Smart contracts

Can AI in contracts replace lawyers?

AI is on the march. The number of tasks various AI-powered tools can complete in a fraction of human time is growing every day. In many cases, AI-enabled functions improve safety, increase efficiency, and reduce errors. However, it’s worth bearing in mind that AI is not infallible. ChatGPT, though much better than it was two years ago, still “hallucinates”, i.e., fabricates sources that are entirely plausible but false.

In the legal profession, smart contract technology has emerged as a ground-breaking innovation. By making use of blockchains, smart contracts execute contractual terms automatically once pre-determined conditions have been met. This innovative self-execution marks a shift in traditional business processes by removing the conventional need for third-party intermediaries. Smart contracts have the potential to reduce administration and servicing costs while improving the efficiency of business processes and reducing risks. However, this revolutionary technology does not come without risks.

What are smart contracts?

In law, a contract consists of an agreement between parties, with a common intention expressed through offer and acceptance. This common intention requires each party to perform an action, provide a benefit, or incur some detriment to fulfil the agreement, which is regarded as enforceable and legally binding. Once an enforceable contract is created, the possibility of a breach of contract by one of the parties emerges.

By contrast, smart contracts are self-executing and typically run on a blockchain, in which a transaction record is stored across multiple computers connected in a peer-to-peer network. Unlike traditional contracts, smart contracts minimise the risk of a breach of contract because the self-executing function only activates once the terms of the agreement have been met. Thus, the execution of a smart contract is simpler and faster than a traditional contract. If smart contract technology can expedite contracts efficiently, is there still a need for lawyers? We believe there is.

The role of AI in smart contract security

The threat of cyberattack is a constant cause for concern. Smart contracts have been hacked, leading to significant financial losses. However, advances in AI technology could enable smart contracts to take leaps forward in cybersecurity, reducing the likelihood of an attack. By using AI to examine code and identify high-risk areas, the safety of smart contracts could be enhanced. AI algorithms could detect patterns and abnormalities in the code that may indicate security vulnerabilities. These algorithms can analyse vast amounts of code to identify common flaws, which can then be addressed and implemented in smart contracts in the future.

Challenges and ethical considerations

Smart contracts raise a number of challenges and ethical considerations, particularly related to data security. Personal and sensitive information must be safeguarded, in accordance with the many data protection laws in place in South Africa and globally. The Protection of Personal Information Act (POPIA) is the leading piece of legislation in South Africa governing data protection and privacy. For smart contracts to be implemented effectively they must be regulated and conform to data protection laws nationally and internationally.

Prevention of bias in AI algorithms is also crucial. Smart contract systems must be transparent and maintain accountability and client confidentiality. The AI tools underpinning smart contracts must be constantly refined to ensure they are trained on the most up-to-date information, as new cases emerge every day and the law is dynamic. In reality, although AI has seen exponential growth, it is no substitute for a legal professional. Lawyers are skilled in key areas of contractual law and have deep understanding of legal interpretation and reasoning. AI has access to large amounts of data, but it cannot make a human judgment.

Can smart contracts replace lawyers?

Smart contracts have some advantages over traditional contracts, but contract law experts believe the need for lawyers will remain relevant. Smart contracts operate on an “if/then” basis. For example, if a predetermined condition is met, then the corresponding contractual clause will be executed. However, deliberate ambiguity in contractual clauses is not detected by smart contracts, eliminating the possibility of interpretation. Interpretation is a pillar of law and a skill lawyers develop over many years. The legal landscape is not black and white.

When are smart contracts useful?

Smart contracts offer straightforward and quantifiable terms and conditions and are useful for many agreements between parties. They can enable greater accessibility and efficiency, reduce costs, and accelerate the time it takes to conclude an agreement. If lawyers embrace smart contracts and work with them, the two can co-exist and contractual agreements will improve. AI can support lawyers by promoting greater efficiency and cost effectiveness.

SD Law can help

Contracts are the backbone of business. Smart contracts have much to offer, but if you rely on a smart contract without the support of a qualified legal professional, you may find the contract does not address all your concerns. And the risk is you may not discover this until it’s too late.

If you’re a business owner, Simon Dippenaar & Associates can help you understand your rights, your contracts and your options and enable you to grow your business. 

Contact Simon on 086 099 5146 or email sdippenaar@sdlaw.co.za to arrange a discussion.

Further reading:

• Drafting effective contracts
• Employment contracts and labour disputes
• Contracts and fairness and real life

SD Law – Simon Dippenaar & Associates Inc.

Attorneys, Notaries & Conveyancers

SD Law is a Cape Town law firm with a strong practice in divorce and family law, urgent eviction matters, antenuptial contracts, liquor licence applications and selected commercial disputes. Clients instruct us when the matter is urgent, high-stakes or strategically sensitive, and when they want direct, clear legal advice backed by practical litigation experience.

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