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The Difference Between E-contracts and Smart Contracts and How These Can Help the Legal Tech

by Shrisha Sapkota

case management software, practice management software, legal accounting software, legaltech, technology for lawyers, case management, immigration, london, united kingdom

Introduction

The emergence of the digital era is aiding enterprises in enhancing their performance. Many new developments and technologies are being introduced in the market that are benefiting organisations of different sectors.[1] All industries are adopting new technologies to streamline their business processes and increase efficiency in a process called digital transformation.[2] However, the legal industry is resistant to change due to high risks and exposure.[3]

With the increase in new avenues of digital transformation, the need for paperless processes has become even more significant in the legal industry. Instead of creating, printing, and sending paper documents across, many law firms and lawyers are switching to their digital counterparts.[4]

Powerful new technologies have emerged in recent years, and they are disrupting the traditional ways of managing contracts.[5] Two such technology in the legal sector are E-contracts[6] and smart contracts.

Both smart contracts and E-contracts are legal business softwares that have the potential of making a lawyer’s work efficient by making the contracting process easier and more reliable.[7] Here, we break down how.

E-Contracts

E-contract is any kind of contract formed in the course of e-commerce by the interaction of two or more individuals using electronic means, such as e-mail, the interaction of an individual with an electronic agent, such as a computer program, or the interaction of at least two electronic agents that are programmed to recognize the existence of a contract.[8] These are generally made for speedy entering into a contract or for the convenience of the parties.[9]

In short, E-contracts are contracts that are not paper-based and are electronic in nature.[10] They are digital versions of traditional paper contracts, created and signed electronically[11]. As simple as that. Electronic contracts can eliminate many costs associated with traditional pen-and-paper contracts and see countless other advantages.[12] Most of us understand E-contracts are formed when you click the “I Agree” button. We, as consumers, click that button at the bottom of the page containing the long and complicated document in terms of the licence before we can download the app, listen to the music, start using the program, etc.[13]

E-contracts are best made between parties who live in two different parts of the world and have to enter into an agreement. A digital signature is all they need to enter into a contract as a party even though both the parties to the contract are sitting miles away from each other.[14] E-contracts with e-signatures just like traditional paper contracts are legal and enforceable.[15] In this proliferating world, it is most convenient to use a  remote legal software to enter into a contract without being physically exhausted.[16]

E-contracts are legally binding. Although it is digital, an E-contract is still a contract.[17] The expansion of e-commerce and digitization forced the legislative bodies around the globe to create the legal framework for E-signatures, E-contracts and related intellectual property rights, etc.[18] Rules regarding the formation, governance and basic terms of an E-contract are included in The Uniform Computer Information Transactions Act. Contract law principles and remedies apply to E-contracts.[19] Both the US and European legislation establishes that electronic contracts are equivalent to paper contracts.[20]

Although the specific rules may vary in different jurisdictions (in this respect there is no harmonised regulation in the EU either), the essence of a contract is more or less the same.[21] E-contact is an agreement between two individuals or companies to create a binding mutual obligation that must meet certain legal elements to be enforceable.[22] The basic legal elements that have to be enforced are:

  • An offer or a proposal to provide a service or deliver/pay for goods of some type
  • Mutual acceptance of the terms of the proposal[23] by the parties involved
  • A promise to do the action that has been accepted, such as payment for certain goods[24]
  • Consideration of the terms – one party has to give something of value to the other party as a fair exchange for their services or delivery/goods
  • There must be free and unaffected consent[25]
  • Whether or not the signers understand the terms being agreed to[26]
  • And lastly, if the contract subject is legal or not

Keeping a record of the contract as agreed is vital.[27] The contract should clearly outline each party’s responsibilities and dictate the requirements necessary for full compliance.[28] It is important to ensure that the parties are clear on the content of the final contractual terms.[29]

Smart Contracts

Smart contracts is a term used to describe computer code that automatically executes all or parts of an agreement and is stored on a blockchain-based platform.[30] They are self-executing digital contracts with terms of an agreement between parties directly written into a code[31] and a critical component of many platforms and applications being built using blockchain or distributed ledger technology.[32]

While it was created to support the Bitcoin cryptocurrency, developers quickly saw the potential for the blockchain platform (i.e. smart contracts) to disrupt the entire system of traditional record-keeping.[33] This is how legal technology and smart contracts converged.

Depending on the particular situation or transaction, the application of smart contracts can be a great alternative to traditional contracts, which are sometimes complex, slow, and expensive.[34] The code it is written in leverages blockchain technology to create a decentralised ledger that controls execution and makes contractual transactions trackable and irreversible.[35] The relevant contract terms and functional outcomes of the agreement are mapped as code in the distributed, decentralised blockchain network. Thus, smart contracts inherently include the key characteristics of blockchain technology[36] and law could make great use of it.

Smart contracts reduce human intervention considerably as they are self-executing and their code is logic-driven – it unlocks value or access when a pre-agreed condition is met.[37] The technical architecture of smart contracts offers possibilities ranging from automatic self-help to the enforcement of legally unenforceable agreements.[38] They can police themselves if both parties are compliant with the terms of the contract or not and in response to a breach, these contracts can penalise the offending party.[39] It is precisely this autonomy of smart contracts from existing contract law that finally raises the question of whether an adaptation of contract law will become necessary and what difficulties such an adaptation would face.[40] By embracing smart contracts, lawyers don’t have to sweat the small technical stuff.[41]

In practice, a smart contract automatically executes predefined conditions written in a blockchain. Only the computer code can decide whether a contract has been fully or partially executed, making these protocols “smart”.[42] The automated execution of the promises contained in a smart contract, specifically their technical characteristics, leads to an increased significance of the contract drafting phase compared to the execution phase.[43]

Smart contracts could revolutionise contractual relations. For example, the automatic nature of these contracts could lead to the cancellation of a contract or the suspension of payment in the event of a contract’s terms being breached or total or partial non-performance of an obligation.[44]

A key property of smart contracts is autonomy and no mediator is needed to go through with it. It is a decentralised system so due to this property it does not require the presence of intermediates at the time of signing deals.[45] So, there is a reduced dependence on intermediaries for trust services between the counterparties.[46] The absence of intermediaries in smart contracts also results in cost savings.[47] And all the documents stored on blockchain are duplicated multiple times; thus, originals can be restored in the event of any data loss.[48] These are great tools for law and the companies and professionals working in the legal industry should all look into this if they haven’t already.

Additionally, smart contracts also facilitate transactions between actors who do not know each other, to ensure that each contracting party meets its commitments, and to avoid any falsification.[49] Smart contracts also ensure higher transparency and hence a lower execution risk. Any amendment to the contract can require the mutual consent of the involved parties.[50]

The concept of smart contracts entered the legal discourse only a few years ago, yet the subject has already given rise to remarkably different approaches.[51] They are one of the most popular and interesting areas being developed in the rapidly growing blockchain industry[52] and legal tech. While some assume that smart contracts can be fully integrated into existing contract law, others predict that they will mark the beginning of the end of contract law.[53]

Right now the most popular use of smart contracts is in the Defi (decentralised finance) space, where it is possible to work with decentralised banks, brokerages, and other financial instruments that you use every day.[54] Ethereum, a cryptocurrency with its proprietary blockchain platform, is widely considered to be the future technology for smart contracts.[55]

Smart contracts, however, are not suited for all transactions and, sometimes, a traditional contract is best.[56] They are considerably more difficult to modify than traditional contracts and they are limited by the fact that the encoding of contracts requires an increased formalisation of the contractual terms.[57] And, while smart contracts may streamline certain transactions, they are not free from legal issues or the potential to create legal disputes.[58] They have some unique vulnerabilities such as performance issues, security threats and privacy concerns.[59]

Difference Between E-contracts and Smart contracts

At first glance, a smart contract might resemble E-contract transactions.[60] After all, both are “contracts” and legal software solutions done digitally or via the internet. But these two are entirely different things. Academic studies also make references to E-contracts and smart contracts separately.[61]

They are a little similar in some regards. Smart contracts, for example, include automated banking payments, standing orders, or buying media online and downloading it after confirmation of payment – all of which are examples of E-contracts.  However, smart contracts differ from these established forms of E-contract execution of an underlying agreement in significant ways.[62]

Major differences between smart contracts and E-contracts come from the public and decentralised nature of the blockchain. E-contracts generally include third parties that retain control over the relevant transaction.[63] If one party is transferring money to another party, money  transfer services or banks have to be involved as the medium through which the money gets subtracted from one account and added to another. They may also charge fees for their services. This will not happen in smart contracts as the need for any outside or third party is eradicated.

Because they are a product of the criteria and attributes supplied by the programmer of the relevant code, E-contracts do not have technical adaptability. For instance, E-contracts are not prompted by occurrences like certain weather conditions except if the developer specifies differently. Smart contracts, on the other hand, allow for such a trigger even if the programmer did not explicitly include it in the code.

With E-contract executions, the code is exclusively in the hands of the third party responsible for it.[64] However, when it comes to smart contracts, all parties involved operate and store the same code because it utilises blockchain technology. Sometimes these codes are publicly available as well. As encrypted records of transactions are shared across participants with smart contracts, there’s no need to question whether information has been altered for personal benefit.[65]

Thus, smart contracts create trust by using the decentralised, open and encrypted nature of blockchain technology that allows parties to trust each other and transact peer-to-peer, making the need for intermediaries and third parties obsolete.

Another basic difference between E-contracts and smart contracts is that E-contracts are essentially still contracts. They are paperless document management systems that operate like a traditional contract – just digital or over the internet. But this isn’t always the case with smart contracts. Sometimes, smart contracts are not contracts at all but computer programs and so strictly speaking just an “automaticity” on the ledger.[66] Rather, they serve the real exchange of services of digitally referenced goods. They automate the exchange of performance because when a “contract” is concluded, the exchange of performance occurs under the precisely defined condition.[67] So, they can’t always be considered legal software tools.

References

 

[1]https://www.feeliumecontract.com/knowledgecenter/importance-of-e-contracting-for-enterprises/5e4be31d5db5611228c6aa8a

[2] https://whatfix.com/blog/smart-contracts-changing-legal-landscape/

[3]  https://whatfix.com/blog/smart-contracts-changing-legal-landscape/

[4] https://msbdocs.com/electronic-contracts-vs-traditional-contracts-lets-bridge-the-gap/

[5] https://medium.com/@ChainTrade/10-advantages-of-using-smart-contracts-bc29c508691a

[6]https://www.feeliumecontract.com/knowledgecenter/importance-of-e-contracting-for-enterprises/5e4be31d5db5611228c6aa8a

[7]https://www.feeliumecontract.com/knowledgecenter/importance-of-e-contracting-for-enterprises/5e4be31d5db5611228c6aa8a

[8] https://www.iilsindia.com/blogs/introduction-e-contracts/

[9]https://www.indianbarassociation.org/e-contracts/#:~:text=E%20contracts%20are%20contracts%20that,the%20convenience%20of%20the%20parties.

[10]https://www.indianbarassociation.org/e-contracts/#:~:text=E%20contracts%20are%20contracts%20that,the%20convenience%20of%20the%20parties.

[11] https://www.trustchain.com/2020/7/25/e-contracts

[12] https://ironcladapp.com/journal/contracts/what-is-an-electronic-contract/

[13] https://www.upcounsel.com/e-contracts

[14]https://www.indianbarassociation.org/e-contracts/#:~:text=E%20contracts%20are%20contracts%20that,the%20convenience%20of%20the%20parties.

[15] https://www.upcounsel.com/e-contracts

[16]https://www.indianbarassociation.org/e-contracts/#:~:text=E%20contracts%20are%20contracts%20that,the%20convenience%20of%20the%20parties.

[17] https://ironcladapp.com/journal/contracts/what-is-an-electronic-contract/

[18] https://www.trustchain.com/2020/7/25/e-contracts

[19] https://www.upcounsel.com/e-contracts

[20] https://www.trustchain.com/2020/7/25/e-contracts

[21] https://www.trustchain.com/2020/7/25/e-contracts

[22] https://ironcladapp.com/journal/contracts/what-is-an-electronic-contract/

[23] https://www.trustchain.com/2020/7/25/e-contracts

[24] https://ironcladapp.com/journal/contracts/what-is-an-electronic-contract/

[25] https://www.iilsindia.com/blogs/introduction-e-contracts/

[26] https://ironcladapp.com/journal/contracts/what-is-an-electronic-contract/

[27] https://www.grin.com/document/427203

[28] https://ironcladapp.com/journal/contracts/what-is-an-electronic-contract/

[29] https://www.grin.com/document/427203

[30]https://corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and-inherent-limitations/

[31] https://whatfix.com/blog/smart-contracts-changing-legal-landscape/

[32]https://corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and-inherent-limitations//

[33] https://medium.com/@ChainTrade/10-advantages-of-using-smart-contracts-bc29c508691a

[34]https://www.romanolaw.com/2021/06/03/smart-contracts-what-are-they-and-will-they-replace-traditional-contracts/

[35] https://whatfix.com/blog/smart-contracts-changing-legal-landscape/

[36]https://www.romanolaw.com/2021/06/03/smart-contracts-what-are-they-and-will-they-replace-traditional-contracts/

[37] https://whatfix.com/blog/smart-contracts-changing-legal-landscape/

[38]  https://www.jipitec.eu/issues/jipitec-10-1-2019/4880

[39] https://whatfix.com/blog/smart-contracts-changing-legal-landscape/

[40] https://www.jipitec.eu/issues/jipitec-10-1-2019/4880

[41] https://whatfix.com/blog/smart-contracts-changing-legal-landscape/

[42] https://yousign.com/blog/smart-contract

[43]  https://www.jipitec.eu/issues/jipitec-10-1-2019/4880

[44] https://yousign.com/blog/smart-contract

[45] https://site.ieee.org/sb-ritb/why-are-smart-contracts-so-important/

[46] https://whatfix.com/blog/smart-contracts-changing-legal-landscape/

[47] https://site.ieee.org/sb-ritb/why-are-smart-contracts-so-important/

[48] https://corporatefinanceinstitute.com/resources/knowledge/deals/smart-contracts/

[49] https://yousign.com/blog/smart-contract

[50] https://whatfix.com/blog/smart-contracts-changing-legal-landscape/

[51]  https://www.jipitec.eu/issues/jipitec-10-1-2019/4880

[52]https://www.romanolaw.com/2021/06/03/smart-contracts-what-are-they-and-will-they-replace-traditional-contracts/

[53] https://www.jipitec.eu/issues/jipitec-10-1-2019/4880

[54]https://medium.datadriveninvestor.com/smart-contracts-4-reasonswhy-we-desperately-need-them-53a1774d94e3

[55] https://medium.com/@ChainTrade/10-advantages-of-using-smart-contracts-bc29c508691a

[56]https://www.romanolaw.com/2021/06/03/smart-contracts-what-are-they-and-will-they-replace-traditional-contracts/

[57]  https://www.jipitec.eu/issues/jipitec-10-1-2019/4880

[58]https://www.romanolaw.com/2021/06/03/smart-contracts-what-are-they-and-will-they-replace-traditional-contracts/

[59] https://www.legalcheek.com/lc-journal-posts/is-the-smart-money-on-the-smart-contracts/

[60]https://www.romanolaw.com/2021/06/03/smart-contracts-what-are-they-and-will-they-replace-traditional-contracts/

[61]https://dernegocios.uexternado.edu.co/web-contracts-and-smart-contracts-comparison-and-perspectives/

[62]https://www.romanolaw.com/2021/06/03/smart-contracts-what-are-they-and-will-they-replace-traditional-contracts/

[63]https://www.romanolaw.com/2021/06/03/smart-contracts-what-are-they-and-will-they-replace-traditional-contracts/

[64]https://www.romanolaw.com/2021/06/03/smart-contracts-what-are-they-and-will-they-replace-traditional-contracts/

[65] https://www.ibm.com/topics/smart-contracts

[66]https://www.forbes.com/sites/davidbirch/2021/09/04/theyre-not-smart-and-theyre-not-contacts/?sh=5e4ca6a5397e

[67] https://www.arvato-systems.com/blog/blockchain-smart-contracts