GUEST COMMENT Do smart contracts work for internet retailers?

As you will all know better than me, more consumers than ever before are finding and buying what they want online. In February 2016 figures published by the British Retail Consortium suggest that more than 20% of UK retail sales took place online and those figures are hot on the heels of an 11% rise in online spending during 2015.

The one thing these figures clearly underline is that this is a growing trend and, as such, businesses will need to do everything they can to keep driving their online offering forward so they derive the maximum benefit from the UK’s increasing affection for internet shopping.

You’ll be glad to know that as a lawyer I’m neither qualified nor competent to give you any direction on the retail side. I am however becoming increasingly concerned in the way that the legal side of online retaining is progressing and, as I am faced with more and more clients trying to resolve disputes that have arisen from internet-based transactions, with what businesses should be doing to protect themselves from the likelihood of ending up in a dispute. Most specifically I am concerned by the potential of disputes with partners and suppliers rather than with customers.

You’ll also be glad to know that this isn’t going to be yet another puff piece from a lawyer expounding the virtues of and necessity to strengthen your terms and conditions, your delivery of goods and your processes around accepting and cancelling orders. I’m not playing these down by the way, it’s just that my assumption is if you are reading this, these are all things you will have well in hand.

My worry is that it could be your will to adopt new technology that could weaken your legal position and increase the likelihood of finding yourself in an unnecessary and expensive dispute somewhere in the near future.

Let’s take smart contracts as an example. In theory this is an exciting development. It is a contract that will rewrite itself according to the commercial circumstances that surround it by using a complex series of rules embedded in its coding.

In the internet retail world the premise currently being sold to retailers is that smart contracts will vastly reduce the input required from the contracting parties (primarily you and those who supply the goods you sell) and both parties’ lawyers. In theory that would mean future contracts will come into being quicker which means future transactions will be completed more quickly, more efficiently and more cost-effectively.

The only problem is that, in their current form at least, I would argue that beneath the bravado and the bluster, smart contracts are neither smart nor contracts. I’d say it would be much more accurate to describe them simply as automated computer code, and a piece of automated code that if not properly managed could cause an internet retailer more problems than it was designed to solve.

Let me explain why.

At the point of its creation a contract requires the agreement of both parties as to the heads of terms the contract will be based on. This has to involve human input as only you and the supplier/s entering into the agreement will know exactly what needs to be covered by those heads of terms in order to make the contract work for you.

Moreover, if this process is going to be successful, it will is likely it will also require the input of a lawyer. As the contracting parties will be looking to include the terms that will benefit them most personally, there will need to be a degree of negotiation and that negotiation has to be supported by someone with an understanding of what can and can’t legally be accepted.

If the terms are negotiated, accepted and signed up to, the probability is that a well written piece of automated computer code could be taught to renew that contract and even apply it to very similar agreements you may want to enter into with suppliers of similar types of goods under similar terms.

However if there are significant differences – perhaps where perishable goods are involved rather than semi-perishable or where physical transit requirements need to be significantly altered – those differences will need to be supported by significant contractual changes and if the fundamental shape of the new contract is that different, I have serious doubts those amendments could be made without human intervention.

The reason for those doubts is simply that the primary purpose of any contract is to protect the commercial and/or personal interests of the parties entering into the agreement. I am concerned that even the most diligent coding will never be able to intelligently navigate all of the variables a robust commercial contract needs to have in order to provide the required level of protection.

Another consideration that you, as an internet retailer, must take into consideration is that international internet law doesn’t exist yet (though it may not be far away). That means that the centre-point of every contract you enter into needs to be an agreement on the jurisdiction that will govern the contract.

I have no doubt that coding could decide which country’s laws would be the most logical choice but logic will never be able to take into account your personal preferences (and the potential you’ve had bad experiences with certain jurisdictions in the past) or any rising legal or political aspects that could affect your choice at a particular point in time.

I’m also concerned that it would be able to manage the negotiable variables that all too often delay or even stop the creation of a new commercial contract. Again these tend to be based upon personal preferences or even behaviours or prejudices set by past experiences. As they are more than likely purely personal, the linear logic that makes computer code work will never be able to fully integrate them into their synthetic decisions.

The good news is that if a smart contract does require all of that in order to come out with a robust commercial contract then we can dispel one of the common myths surrounding smart contracts: you can’t litigate against a smart contract if things go wrong.

If the terms are clearly set out and the jurisdiction governing the contract has been agreed and the contract is broken in any way (i.e. there are billing or payment issues or if goods are not supplied to the standards or deadlines agreed) or there is good reason to suggest the contract can no longer be considered fit for purpose, you most definitely will be able to take legal action. But again that additional level of reassurance can only be provided by human input (including input from the very lawyers smarts contracts are trying to preclude) rather than by any automated computer code.

To me this is the fundamental contradiction between the theory and the reality of a smart contract.

Having been involved in resolving a number of contractual disputes that could easily have been avoided if the buyer and supplier had set out their heads of terms and agreed the jurisdiction they’d be using at the start. Without putting these foundations in place any contracting party runs the risk of a risky future. I know the nature of your business dictates you have to stay at the cutting edge but you also need to be wary of buzzwords and of developments that could well have been developed for the sake of development rather than for the purpose they are being sold to fulfil.

And this is pulled into even sharper focus if that purpose is to legally protect your business and minimise the likelihood you’ll find yourself in an expensive, stressful, time consuming and potentially commercially damaging dispute at some point.

Richard Howlett is a partner at Selachii LLP, a boutique litigation practice that specialises in bitcoin, blockchain and smart contracts.