Quick Summary: This blog covers everything you want to know about blockchain for smart legal contracts. By the end of this, you will thoroughly understand what are smart legal contracts, their benefits, and use cases or applications. It also spills the beans on key differences between smart contracts vs. smart legal contracts.
Legal contracts are the building blocks of any business, whether it runs locally or has an international presence. However, traditional legal contract management involves paper-based transactions and is prone to errors, slow, and difficult to ensure adherence with. This is where blockchain-powered smart legal contracts come into the picture.
Using blockchain for smart legal contracts revolutionizes how we deal with legal transactions and guarantees adherence to defined terms and regulations. Until now, what’s been popular is smart contracts, but what exactly this smart legal contracts are. Let’s dig deeper to understand smart legal contracts, their benefits, applications, and a lot more.
What is a Smart Legal Contract
Every business operates under a framework of agreements that govern its interactions with stakeholders. These agreements, often in the form of legal contracts, outline the terms and conditions for using the business’s products or services. To ensure smooth and compliant operations, businesses and their stakeholders must diligently adhere to these contractual terms.
Not only it is time-consuming and error-prone but there are chances of overlooking essential terms, which may have consequences in the future. A smart legal contract is a self-executing contract where every term of the agreement is mentioned straight into the code and stored or recorded on a blockchain.
Once the pre-defined conditions are met, the contract will perform the agreed-upon actions. All this happens without involving any human resources.
Smart Legal Contracts Example
To better understand blockchain for smart legal contracts, let’s take an example:
A tenant signs a lease agreement with a landlord. This may involve challenges like manual rent payments, potential disputes over security deposits, and delays in maintenance requests.
Doing the same with smart legal contracts can become much easier and stress-free. How? Well, blockchain-enabled smart legal contracts automate rent payments, manage security deposits, and entertain maintenance requests.
Are Smart Contracts Different from Smart Legal Contracts
Smart contracts and blockchain smart contracts for legal systems might seem similar, but there are differences between them. Let’s quickly understand:
Smart Contracts Vs. Smart Legal Contracts
- The purpose of smart contracts and legal smart contracts is the same; to self-execute a piece of code that automatically applies the terms of an agreement between parties. While the former is a broad term, the latter deals only with legally binding agreements.
- Smart contracts aim only for automation, whereas legal smart contracts focus on ensuring legal enforceability and compliance with relevant laws and regulations.
- Smart contracts could be but not necessarily legal, on the contrary, smart contracts for law or smart legal contracts involve the integration of law and technology leveraging blockchain.
How Does Smart Legal Contracts in Blockchain Work
Let’s break down how smart legal contracts work:
- In the first step, authorized persons of a business define the terms and conditions of the agreement.
- These terms are then written in the codes of a smart legal contract.
- The smart legal contract is uploaded and stored onto a preferred blockchain platform.
- The blockchain platform, such as Ethereum or Solana, verifies the code and stores it on the distributed ledger, which makes the records immutable and difficult to tamper with.
- When the conditions listed or coded in the smart legal contracts are fulfilled, it automatically performs the next action.
- Whatever actions the smart legal contract performs are recorded securely on the blockchain platform that is accessible for viewing for all users.
Benefits of Blockchain for Smart Legal Contracts
Blockchain for legal contracts is gaining immense popularity for rendering the following benefits:
Enhanced Efficiency
Legal or the law industry executes various contractual terms, smart legal contracts automate the execution of these terms and, therefore, save a significant amount of time and reduce the chances of errors and delays. It improves the overall efficiency.
Improved Security
Blockchain has an immutable nature; it means all transactions and interactions are recorded securely and cannot be altered or tampered with. It not only enhances security and transparency but also keeps fraud and disputes at bay.
Minimizes Costs and Delays
Smart legal contracts eliminate the need for manual resources to prepare and execute contracts. This reduces overall costs while expediting the speed at which contracts are executed.
Improved Trust
Recording and managing records in an immutable manner builds trust and collaboration among all parties involved. All participants can access the information at their convenience anytime.
Enhanced Adherence to Legal Compliance
Smart contracts, specially designed to verify legal compliances and regulatory requirements minimize the risk of non-compliance, preventing the imposing of fines and associated hefty penalties.
Increased Speed
Smart legal contracts in blockchain, when implemented in a business environment, look for certain conditions to be met. And once the contract terms are fulfilled, the contract automatically performs the next sequence of action. It eliminates the need for getting manual approvals for any task, which may be time consuming.
Are Smart Contracts Legally Binding
Since smart contracts are a broad term, the ones that are specially made for self-executing legal terms and conditions are legally binding and known as smart legal contracts. Legal binding depends on multiple factors, including the laws and regulations of a particular jurisdiction contractual elements, and more.
Legal smart contracts’ terms need to be clear, easy to understand, and enforceable within the limitations of the blockchain network on which they are deployed. Moreover, smart legal contracts blockchain must comply with relevant laws and regulations associated with consumer protection, financial regulations, and data privacy.
Applications of Blockchain in Smart Legal Contracts
Blockchain in smart legal contracts has the following applications or use cases:
#1 Real Estate
Smart legal contracts can be used to automate property transfers without requiring human involvement or manually performing any process. These contracts are coded in a way to facilitate secure and efficient transactions with minimal paperwork and no delays. In the case of renting properties, these legal smart contracts automate paying rent, managing deposited securities, and dispute management between landlords and tenants.
These contracts are deployed on the blockchain, which ensures seamless property rights management. The property records stored on the blockchain cannot be tampered with, which further ensures transparency and minimizes fraud.
Explore More: Real Estate Tokenization Guide for Investors & Asset Owners: Challenges, Benefits & Future
#2 Supply Chain Management
In the supply chain sector, smart legal contracts can be employed to automate executing contracts within stakeholders to ensure smooth and timely movement of goods, increase transparency, ensure adherence to quality standards, and make sure on-time payments.
These legal smart contracts in blockchain are also used for provenance tracking of goods throughout the supply chain. These contracts help keep counterfeiting and other potential problems at bay.
Businesses in the supply chain industry can utilize blockchain in smart legal contracts to transform trade finance operations, including issuing letters of credit and ensuring quick and secure cross-border transactions without paying anything to any intermediaries (since no middleman is involved).
#3 Intellectual Property Rights Protection and Management
One of the best use cases of blockchain in smart legal contracts is to protect intellectual property rights, ensure proper attribution, and automate royalty payments. Smart legal contracts for license agreements can be used to make sure adherence to regulations and compliances.
#4 Financial Contracts
The finance or fintech industry can make the most of smart legal contacts for derivatives trading, i.e., automating the execution and settlement of derivative contracts. It enhances efficiency and reduces workload. Besides, legal smart contracts can also be used to verify insurance claims and automatically release payouts upon fulfilling pre-defined conditions.
#5 Dispute Resolution
Blockchain in smart legal contracts can help businesses automate dispute resolution that is required in many businesses, including real estate, finance, legal, and more. Automation minimizes the requirement for costly and time-consuming court proceedings, giving a stress-free and hassle-free resolution to each party involved.
The aforementioned ones are only a few use cases or applications of blockchain in smart legal contracts. If you wish to leverage the potential of smart contracts for your particular business, connect with a reliable smart contracts development company.
How to Build Smart Legal Contracts in Blockchain
For creating smart legal contracts or implementing blockchain in smart legal contracts, follow this stepwise process:
Step 1: Prepare the Legal Agreement
The first step is to thoroughly understand your business’ legal requirements and what sort of agreement you want to create. Begin with preparing a traditional legal contract. Make sure you include every minute detail and the license agreement should also adhere to the required laws and regulations defined by your government.
Highlight the main terms, conditions, and actions that smart legal contracts will perform upon fulfillment of a particular task. Also, define the aspects of the license agreement that need to be automated using code. These aspects may include releasing or scheduling payments, dispatching deliveries, and more.
Step 2: Select a Blockchain Platform
Choose a suitable platform that clearly aligns with your security, speed, scalability, and other requirements. You can consider the most popular ones, i.e., Ethereum, Solana, Hyperledger Fabric, etc. Explore all the features and integration capabilities of the platform before making a decision.
Step 3: Create Smart Legal Contracts
Choose a programming language that your chosen blockchain platform supports. For example, for Ethereum, the suitable programming language is Solidity, for Solana, it is Rust, and for Hyperledger Fabric, the language is Chaincode. Convert the terms and conditions, including the rules, actions, and conditions, of your legal agreement into executable code.
Step 4: Testing
Thoroughly test the smart legal contracts’ functionality and identify technical glitches that may impact their functioning or performance. Conducting regular security checks and audits is also imperative to ensure the security of the smart legal contracts’ code. Get the contracts reviewed by legal professionals.
Step 5: Launch and Maintenance
Launch or deploy the smart legal contract on the selected blockchain platform and continuously monitor it for any issues or glitches. Check its functioning and performance. Implement it in your business processes.
In case, you don’t have technical expertise, connect with a reputed blockchain development company with experience in smart legal contracts development. Make sure you choose an experienced one to build a custom smart contract aligning with your unique business needs.
You may also want to read: Blockchain in Asset Management: Benefits, Use Cases, Implementation Process, and More.
The Bottom Line
Smart legal contracts automate the execution of a business’s license agreement, enhancing efficiency, reducing reliance on human professionals, enhancing accuracy, increasing speed, and rendering many other benefits.
Dig deeper into this blog to learn more about smart legal contracts in blockchain. It highlights the legal smart contracts’ benefits, use cases, step-by-step working, and more. If you wish to implement blockchain in smart legal contracts, the blog also spotlights the stepwise process for the same.
