This article is written by Dhrubajyoti Das pursuing a Diploma in Advance Contract Drafting at Lawsikho. This article has been edited by Ojuswi (Associate, Lawsikho).
This article has been published by Sneha Mahawar.
Table of Contents
Introduction
Nearly every unit of today’s worldwide various operational pursuits is coming under the influence of the booming digital revolution – so why not the legal field? We are living in a world of technology, one cannot deny it! Technology is making our life easier once we get a hold of its way of functioning. So to proceed with this point we should consider that the burden of day-to-day computation of this huge transactional business world where a huge number of Contracts and Agreements are executed daily, is gradually shifted to the definitive hands of Artificial intelligence hoping for a more accurate and explicit computable outcome effortlessly. The age-old practice of drafting a contract or an agreement in any natural speaking language is always legally comprehensive but one cannot guarantee, especially in a financial scenario, an unambiguous output, (especially in terms of financial contracts) without a strenuous human effort – which when executed computably gives an exact calculated result effortlessly.
What is a computable contract
Harry Surden, University of Colorado Law School in his article cited the definition of ‘Computable Contract’ as “a contract in which the parties have expressed one or more terms or conditions of their agreement in a manner designed to be processable by a computer system” to be a ‘Data-oriented contract’. In a broader sense, Data-orientation of a contract makes the contract Computable. A Contract where one or few conditions are computable is “Partially Computable” when all the clauses are computable the contract is “Fully Computable”.
But at the maximum level, the main target is the Computer Automation of business terms as a whole. The maximum digital orientation for logical understanding should be the goal for the vision of computable contracting. However, it envisages broader scope than Insur-tech, Fin-tech, or Legal-tech where these industries successfully automate only a few supplementary facets of their day-to-day operations and their larger contractual obligations are mostly on a natural-language-based approach.
Thus, it is to say that a Contract is made computable by automation of particular terms and conditions as a whole which is understandable by a computer, and also it holds up the legal enforceability of the contractual obligations through safe and secure tamper-proof computer cryptography. A computable contract is a contract that is intelligible by both humans and computers.
The working method : how a computable contract is made computable through semantics and advanced semantics
Most importantly it has to be understood that there is no means to make the computer comprehend the conceptual logic that lies behind any human-made terms. The closest possible way to establish conformity between any deep conceptual meanings of something related to a human understanding with computer logic is to make the computer deliver an output similar to the conceptual meaning of the natural term. To exemplify what it is tried to establish here we can think of a word, say “Recycle Bin” featured in every computer; now we get here two different words, viz: “Recycle” and “Bin” which have two different meanings to understand conceptually; by the word “Recycle” we mean “Re-use” of something and “Bin” stands for “A receptacle of trash”, but a computer needs not to understand even a single meaning of either of these two words to function accordingly to comply with this phrase; we can observe that if we delete a file initially it gets stored in the Recycle Bin of the computer from where it can be restored if necessary, which is conforming the meaning of the phrase. The computer acts as if it has understood the conceptual meaning of these two words, but this is not the fact. It is just a processing of some computer programs which enables the computer to function in that way, concluding an output that conforms to the conceptual meaning of the phrase. In Computer Science, the theory of conveying meaning to computer systems through programming languages is known as Semantics. It is the mathematical study of the programming languages which makes the computer function following a command.
This function of conveyance, as time is proceeding, goes through more advanced semantic systems, making more complex terms transmutable by computer syntaxes, thus processing automation of a vast logical part of many contemporary computable contracts through rigorous programming languages. E.g. when HDFC tied up with IPPB (Indian Posts Payment Bank) allowing the IPPB customers of having access to HDFC Bank’s Products and Services the HDFC Banking system had to have a strong computer Database to distinguish IPPB customers from other banking customers so that the legal terms of the contract are affirmed, even during computable automation, while dealing with customer service or other banking protocols as contracted. Now, this is not just basic numerical reasoning that is to be computably performed by the HDFC banking database; rather, it includes many complex obligations like; financial access to its customers, leveraging customer convenient digital technologies, and other citizen-centric services. This needs a serious identification of its customers and following the contractual terms and obligations at a more cognitive level, not just any superfluous functioning method automating a few contracted terms will deliver the intended outcome. This is what the advanced semantics methodology does.
Similarly, one can seek for the legal implication to be asserted computably through advanced semantics. Like, to identify “senior citizens” for certain Financial Schemes or Medical Schemes the particular Database has to recognize distinctly persons above the age of “60” to confirm the Legal assertion of the policy contracts. For this, various documents, age-proof have to be reviewed by the computer and evaluate all the policy-related data stored to compute the age of the customer and apprehend the word “Senior Citizen”; the whole process is a result of rigorous computer programming; where under advanced semantics methodology the meaning of the contractual terms are conveyed through strings of programming languages to the computer systems and we can get the desired result without human intervention.
DLT and BlockChain technology : a way ahead to computability
After Harry Surden of Colorado University devised the thought of “Computable Contract” in 2012, it can be propounded that the scope of self-executable or automation of consensus has been broadened from what Nick Szabo suggested as “Smart Contracts” in the 1990s. As Smart Contracts are mere implementation of consensus of protocols through a computer network or in other digital forms but the thought of Computable Contracts has graduated to a wider scope where one may think of the whole contract to be obligated computably. This computable implementation needs validation of faithful computer codes; these codes may be considered similar to the language used in a traditional natural contract. A traditional natural language contract may be drafted in different languages for different parties without varying the obligations and interpretation of the contract; but, if we try to automate the contract computably there will be a conversion of the natural language to computer understandable codes, through computer semantics as discussed earlier.
Partial automation of a contract at different counterparties by different codes may alter the interpretation of the contracted terms and can have separate semantic errors for which interference of human resolution may require, thus disrupting the computable feature of the contract. Christopher Clack from UCL at Fintech Week while pointing out the gradual ascent of Contract terms towards computability; that is from Traditional Natural Contracts to Smart Contracts and then to Computable Contracts; put forth the requirement of the mechanism of common codes underneath the execution of Smart and Computable Contracts at different levels. So, this problem has been addressed, by the onset of Distributed Ledger Technology (DLT) now. DLT refers to the technology that allows access and validation of a common code simultaneously by different users in an immutable manner, through a distributed network that’s spread across multiple entities or locations as a decentralized database.
The institution of BlockChain Technology has emerged as the first instance of distributed ledger system by Bitcoin, and it has tiled the pathway where recording transactions and tracking assets can be done in a decentralized system without human interference, i.e. not requiring relying on a different authority. Bitcoin, considered to be progressive transmigration of Nick Szabo’s BitGold, in its ecosystem has the rewarding process just as long before BitGold was theorized to have, that is ‘value based on proof of work’. Such as, in mining, the one which solves the hash puzzle first receives BitCoin in reward as the value based on ‘Proof of Work’ after which a new block is created and the whole resolution is saved in the previous block immutably, and more of it the whole process is decentralized from any human authority. As every transaction recorded in a block is immutable and so it is safe from any fabrication.
Now with the rise of the Ethereum Network, the ambit of Distributed Ledger Technology broadened to make self-executable programming reach the extent where Smart and Computable Contracts can be materialized. Applications in Ethereum are written in a programming language such as Solidity, which is far superior in terms of the features offered compared to Bitcoin’s scripting language. Both users and contracts can store money (ether) and send/receive ether to other contracts or other users through DLT. Many industries and national governments have started utilizing DLT with significant investments. More specifically, DLTs have been prototyped in different use cases. These use cases include digital currencies, cross-border payments, syndicated lending, know your customer (KYC), insurance marketplaces, voting platforms to secure votes, etc. The French Insurer ‘AXA’ is the first major insurer to use Blockchain technology to compensate their customers for delayed flights – a significant example where the computable contract is executed through DLT.
So with the rise of Blockchain and DLT, computable contracts have found renewed prominence. We find the applications of computable contracts in a few recent industries, for now, smoothing the way forward for more enterprises in integrating computable contracts to achieve greater transparency and higher process efficiencies.
Why is computable contract a boon
One may argue about lacking the advocate’s craft of drafting when a contract is set on computer codes other than the natural language. But, as in the modern era computability is another world we cannot stay out of its scope. From the view of today’s thriving entrepreneurship automation of business is the need of the hour to save time and expense. Every sector is looking to obliterate all third-party interference for smooth operation which nourishes the customer and seller relationship. If we examine the power of Computational Contracting then the online computerized market in the pandemic era recently provides a very significant example. In February 2021 Forbes published on its website that in 2020 Amazon’s reported revenue increased 38% to $386 billion, a yearly increase of over 100 billion up by 84% compared to last year. It is further added that the company’s strengths of integrated digital platforms allowed Amazon to pivot swiftly and adeptly to meet shifting consumer demands amidst the pandemic. Thus the evolution of human reliance on computability has taken place.
Though it is great to observe the advancement of effortless automation of today’s entrepreneurship in a gradual process, still few implementation challenges have to be encountered thoroughly to increase the potential feasibility of computability in business.
Divergence of legal and computer languages
Till now human intelligence is familiar with the drafting of their contracted terms and conditions in any natural language – comprising a variant form of legal vagueness. So, the challenge is faced when the terms and conditions of such a contract, drafted in a natural and legal language, are to be transformed into a computer-understandable language. This is mainly a technical challenge. This challenge can be solved by using prominent programming languages which lays out clear-cut terms and conditions of the contract understandable to the computer – realizing the crux of the material and obliterating the dispensable vagueness of the original language without altering the intended output. The importance of implication of DLT and BlockChain Technology has already been gone through in this article, is significant for this purpose where individual implementation of separated codes is substituted by a distributed system of common codes through a single network, a step forward to meet this challenge.
Legal compliance
A contract is always intended to be legally binding when both parties set their terms and conditions to safeguard their legislative right. Now, as the final automated output is through a computer programming language other than the legally set natural language, the execution of Contractual terms may raise the question of Legal assertion and compliance. Now this challenge should be overcome by a comprehensive database to implement positive output complying with the legal terms and obligations that are set in the contract. This comprehensive database is needed by appropriate programming of the system interface to be used. For example; few food-delivering apps prohibit consumers below the permissible age to order alcoholic beverages. To assert this legal compliance the app has its methods of verification by scrutinizing photo-id proofs and valid documents; the process should be précised by a comprehensive database to secure from fraudulence and forge of self-identity.
Promoting new method
It can be a challenge to convince leaders and other parties attached to the business that they should embrace a new way of administration where the computable implementation of their Contracted terms will be set up. A productive approach to managing this change may involve finding a particular way where such an approach can be taken by educating every concerned person with the skill to advance along a technical approach and then adopt the Computability terms of business for the enterprise.
Technical security
When the whole business is approaching computability then technical security is a crucial concern. All data transmissions should be defended from bugs and other web attacks. A dream of computability can be materialized in terms of a secured and safe computable sphere with a compact data privacy system. With huge strides towards technicality, it can be assumed that more effective technical security can be devised.
The contemporary and future world of such a huge number of contracted transactions would be facilitated through the revolution of Computability in Contracts as a boon for society. It will make the policy more transparent and understandable for the consumers and other users; the vagueness of the natural legal language sometimes fails to do so. Automated calculation of certain contracted matters will make the outcome hassle-free for consumers and a broader marketplace for inter-company transactions can be generated.
Conclusion
The implementation of computability has increased the need for computer expertise alongside the legal aptitude of a drafter. But, it doesn’t mean that the legal quotient with the ascent of computability is reduced by any means. Rather a lawyer today has to look forward to achieving the technicality in drafting contracts that are to be made understandable by Artificial intelligence. Domain-specific language has to be used in place of sophisticated natural language for drafting contracts for different sectors. Like, a lawyer has to be aware of the terms of an insurance sector while drafting a contract of that specific domain. This technical progress in the field of Legal Contracts by holding the hands of technology is worthy of acknowledgment as a boon to society rather than a bane.
References
- https://scholar.law.colorado.edu/articles/148/
- https://law.stanford.edu/2021/05/12/computable-contracts-and-insurance-an-introduction/
- https://www.capgemini.com/wp-content/uploads/2020/11/Computable-Contracts.pdf
- https://www.youtube.com/watch?v=2p7d9_S9D0M&t=544s
- https://www.youtube.com/watch?v=cc5C3FPABAQ&t=1136s
- https://www.brickken.com/blog-nick-szabo/
- https://www.investopedia.com/terms/d/distributed-ledger-technology-dlt.asp
- https://www.youtube.com/watch?v=wTDtSZuM9Kg
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