31 Jul 2017

Contract management systems do not manage contracts. Many provide excellent account management functions, allowing organisations and enterprises to compare supplier performance in relation to prices, deadlines and other metrics. However, they work only by reference to data extracted from contractual documents, and not by reference to the contracts themselves. Whether that data is extracted manually or through increasingly sophisticated document reading software, the result is a gap between the contract and the data that is actually being used to manage the contractual relationship.

Mostly, that gap has limited practical significance. However, there is a dispute the court must either look to the terms of the actual contract or be persuaded that the parties' conduct has altered their relationship by waiver, estoppel, acquiescence or variation. When there is a dispute, the contract management gap matters.

Connected contracts (or "dynamic" or "smart" contracts) promise not so much to close the contract management gap, but to make it practically irrelevant. Rather than creating an extra layer of contract management based on more-or-less accurately extracted data, connected contracts allow key contractual events, such as payment, to be driven by agreed data feeds. For example, real-time delivery data derived from internet-of-things (IoT) connected containers might trigger full payment or payment of a reduced sum if the parties agreed that delay would be compensated by a daily reduction in the price. Dynamic adjustments to the contract, applying agreed criteria, take the place of potentially protracted claims for liquidated damages.

The commercial and efficiency-based benefits of connected contracts are clear. However, their development and adoption depends on the application of key legal concepts, such as valid contract formation, governing law and jurisdiction, interpretation and enforcement. It remains necessary to know where a contract is formed, and what rules will apply to its interpretation and enforcement.

For that reason, the development of connected contracts cannot be approached from a purely technical perspective. In principle, any contract provision can be made "smart", essentially by being reduced to an "IF/THEN" statement where the input of specified data triggers an agreed result, such as release of a payment. However, the validity and effect of some agreed results may be open to challenge depending on the law governing a particular contract. For example, in a contract governed by the laws of England and Wales a "liquidated damages" clause will be effective as long as the figures specified as liquidated damages are not "out of all proportion" to the interest that is being protected. The result is that, in England, the figure you specify is likely to be the figure you get. In other jurisdictions the situation may differ. In India, liquidated damages are rarely used because they run into parts of the Indian Contract Law Act 1872 under which the sum specified for liquidated damages acts as a cap, within which the claimant may recover "reasonable compensation not exceeding the amount so named". The figure you specify will be the figure you get only if you can prove actual damage. In other jurisdictions, particularly those governed by civil or commercial codes, the courts retain significant jurisdiction to adjust the figures to provide an objectively reasonable remedy.  

For now, the development and promotion of connected contracts depends on their ability to reflect and accommodate jurisdictional differences. Legal expertise and experience is therefore required to ensure that connected contracts work as the parties expect. Over time, it may prove that laws bend to meet commercial practice, and that the widespread use of connected contracts will create a distinct, cross-border or even borderless position. In that case, legal expertise and experience would have to adapt to new facts. Either way, legal practitioners have a vital interest in understanding and contributing to the development, standardisation and success of connected contracts.

That is why we have seized an unmissable opportunity to work with and learn from Clause, a legaltech startup that is pioneering the use of smart legal contracts. Clause is known for developing the world’s first data-driven and IoT-enabled contracts. Today they are announcing Accord - a project developing legal and technology standards for the future of smart legal contracts - with the support of the leading bodies that sit at the interaction of this nascent legal technology, including Hyperledger, the International Association for Commercial and Contract Management, and some of the world’s leading law firms. Bond Dickinson is proud to be in such innovative company.

More information about the Accord Project is available at www.accordproject.org. Membership enquiries can be made at: admin@acordproject.org.