Understanding Smart Contracts in the Legal Landscape
The legal industry is change-resistant due to high risks, but rapid digital transformation processes require innovations, including the transition to smart contracts. Smart contracts are legally binding and have numerous benefits, and are easier adopted with the help of legal contract management software.
What is a smart contract, and how does it benefit legal teams?
A smart contract is an agreement in the form of a computer code. These codes run on the blockchain, meaning they are stored on a public database and cannot be altered. Additionally, since the blockchain processes them, there is no need for a third party, and you can send all agreements automatically. Smart legal contracts are gaining traction among law firms due to their advanced security, high speed, lower risk, and reduced cost.
Key differences between traditional contracts and smart contracts:
Traditional contracts often take a long time to close since there is a lot of back and forth and editing that needs approval by the opposite party. On the other hand, smart legal contracts eliminate the need for third-party authorization since they run on the blockchain. This means that using smart contracts will save your firm a lot of time because they are sent automatically.
Manual contract management/automatic contract management
Manual contract management is an outdated process that contributes to low productivity levels, higher costs, and human error. By switching to smart legal contracts, you can automate your contract management process, meaning that all of your CLM processes will be streamlined and optimized for you, thanks to legal contract management software.
Escrow necessary/escrow may not be necessary
Escrow is typically used in traditional contracts as a placeholder, ensuring that the other party will uphold their end of the deal. However, smart contracts eliminate the need for escrow since they are automatically executed once one party delivers on all terms of the agreement, meaning each side is automatically protected. Conversely, if one side fails to uphold their end of the agreement, the other party automatically gets their payment back.
Physical presence required/virtual presence is enough
The COVID-19 pandemic has made it difficult for individuals to meet in person, putting pressure on firms to develop a digital way to execute contracts. With smart contracts, the parties do not need to meet in person since virtual presence is enough making them far more convenient and reliable than paper contracts.
Key legal smart contracts benefits
Smart legal contracts are automatically run and executed via blockchain. Since everything is completed automatically, they are far quicker to execute than traditional contracts. Additionally, law firms will benefit from using legal contract management software, which will expedite the contract management process and its closure, allowing your team to dedicate time to more pressing matters.
One of the significant drawbacks of traditional contracts is their lack of security features, which is especially detrimental to law firms that handle sensitive data. On the other hand, intelligent contracts possess advanced security features that encrypt all your data and store it on the blockchain where it cannot be accessed or tampered with.
Therefore, by switching to smart legal contracts, your data will be safely stored on an external platform, ensuring that no malicious individuals have access to it.
It’s challenging to execute traditional legal agreements without an intermediary. However, using intermediaries or third parties often increases expenses and the time spent waiting for confirmation from an independent party. Smart legal contracts eliminate the need for a third party by automatically executing the deal once each party fulfills their assigned term.
Lower execution risk
Manually assessing risk is an unreliable process in which firms take on more risk in their agreements than they can handle. However, legal contract management software can be used along with legal smart contracts to automatically mitigate risk in your agreements. By using these processes, your firm will gain advanced insight into your risk ratio and determine which steps you need to take to lower your contractual risks.
Many components of traditional contracts are costly paper supplies, software subscriptions, and hiring an independent mediator are just a few of the expenses. If your firm is looking to cut costs but doesn’t know where to look, smart contracts are a great solution. These technology-based agreements eliminate the need to spend money on many of the required components by traditional contracts since everything is already on the blockchain.
Impact of smart contracts on the legal landscape
Every industry is becoming more and more reliant on technology to assist their CLM processes, and it would make sense for the legal sector to follow suit. Legal department management software and intelligent contracts prove to be exceptionally beneficial to law firms as they account for the drawbacks of traditional agreements. Therefore, smart contracts are improving the efficiency, security, and profit margin of the legal landscape.
Final thoughts on the adoption of smart legal contracts
If you would like to implement smart contracts in your law firm, using legal contract lifecycle management software will make the transition go a lot smoother. In addition, legal contract management platforms are designed to be used with digital contracts, meaning your team can get the hang of the basis of digital contracts before entirely switching to smart contracts.