Fur’s Getting Ruffled by Smarter Folks

By now we think we’re pretty smart - we’ve made it easier for folks to navigate and read one of the most complicated things in the world to read - legal documents. But then along has come “smart contracts”, to remind our team at my beloved Clausehound.com that there’s always someone “smarter” out there. While not a post on my personal founder’s journey, this is something that we’re watching carefully from a product perspective to see where the “smart money” is going.

Making contracts verifiable

SMART contracts are regular contracts with the additional benefit that some of the terms are automatically and electronically verifiable. The blockchain facilitates much of this potential verification by hosting confirmed information (e.g. confirmed company address details, confirmed individual personal information, confirmed bank account details, among other things). In fact, they should be called verifiable contracts or self/enforceable contracts rather than smart (as the latter does not have a meaningful, acronymical or etymological relationship to either smart or contracts).

Who would benefit from verifiable contract terms?

Sales professionals or organizations earning sales commissions would be happy about verifiable contract terms; the payment of a sales commission could trigger instantaneously as soon as revenues are verifiably collected into a bank account, as can bonuses or trailer fees. Should a sales bonus be approved based on certain milestones being met (time based, earnings based), the additional complexity can also be calculated so that when the earnings are received and the time trigger is fired, a commission, referral fee, bonus or trailer fee would automatically be paid.

Much more complicated are the parties obligations in a large commercial services contract. Picture a construction contract or large software development contract which has a complicated statement of work. Benefit to the contractor in this case is faster payment approvals and triggers that are less subjective: is that what the customer wants?

The deliveries, acceptance and milestones are presently elements of the contract, but, from the customer perspective, a project would have to be scoped extremely tight with designs pre-approved in advance in order for payment to automatically trigger. Otherwise, delays in testing, shifting scope, team members on holiday and other factors would result in the inability to adequately test software, or review project progress. There’s another benefit to the company: no payment if the work is not delivered; and possibly another: automatic contract cancellation.

The complexity lies in the verification

The complexity lies not in the ability to create a tagging and verification system but rather in the human verification aspects that are not time-based but rather require approval that the product meets the specification, and that the desired outcome has resulted. This is also a likely bottleneck for commercial counterparties for verifiable contracts is the actual human verification on whether the delivered product is “up to spec” and whether the specification results in the desired outcome.

Can this be a public or group verification process? Where group review can be adopted without “gaming” of the system, smart contracts can be used to approve milestones as diverse as city construction projects to city website usability testing. This could also be true within organizations, with usability testing teams that confirm and approve progress, and release payments from a “smart escrow.”

Enabling public verification

This concept of group verification has powerful consequences. Imagine: each YELP or AirBNB reviewer was uniquely verified to be an individual (and not a bot), their approach to ranking (extremely lax/generous or extremely strict) is adjusted, and their rankings and ratings are captured on blockchain, then Tripadvisor/YELP and other product/service ratings will immediately provide real time public sentiment and feedback.

The 360 degrees of reporting (verifying and assessing the reviewer and then doing the same of the product/service) is powerful, scary for the business, but tempered more so under this system - blockchain verified individuals means the ability to apply measurements of reasonableness to the reviewer.

Numerically verifiable contracts

Registering bits of information related to the financial aspects of a contract in order to trigger an action makes it possible for a contracting party to take some action. Numbers don’t lie and when a politician overspends on their travel expenses, or when a company does not have enough money to pay its upcoming obligations (and is therefore insolvent), these triggering events could automatically warn lenders or the public that there is a default or deficiency.

Do private companies want this? There are a lot of rocky roads in running a business and problems that can be solved in the same period that they arise based on a financial injection or customer payment coming through. Adding the additional pressure of calls with the banker might crush a small business. That being said, as a private lender, the ability to understand the real time creditworthiness of a business is useful.

Developing standards

A lot of the upcoming emphasis by verifiable contracting engineers will be to develop a common taxonomy. Our team is in support of this - the more public the taxonomy, the easier it will be for us to snap in our software which is beneficial to our mass of “free-tier” users as well as to our paying customers. Bring on the standards - if the result is transparency, to break down problems to their taxonomy of issues, as well as to track, source, and share solutions on a large scale.

I’ve poo-pooed the topic of smart contracts in the past (see my previous post here). But I’ve recently returned from the Brooklyn edition of the global Legal Hackers Blockchain and Computational Learning Festival, where “smart contracts” were discussed and dissected, and the future of legal agreements were planned and predicted.

At present, contracts are a long way from verifiable, but as was described by the expert and talented presenters at this conference, with verifiability comes transparency, which brings accessibility/understanding. Transparent and accessible rules drives fair play. So bring on the smart contracts, I say.

Written by Rajah. Rajah Lehal is Founder and CEO of Clausehound.com. Rajah is a legal technologist and technology lawyer who is, together with the Clausehound team, capturing and sharing lawyer expertise, building deal negotiation libraries, teaching negotiation in classrooms, and automating negotiation with software.