Smart contracts, which replace traditional paper documents with a computer program that automatically verifies and executes an agreement, are poised to fundamentally alter the way M&A and contract-based legal work is performed. Think of a smart contract as a small army of robot lawyers and accountants: once the parties agree to terms, these robots automatically implement the agreement’s terms (e.g., payment, termination, etc.) as each party performs, or does not perform, their end of the bargain.

What is blockchain?

Blockchain, the technology underlying smart contracts, is a nearly unalterable, decentralized system that implements, verifies and records transactions. By making use of this technology, smart contracts have the potential to drastically reduce the need for lawyers, accountants and other professionals that currently perform that work. Blockchain is already predicted to reduce finance companies’ transaction and infrastructure costs by over 50%, amounting to savings of over $100 billion a year. Similar efficiencies could fundamentally change the structure of M&A legal work as smart contracts verify and execute agreements between parties independently of the current lawyer-dependent system.

Development of smart contracts

The legal industry is notoriously slow to adapt to new technologies, but it is already starting to assess the implications of smart contracts. A consortium of law firms and start-up companies, including Vancouver’s Clio, recently launched the Accord Project, a joint research organization that aims to develop technologies that integrate contracts with real-time data, automatically executing a contract’s terms as the data changes.

There are still many issues standing in the way of smart contract implementation. Security issues remain the largest concern, as demonstrated by the recent theft of $30 million from a smart contract app due to a simple programming error. Additionally, because many legal standards are subjective, current smart contract and computer technology cannot yet replace high-level legal advice. However, the fast pace of technological change and the looming promise of artificial intelligence mean that smart contract technology is already being implemented much more quickly than was thought possible even a few years ago. Companies are already using smart contract technology in everything from bike rentals to loan agreements and it is likely only a matter of time before the legal world follows.

The author would like to thank Jamie Parker, Summer Student, for his assistance in preparing this legal update.

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