smart contracts

Editor’s Note: This is an installment of a series of articles providing background to smart contracts coders about how contracts work in real life. The articles reference this sample sales contract. This guide is intended for general informational purposes only. If you need legal advice about a specific situation, contact a lawyer.

The second section of a contract is the scope of work. This is where the action is. It describes the promises and obligations of each of the parties. In the sample contract, it’s sections 1 and 2, which describe what’s being sold, when it needs to be delivered and where.

The sample is a contract for the sale of goods, which is a simple business relationship. I send you money, and you send me widgets. In a more complex relationship, the description would be a lot longer than it is in the sample. In some cases, particularly if one party is building something complex for the other party, the terms are put in a document that is attached to the back of the contract. 

Contracts drafters may use the term schedule, exhibit, appendix, attachment or statement of work for this separate document. Don’t get caught up in what it’s called. The names are pretty much interchangeable. They’re used for a couple of reasons. They make the flow of the main part of the contract a little smoother because they move some of the more complex terms to the back of the contract, but the main reason to move terms to a schedule is that there may be a different group of people that are focused on those terms than the terms in the main agreement. For example, if the contract covers the development of software, there may be a separate schedule that will require the attention of software engineers, solution architects and project managers. If the scope of work is in a separate document, these folks can trade drafts while others — lawyers, sales people and the business development team — work on the main sections of the agreement.

The main key to the scope of work section is to ensure it’s accurate and complete. If you’re the one providing the goods or services, you’ll want to make sure it doesn’t promise more than you intend to deliver. If you’re the one buying the goods or services, you’ll want to make sure it doesn’t promise less than you think you’re paying for.

Next up: Part 3 — The Money

Editor’s Note: This is the second installment of a series of articles providing background to smart contracts coders about how contracts work in real life. The articles reference this sample sales contract. This guide is intended for general informational purposes only. If you need legal advice about a specific situation, contact a lawyer.

Nearly all contracts begin by identifying the people or businesses that are making promises that are memorialized in the contract. You’ll see in the sample that it has a blank for “STATUS OF BUSINESS.” Yipes! What I think that really means is the type of business (in the U.S., this generally is a corporation or a limited liability company) so that it would say Acme, Inc.” or “Acme, LLC”, but considering the sample is pretty old-school, it’s also likely expecting that you’ll include the state of registration so that it would say “Acme, Inc., a Delaware corporation” or “Acme, LLC, a New York limited liability company.” Trust me, you can skip that information if it’s not readily available. Lawyers waste a bunch of time trying to track down the state of incorporation including too often for subsidiary companies of their own employer. I supposed this information could be useful in a lawsuit, but I think it appears in contracts mostly because people are afraid of the unknown consequences of leaving it off. God forbid if you’re the first person to not include the state of incorporation in a contract. The Law doesn’t like change. 

In addition to identifying the parties to a contract, the introductory paragraph usually also identifies the start date of the contract. Until you’ve done a contracts due diligence review, you have no idea how often people screw up the date of the contract, and people looking years later can’t figure out when then contract was supposed to start or, generally more importantly, end.  Was a contract that was sent by email on December 28, 2018, really meant to start on January 1, 2018 or was that a typo? Or then there are the contracts with a missing date. Again, you may need to look back at emails (if you have them) to see when it appears the parties intended the contract to start. The lesson here for coders is make sure you’re capturing the intended start for the contract you’re working on, and remember that is usually, but not always, the day the parties are signing the contract.

The next part of the introductory section of the contract is the recitals paragraph. I hate the term recitals.  It sounds as bad to my ears as an afternoon of listening to little kids playing Chopsticks on the piano. Some people call them the “whereases,” but that is even more awful.  As-es? You can’t be serious. If you know what you’re doing, you call this the background section, you write it in plain English (or whatever the native language is for your contract) and you actually make this useful. With high-volume sales contracts, there shouldn’t be much doubt about the background, but with customized, one-off contracts it’s really helpful to have a good description of why the parties were entering into the contract and what they intended to accomplish. 

Next up: Part 2 — The Scope of Work

So, if you’re doing smart contracts as, well, actual contracts, it might be a good idea to know something about contracts. 

Law students in the United States spend one semester taking one class on contracts, and at least at the better law schools, it’s all theoretical and you don’t actually learn anything about contracts. I’m serious. In three years at one of the best law schools in the U.S., the only contract I saw was the lease agreement for my apartment.

It takes time grinding out billable hours at a Big Law firm to really learn contracts the way a good software engineer understands the flow of well-written code. It’s one of those Malcolm Gladwell 10,000-hour things.  Except, unlike some kid learning the violin who becomes a virtuoso between ages 4 and 18, as a law firm associate you get your 10,000 hours under your belt in two years because you’re trading time for money — actually your firm is trading your time for their money — in the most brazen way.

Anyway, here’s my effort to distill my 10,000 hours into a 20-minute read, and like a cheap wine distilled into grappa, it’s going to go down a little rough.

You’ll need something to follow along with, so here’s a sample sales contract that I found on the web. Like everything else you’re going to find on the web, it’s awful, but it was free and didn’t require trading my PII. And it’s good enough to demonstrate the points I’m going to make.

I’m going to break contracts into five parts. You’ve heard about contracts that were written on paper napkins like the world’s best footballer (soccer player for those of you in the States) Lionel Messi signing with Barcelona as a teenager, but those kind of contracts only work when there aren’t any disputes. Real contracts run several pages, and you can bet Messi’s current contract isn’t written on a cocktail napkin.

Here’s how I’ll break contracts down:

Part 1: The introduction

Part 2: The scope of work

Part 3: The money

Part 4: The risk shifting

Part 5: The miscellaneous junk that lawyers feel obligated to include.

Stay tuned for future installments.