People can be pretty terrible. We lie, cheat and steal when given the opportunity, so over time we’ve developed a ton of rules to keep each other in check. In the business world lawyers play a key role in creating and managing the enforcement of many of these rules through contracts and litigation. They act as trusted third parties who know how to interpret our complicated legal code.
That legal code is currently stored in lengthy text documents that, until recently, often resided in physical legal libraries. Corporations rely on in-house lawyers or large firms to help them stay on the right side of the law and execute their contracts appropriately. However, new research tools and trust-building technology are threatening to shake this up over the next decade and may fundamentally change the way businesses think about their “legal team”.
Two different kinds of technology are shaping the future of the legal profession.
The first is new software that makes it faster for lawyers to search and consolidate information about legal precedent or an active case. Smarter research tools may accelerate the consolidation of labor that’s been occurring in the legal industry since the 1970s, when technology like the Xerox copier changed the speed at which drafts were created. As editing became easier and digital documents revolutionized the nature of litigation research, legal secretaries and junior lawyers became less important. Now a single person often creates and reviews their own contract drafts. In litigation there may be only one senior lawyer supported by a small number of junior staff using research programs like Lexus Nexus and Relativity to quickly scan prior rulings and vast volumes of case documents.
Just as Lexus Nexus has made legal libraries, once a must-have for prestigious firms, extinct and word processing eliminated the functions of many secretaries, junior staff should watch out for natural language processing programs, like IBM’s Watson, as they take on a large role in the research phase of legal cases.
The second type of technology makes it easier for two parties to trust each other in the absence of a third-party enforcer. Blockchain technology enables information to be stored in an uneditable format that is only accessible under the right conditions. This secure system of managing information can be used to code self-executing rules in a way that ensures neither party has the upper hand in the way the rules are enforced. This means that a contract requiring payment on receipt of goods could automatically enforce payment terms (eg, a bank transfer from Company A to Company B) without involving any active choices on Company A’s part (payment triggers when Company B’s inventory system records receipt of goods).
Near term use cases for blockchain include smart financial instruments, where terms can be easily baked into the platforms used for trading bonds or derivatives. Elevance and R3’s Corda platform both promise to reduce legal friction in finance, and this April Barclay’s announced that it is working with the ISDA to make this a reality. With secure code executing across a peer-to-peer network of databases, the “trust” function that a legal team currently plays (analogous to the role of AliPay in ensuring digital trust in China) becomes a little redundant. Once more systems are fully digitized like our financial markets, the opportunity for blockchain contracts increases. A couple in Singapore even recorded their prenup on blockchain this June, and startup Attores is encouraging more people to submit their own “social contracts”, digital certificates, and tenancy agreements to its platform.
Lawyers aren’t known for their lightning-quick adoption of new tech. Many of these changes will be adopted relatively slowly in this conservative industry. It is, however, important to consider the implications of relying more on algorithms to create and execute the terms of our contracts. Without teams of secretaries, junior lawyers and research assistants involved, the burden of proofing falls on a single senior lawyer. There will also be fewer checks for inconsistencies once contract code goes live. Perhaps most dangerously, coding errors and cybersecurity threats could wreak damage when contract rules are enforced instantaneously.
It’s not all downside though. As expensive head count is reduced legal services become less expensive, and some of these new coded contracts may even reduce the level of litigation that’s pursued to punish parties for failure to comply with a set of terms. We may start to use our lawyers as product managers for contractual coding platforms that make it easier and easier for everyone to have cheaper access to simply enforced legal tools. (768 words)
A special thanks to G. Cooke and P. de Lucio for their expert legal opinions. Until the robots win, we’re lucky to have them watching out for our best contractual interests.
Coy, Peter and Olga Kharif. “This is Your Company on Blockchain.” Bloomberg Businessweek, 8/25/2016.
Kharpal, Arjun. “Barclays used blockchain tech to trade derivatives.” CNBC, 4/19/2016
Norton, Steven. “CIO Explainer: What is Blockchain?” The Wall Street Journal, 2/2/2016.
Stark, Josh. “Marking Sense of Blockchain Smart Contracts.” Coindesk, 6/4/2016.
Withers, Kate. “Smart Contracts: Opportunities and Legal Risks in FinTech.” The National Law Review, 11/8/2016.