News focus: Master of the rolls' vision for smarter contracts

Imagine if, after every journey in an Uber car, you had to hire another Uber to go and collect the receipt. That is roughly analogous to current practice in international trade in goods which requires a bill of lading – a contract conferring title – to be passed on paper between shippers, carriers and consignees. Some 4 billion such documents, each typically running to 100 pages, are generated by global trade every year. Inefficiency and inaccuracies are rife, as is the opportunity for fraud.

The prospect of computerising the process is one of the star case studies of Smarter Contracts, the second initiative of the government-funded LawtechUK initiative following its ‘sandbox’ project. Others, set out in a major report launched at an event in London last week, range from insurance to sports sponsorship to home-buying and selling. The overall theme is reducing the inefficiencies inherent in the way we currently process and store contracts.

For LawtechUK ‘smarter’ can mean anything from simply signing contracts electronically – ‘basic banana’, as Jenifer Swallow, LawtechUK’s director called it – to fully automated self-executing agreements secured by blockchain encryption.

Opening last week’s event, the master of the rolls, Sir Geoffrey Vos, was on form with his characteristic enthusiasm for blockchain and distributed ledger technology. ‘This is not something that might happen in years to come; it is happening now,’ he said. Blockchain’s development is equivalent to the internet’s in 1995, Vos continued. ‘The internet was unstoppable in 1995 and blockchain technology is unstoppable now. It will become ubiquitous in all major industrial and financial sectors, simply because it allows for the immutable recording of data, thereby reducing friction in commercial and consumer transactions and obliterating the scope for dispute as to what has occurred.’

The way to this ‘on chain’ nirvana will be paved with three key developments, he said. First is the launch of wholesale or retail central bank digital currencies. Second is the use of digital transferrable documentation including electronic bills of lading; and third the widespread adoption of ‘digital/smart commercial documentation in place of analogue applications such as PDF and Word’.

The first of these key developments has already attracted wide attention (and scepticism). The latter two are less talked about but perhaps even more critical. The point about digital transferrable documentation, such as bills of lading, is that encryption technologies such as blockchain offer a way out of the ‘double spend’ problem. For the first time, parties can be sure that an electronic bill is unique and has not been tampered with along the way.

A remaining obstacle is legal. Currently under English law, an electronic document cannot be a ‘possession’ in the way that a paper document can. However work on changing that is well under way, Professor Sarah Green of the Law Commission told the event.  The commission’s project on electronic trade documents, linked to a wider programme of work on cryptoassets is due to report on 16 March.

Under the proposals, to be set out in a draft bill, an electronic trade document will have the same status as a paper trade document, so long as it can be under the exclusive control of a single party at any one time, and that this control must be fully divested on transfer. Green stressed that the draft legislation would set out principles rather than specifying technologies. ‘We recommend changes in the law but aim to be technologically neutral,’ she said.

Practical work on electronic bills of lading has already begun. Niall Roche, of Mishcon de Reya’s ‘transformation’ arm MDRxTech, described progress on a digital bill of lading encoded in the UK Legal Schema markup language and identified by a unique blockchain token.  

Markup schemas, similar to the codes that create the worldwide web, also underpin the third of the master of the rolls’ paveway developments. This will happen when documents such as contracts are not made up of dumb text but are structured, with their elements invisibly labelled for identification by computer. The possibilities are intriguing: not only will such documents be more amenable to automated creation, exchange and execution, but for the first time the vast quantities of potentially useful data that organisations hold in their contracts will be opened up.

Contracts today can be likened to a sponge soaking up information, Professor Sally Guyer of Durham University Business School told the event: ‘What a waste!’. Whether technology can turn them into a golden goose remains to be seen – but the tipping point may be closer than most lawyers think.