Natural language processing can Capture and compare the meaning of each version of each phrase or sentence Connect versions to explanations or equivalent phrases or sentences Provide suggestions as entire phrases or sentences that have been used in the past, where such suggestions have known meaning Identify deal-breaking changes Identify trivial, non-critical, changes so that focus can be put where it is needed

7 Smart technology applied to contracts How would this work? Explicit knowledge: knowledge that has been explicitly explained, codified and expressed in formal language and can therefore be effectively applied Explicit knowledge drives identification this is not Siri How about an example:

8 Smart technology applied to contracts Is this, Liquidated Damages. In light of the difficulties in estimating the damages for an early termination of Executives employment under this Agreement, Company and Executive hereby agree that the payments, if any, to be received by Executive pursuant to this Article 5 shall be received by Executive as liquidated damages less any amounts specified in the Executive s contract and Company policies. The same as this? Liquidated Damages. In light of the difficulties in estimating the damages to Executive in the event Executive s employment is subject to termination, Company and Executive hereby agree that the payments and benefits, if any, to be received by Executive pursuant to Article 5 shall be received by Executive as liquidated damages offset against any amounts to which Executive may otherwise be entitled under any contracts and policies maintained by Company.

9 Smart technology applied to contracts This is Liquidated Damages. In light of the difficulties in estimating the damages for an early termination of Executives employment under this Agreement, Company and Executive hereby agree that the payments, if any, to be received by Executive pursuant to this Article 5 shall be received by Executive as liquidated damages less any amounts specified in the Executive s contract and Company policies. the same as this..(in the case I had recently) Liquidated Damages. In light of the difficulties in estimating the damages to Executive in the event Executive s employment is subject to termination, Company and Executive hereby agree that the payments and benefits, if any, to be received by Executive pursuant to Article 5 shall be received by Executive as liquidated damages offset against any amounts to which Executive may otherwise be entitled under any contracts and policies maintained by Company.

10 Smart technology applied to contracts Smart technology then stores: the payments, if any, to be received by Executive pursuant to this Article 5 shall be received by Executive as liquidated damages less any amounts specified in the Executive s contract and Company policies. and the payments and benefits, if any, to be received by Executive pursuant to Article 5 shall be received by Executive as liquidated damages offset against any amounts to which Executive may otherwise be entitled under any contracts and policies maintained by Company. As equivalent. Then both can be used to compare against: Payment of the Termination Payment pursuant to Article 5 shall be in lieu of any severance benefit Executive may be entitled to under Executive s contract or any severance plan or policy maintained by Company or its affiliates.

11 But today Smart Contracts are Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network. Smart contracts permit trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism. They render transactions traceable, transparent, and irreversible. Investopedia We actually use similar technology every day: A link in a webpage Functionality behind an address in an Phone number in a text message links to your phone dialer Address in an app on your phone

12 Databases vs Blockchain Imagine a supply chain for bananas

13 Databases vs Blockchain Imagine a supply chain for bananas

14 Databases vs Blockchain Imagine a supply chain for bananas that s actually a chain!

15 Databases vs Blockchain All entities have ledger of blocks for bananas

16 Blockchain supplements Databases Blockchain is NOT a replacement for institutional data especially private data Blockchain provides a different function transactions that must be verified, shared, and are immutable once verified What problems does blockchain solve? Economic transactions Removes central verification from any transaction, action, or data

17 Blockchain is based on Distributed ledger all participants have copies of blockchains Trustless no one entity is trusted source Consensus 51% of nodes in the network must verify the new block (transaction) Encryption to take over a blockchain network the hacker would have to deploy thousands of servers and play the odds (i.e. would you buy 51% of the lottery tickets sold and feel confident you would win?)

18 What is blockchain technology?

19 How does blockchain work? Each block has: Identifier of previous block Blocksize Blockheader Transaction counter Transaction data (may be encrypted) To verify, majority of nodes has to find a hash value that is input into a math function where the function produces: Identifier of previous block Blocksize Blockheader Transaction counter

20 How does blockchain work? Hash Value 1 Hash Value 2 Hash Value 3 Hash Value 4

21 Why is executable code better? Each block has: Identifier of previous block Blocksize Blockheader Transaction counter Content executable code run after verification

22 Smart contracts include actions triggered upon events 4. Payment Terms. Vendor shall pay a fee of $1000 upon delivery of each order to cover shipping and delivery expenses. Such payment shall be made to the Company without regard to sales of any item contained in the delivery and shall be non-refundable. Delivery shall be considered complete upon affirmative confirmation of shipper that such order has been delivered to the address specified in the associated purchase order. Shipper creates a block confirming delivery Company, upon verification of shipper block, creates a block requesting payment Vendor receives the requesting block and upon verification code executes wiring $1000 to Company

23 Personless transactions, are you kidding me? Nope, consider the following person to person transaction: Joel sends this From: Joel E. Henry Sent: Thursday, August 16, :21 AM To: Jane Smith Subject: Investment Jane, Thanks for completing the subscription agreement for Invest LLC. Can you please wire your investment in JoelBrewing LLC. It was for $500,000. Thanks Joel

24 Personless transactions, are you kidding me? And Jane sends this response: From: Jane Smith Sent: Thursday, August 16, :24 AM To:Joel E. Henry Subject: Re: Investment Joel, Yes. Please send me wiring instructions. Thanks Jane

25 Personless transactions, are you kidding me? And Jane gets this response: From: Joel E. Henry Sent: Thursday, August 16, :29 AM To: Jane Smith Subject: Re: Investment Jane, Please wire to: First Security Bank For the benefit of JoelBrewing LLC Routing Number: Account Number: Thanks Joel

26 And all is well in JoelBrewing LLC Land Except it sure isn t. The routing number is actually to Jamaica, where First Security Bank has yet to open its first branch. What s your first hint as to how this went south? jhenry@wordenthane.com IS NOT jhenry@wordenthame.com

27 But a Smart Contract with executable code If this is in the subscription agreement and signed by docusign: 4. Payment for Securities. Payment for the Securities shall be received by the Company from the undersigned by wire transfer of the Purchase Price in immediately available funds wired to the address below. At the Closing, the undersigned shall execute the Company s Joinder Agreement. First Security Bank For the benefit of JoelBrewing LLC Routing Number: Account Number: This could be executable wherein the signatory enters information

28 Smart Contract coordinate with other entities If the transfer of funds requires multiple signatures: No money is transferred anywhere until all signatures have been acquired (a block), validated against known signatures (another block), and recorded by the bank (yet another block). Joe Smith, as member of Invest LLC Sally Jones, as member of Invest LLC Fred Small, as member of Invest LLC Final signature triggers validation, which triggers recording, which triggers transfer

29 Takeaways Natural language processing can solve problems in creating, editing, and finalizing contracts (front end costs) Blockchain is a unique technology using cryptography, distributed ledgers, and consensus verification (back end costs) Smart contracts represent an efficiency and security leap forward when implemented by all parties (next step in automation) Vendors out there but be wise not seamless and target niches Slock.it, Fizzy, EtherParty, Propy, and Populous have made some bold claims

30 Contact Information Dr. Joel E. Henry Attorney Worden Thane P.C. 321 W. Broadway, Suite 300 Missoula, MT Phone: