Smart Contracts: What Are They and Can They Help Your Business?
By Mark D. Norych, Esq. President and General Counsel Arbitration Resolution Services, Inc.
Contracts are legally enforceable agreements which are usually, but not necessarily, in writing and involve some type of transaction. Historically, the only way to enforce a contract in the event of a breach was to file a law suit. Law suits are often time consuming and expensive, particularly for businesses because usually they are required to be represented by an attorney increasing the costs exponentially.
Recently, a new type of contract has emerged known as smart contracts. Essentially, a smart contract is an electronic or digital agreement which is incorporated into a computer program that allows the agreement to be self-executing without the need for human intervention. Like any contract, it can be drafted to meet the specific needs of the parties.
The origins of smart contracts can be traced to the cryptocurrency area. Smart contracts were created to allow anyone wanting to buy cryptocurrency (ex. Bitcoin) to purchase it directly without the use of a broker. But smart contracts can be used for virtually all agreements including those involving financing, leases and sale of goods or services.
One of the more significant features of a smart contract is that it can be self-enforcing – that is, it provides for an automated computer process to occur in the event a party doesn’t perform its obligations under the contract. For example, let’s say in a contract for the sale of goods, one of the parties fails to send payment or delivery of the goods is late, the agreement could be programmed to send letters, notices or demands automatically by email in the event of a breach by one of the parties.
Most interesting is that with the right software and arbitration company, smart contracts can be programmed to automatically file an arbitration to enforce the agreement! Since companies do not need to be represented by an attorney with arbitrations, they can save substantially on the costs of enforcing their contracts.
Smart contracts can save significant time and money, particularly for companies that have a large number of smaller contracts. It is time-consuming and expensive to have staff monitor performance on such contracts, send out letters and file actions especially when the individual dollar amounts may be less than $50,000. Smart contracts are here now and represent the future of contract management and enforcement for many businesses. Is your business ready to reap the benefits?