Contract Work

$33M Lost Due to a Contract Not Being Smart

A recent report says that $33M have disappeared from the escrow account of a law firm and its managing partner went missing immediately after that. Being passionate protagonists of the new technologies implementation in the legal industry, we at Legal Nodes are sure that such cases can easily be avoided with the help of blockchain.

Since the appearance of cryptocurrencies in 2009, the idea of blockchain has changed considerably and the number of possible use-cases has been steadily increasing. For some, blockchain is a way to play the market and earn through trading, for the others - it's a way of storing information in a safe distributed ledger. For some people, it is an opportunity to embody new tech-projects, for the others, it's another step towards libertarianism, comparable in its significance to the invention of the Internet, as the state lost its monopoly of information, and now it also loses its monopoly of finance. For us lawyers, the main advantage of blockchain is its speed and security, that is to say, the impossibility of tampering with data that was once put into distributed ledger, as well as the possibility of smart contracts usage in legal services, as the criterion of trust between the parties to the contract gradually turns into rudiment.

As of now, whenever you use a law firm as a provider of escrow services, you must trust that firm to handle your funds in a proper way. Also, you have to check, before submitting any payments, whether a law firm has separate business and client bank accounts. This is usually clear from the Engagement Letter. In certain jurisdictions, like the United Kingdom that is a requirement to law firms licensed by SRA. This division gives you extra protection against your money being lost or stolen as it is only transferred from the client’s bank account of the firm to the law firms own business bank account after certain conditions are met, before that it fully belongs to the client. But the problem is that in this scenario there is at least one potential point of failure - that exact firm. It does not matter how reputable they are - if there is a possibility that they can fail to deliver, then, according to Moore's law it happens at some point. This is just how anything centralized (entity or system) works. According to the recent article by The Straits Times Singapore, $33 million belonging to Allied Technologies has disappeared from its escrow account. At the same time the managing partner of JLC Partners, a law firm, that was holding the funds, remains uncontactable. While the investigation is underway, we cannot clearly identify the party at fault, as the only thing that is obvious at this time is that JLC has broken its obligations as the escrow agreement was not executed in the required timeframe.

In our opinion, such a situation could have easily been avoided with the use of blockchain technology.

Under the condition of a mass-adoption of blockchain and smart contracts in the legal industry, the parties would no longer need intermediaries: assets and terms of the agreement would be stored in blockchain, therefore the contract will be executed only when parties perform their contractual obligation. Consequently, the assets shall be transferred in accordance with the terms and conditions of the agreement, which is an exceptionally simple and transparent algorithm.

A smart contract cannot be bribed, does not have a personal interest in a particular income, will not transfer your funds to any third party. If the smart contract has proper logic programmed into it, once you have deposited your funds to it, the funds can go only two ways - either be released to the intended receiver or be returned to you. This determinism and security are what made blockchain-based escrow service providers increasingly popular choice within crypto-enthusiasts.

This is exactly why Legal Nodes decided to create our own personal escrow smart contract: to ensure that once our client deposits the payment for lawyer's work - it will either be returned to him or released to the lawyer. If the client is satisfied with the services provided by the lawyer and accepts them in Legal Nodes Chat, the smart contract immediately releases the deposited funds to the respective lawyer. If for some reason a dispute arises - the case is given to an independent arbitrary, which then decides to which of the two parties the funds will go. No third option.

In the past two years, the legal tech industry has evolved tremendously which can be explained by the fact that mainstream law firms and services are becoming legacy law firms and services. According to Forbes, the total amount of investments in legal tech in 2018 has surpassed the respective 2017 figures by 713,7%. In our opinion, due to the rapid growth and development of legal tech, the distributed technologies will increasingly be used in contractual law. This will reduce the human impact on legal relations and make them much more transparent. The legal industry has to obtain a necessary immunity against human factor, so why not to use distributed technologies as a pill?


Disclaimer: the information in this article is provided for informational purposes only. You should not construe any such information as legal, tax, investment, trading, financial, or other advice.

Nestor Barchuk, Lawyer at Legal Nodes
Max Maliuk, Co-Founder & CTO at Legal Nodes


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