Get Smart: Why Cost Cutting Should Not Elevate Forms Over Substance


n 1994, a computer scientists named Nick Szabo—a man many believe to be the creator of Bitcoin—outlined, in a blog post, how the need for corporate counsel would eventually be eliminated and replaced by a concept similar to vending machines. Now, two decades after Szabo’s original post, cutting-edge clients have begun to ask whether legal costs can be cut by Szabo’s so-called “smart contracts.”

In the recent past, artificial intelligence chewed into the legal profession, first through the revolution of e-discovery tools such as Symantec and Exterro, which can search thousands of documents in less than one billable hour, and then through software such as Ross Intelligence, which can research more substantive legal questions. But, while both sets of tools are used to reduce the number of hours that appear on a client’s bill, both are considered additive contributions to lawyers’ effectiveness. Szabo’s “smart contracts,” however aim to make attorneys’ contributions entirely redundant.

In a 2007 blog post, Szabo explains that a smart contract is a “digital code that augments or even replaces the functions of traditional private law.” By way of example, and as mentioned above, Szabo asks his readers to consider the vending machine against their basic understanding of offer, acceptance and consideration: the vending machine offers the customer a certain soda at a certain price, the customer accepts the offer by providing considering in the form or coins or a dollar bill, a computer confirms all conditions have been met, and the customer is presented with the cola bargained for. Because vending machines can be maintained without surveillance and continue to be consistent, they’ve almost universally replaced concession stands. Szabo’s contention is that the premise of the vending machine could be copied by computer science for more commercial uses.

To be more specific, and in Szabo’s idea, smart contracts exist on what is known a “distributed ledger.” A distributed ledger can be thought of as similar to the Internet in how it enables peer-to-peer sharing but dissimilar in that there is no central administrator or centralized data storage. From there, “shared business logic” between two parties can be executed by computer software (e.g., if X, then Y) and the essence of a smart contract has been created.  In Szabo’s preceding metaphor, the distributed ledger is the vending machine, the shared business logic is the smart contract and the soda that drops is the benefit bargained for.

The counterargument to Szabo’s proposed paradigm shift is that client preferences, competition among parties, and leverage create too much of an incentive for customization and, as such, carve out a market for human lawyers that will always be there.  As such, even if smart contracts are used where otherwise form or unilateral contracts would be acceptable (e.g., property leases, loans, etc.), lawyers should not cede that work to mindless automation. Second, and more important, if it saves them time and money, people will predictably cut corners, leading to less favorable results than if a human attorney had given a matter the attention it deserved.

This past January, tiny capital, the parent company of tech companies such as MetaLab, Flow, Designrer News, Pixel Union, purchased a majority stake in a company called Dribbble. In a piece published on Medium this past March, tiny capital founder Andrew Wilkinson outlined how he reduced the acquisition’s usual 12-month gestation period to eight weeks by following a two-page contract that Warren Buffet used to purchase National Indemnity for $8 million ($6 million, when controlled for inflation) in 1967. Wilkinson did not republish the Dribbble agreement but, in Buffet’s original contract, National Indemnity and Berkshire Hathaway agreed (1) Berkshire would deposit $8.5 million with a bank, (2) Berkshire would mail a tender offer to all shareholders of National, (3) all National shareholders would accept the tender offers, and (4) Berkshire would purchase all shares. Since March, according to Wilkinson, tiny capital has purchased three more companies used this vending machine-style convention and intends to continue doing so. From here, the distance between Buffet’s and Wilkinson’s pared down acquisition process and the incorporation of smart contracts to facilitate that pared down process is not much of a chasm.

In fact, UK banking giant, Barclays, has undertaken an entire Smart Contract Templates initiative, producing a series of research papers on the subject, in order to better understand the coming phenomenon. Accordingly, the question now is whether attorneys can be the ones to close any potential gap between clients and smart contracts by including Szabo’s ideas into their collection of practices they can provide. Time will tell the answer, but given the inherently idiosyncratic, technical, and often personal or emotional considerations inherent in even rote transactions and legal matters, smart contracts should become a staple of tools that human attorneys can offer to streamline and reduce costs, but should not replace the learned advice of an experienced and practicing lawyer who fully understands the potential risks and rewards of a particular transaction or matter and the preferences and pet peeves of a human client.

Filed in: Legal Blog

July 20, 2017