Every business requires association with suppliers, service providers, and clients. Such business dealings are largely governed by contracts. Contracts are legally binding agreements between two or more parties.
Based on common business processes, these are the three types of contracts that no business can avoid:
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Most businesses hire services of freelancers or consultants, apart from the regular employees who are a part of their payroll. There are certain terms and conditions governing these contracts. The employer and employee are obligated to agree upon and abide by these terms.
Buying and Selling Contracts
With suppliers and clients, businesses have to regularly form contracts regarding delivery of the products and services. These also include the stage contracts where payments are made at the completion of certain tasks, stages or, phases of delivery.
Leasing and Licensing
Businesses require resources such as property, machines, vehicles and, software etc. for their routine operations. Some of these require leasing or licensing for use.
The implementation of contracts involves certain hassles and risks. So, getting into a contract is not an easy task for a business.
In general, the basic components of business contracts are as follows:
- Parties who hold obligations and receive benefits
- Third party intermediaries such as witnesses, enforcers, mediators
- Terms and conditions governing the contract
- Financial transactions
Apart from the above, there might as well be certain components specific to the type of contract.
Businesses can get into legal problems due to controversies generating from some such contracts.
These illustrations describe some such controversies:
Company A hires a consultant B for a complete interior design of their premises. B quits the task midway due to conflict breaching the terms of the contract.
A delivers services to its client B. But B doesn’t make the payment to A despite several reminders.
Property owner C leases an office space to company D through a broker and the lessee doesn’t pay the rent while continues using the property and the broker is not successful in mediating between them.
Most businesses have to deal with such situations on a day-to-day basis. And so they need a fool-proof contract management system in place which could ensure that the parties do not back off before completing the contractual terms and conditions.
Blockchain & Smart Contracts
Contracts had always been subject to such issues till the advent of the famous blockchain technology. This technology allows businesses to make digital contracts known as smart contracts.
Vitalik Buterin, the co-founder of Ethereum, defines a smart contract as, “a mechanism involving digital assets and two or more parties, where some or all of the parties put assets in, and assets are automatically redistributed among those parties according to a formula based on certain data that is not known at the time the contract is initiated”.
A develop smart contract does not require an intermediary. Except this, the components of a smart contract are the same as those in a conventional contract system. Also, the terms and conditions are encoded into the blockchain itself. Moreover, in a blockchain based contract system, financial transactions are digital.
Here is a summary of the primary reasons why your business should shift to smart contracts.
#1. Absence of Intermediary
Smart contracts are autonomous or self-managing systems with no need of intermediaries to govern their operations. Generally, intermediaries form a part of the traditional contracts for authentication of participants.
The presence of intermediaries can lead to problems like lack of coordination and support. Nevertheless, the possibility of any bias for or against one of the parties cannot be ruled out.
Smart contracts do not need an intermediary. These systems manage themselves digitally without a third party intervention. Participants in a smart contract are verified by the blockchain itself. Every interaction of the participants with the system requires authentication with the use of public and private keys.
A smart contract encompasses data and transactions through encryption. This prevents the system from any possible external threats or tampering.
Smart contracts give traceability to every transaction. All the participants validate each of the transactions on the system. Thus, no participant can alter any data without the permission of the others.
If monetary transactions are applicable for fulfilling terms of this contract in part or in stages, smart contract blockchain receives the money from the service seeker. The service provider delivers the required service to the service seeker. After the approval of delivery of services from the service seeker, the blockchain releases the payment to the service provider.
Similarly, for partial or stage payments, the service provider receives the payments at different stages of completion, as per the agreement. Thus, the system is self-sustaining and transparent.
This automatic and digital system has fewer levels of authorization. Encrypted data substitutes cumbersome documentation. The high-performance system, by itself, governs the storage and access to information.
So, the smart contract is faster in implementation compared to the conventional, on paper contracts.
The absence of intermediaries further enhances the efficiency of the system. The speed is better as there are lesser levels for the processes to pass through. However, with increasing speed of digital systems and processes, we can expect these systems to become even faster in the future.
#4. Data Security
The blockchain contract systems are based on a multi-signature technology (multi-sig). This necessitates multiple participants to authorize any transaction through their digital keys. Thus, any transaction can take place only when the participants have agreed to it. It is a decentralized system. So, the record doesn’t reside at just one end.
The data backup and replication takes place at multiple locations. The real-time updating of data keeps the participants aware of any possible encroachment or suspicious acts on the system.
Thus, smart contracts are considered as safe, incorruptible, and trustworthy systems. Likewise, data encryption gives the system immunity against hacking or tampering.
The smart contracts facility of blockchain is undergoing development at a very fast pace. So, we can expect it to be an integral part of every business gradually.
To make the most out of this emerging technology for your business, start using smart contracts now!
Jin Markov is a Content Writer with Goodfirms.co, a research firm in the USA. He has an experience of 5 years and has been writing on areas related to technology, small business, start-ups, and marketing.