Law firm BakerHostetler develops blockchain-based smart legal contracts for the freight market

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From an idea that envisioned currency devoid of centralized authority a decade back to thousands of use cases across various industries, the rise of blockchain has been explosive. The logistics and transportation space has been no different, witnessing several blockchain projects being commissioned by businesses looking to stay ahead of the curve. 

National law firm BakerHostetler has partnered with Clause, a software platform for smart legal contracts, to develop a blockchain-based automated legal agreement for the freight market. This is a smart legal contract available digitally to the involved parties, with it tracking the post-signature performance of the contract by integrating with the existing enterprise systems. 

“We have found that some of the pain points our clients experience post-signature can be alleviated with the use of a blockchain. For example, a distributed ledger can increase transparency among parties and allow them to use a shared database for certain transactions instead of siloing data that everyone needs to see in their own databases,” said Katherine Lowry, director of practice services at BakerHostetler.

Such a smart contract allows stakeholders across the supply chain to “notarize” that certain events have occurred. Lowry pointed out that this could be leveraged to negotiate better positions in agreements, demonstrate compliance with regulators, provide new benefits to consumers or structure new kinds of mutually beneficial business arrangements.

These smart contracts fundamentally disrupt the way traditional contracts work. “After a traditional contract is signed, all you have is a PDF. Someone has to create an Excel spreadsheet that calculates one metric, configure a software system to manage another, and manually input data or send emails to ensure everything flows smoothly in carrying out the contract,” said Lowry. “It’s inefficient, difficult to track and more likely to create deviations from the agreement.”

However, a smart digital contract can directly respond to real-time internal and external business data, automate the performance of contract obligations, and provide visibility into the contract’s roadmap. 

“With a computational contract, you directly connect the legal agreement to the business processes that flow from it. It’s a way of combining software – which is why we’re working with Clause – and the practice of law to create better alignment,” said Lowry. “What we do is help clients figure out which parts, if any, of their processes should be tied to a blockchain-based system. This also gives us the opportunity to redesign and improve the overall workflow given the advantages and constraints of working with a blockchain.”

For instance, smart contracts can be used in the management of fuel surcharges in the supply chain. BakerHostetler identified several pain points within the process, including redundant phone calls, burdensome manual reviews, and variable financial costs due to seasonal differences across the length of the contract. 

One of the use cases of this contract is in automating the weekly calculation of the fuel surcharge adjustment. The smart contract can trigger payment to a carrier or refund to a shipper, raise an invoice, and record the fuel surcharge calculation – all on a permissioned blockchain network. Baker Hostetler’s collaboration with Clause is an extension to the firm’s IncuBaker program that has been helping lawyers and clients understand and navigate the intersection of digital business, emerging technology and law. 

“Our most recent market analysis shows the breadth of our legal clients’ engagement with blockchain technology – whether through strategic investments, consortia, proofs-of-concept, or joint ventures,” said Lowry. “After heavily researching and crafting a thoughtful methodology, we made the decision to bring what we think is a best-in-class approach to computational contracts to market.”