Law and Autonomous Systems Series: Micro-Justice and New Law? “Swarm Arbitration” as a Means of Dispute Resolution in Blockchain-Based Smart Contracts

If Alice wishes to buy real estate from Bert free of defects, she will – under the old law – enter into a contract with Bert contemplating their transaction. Their contract will be governed by the applicable substantive law (statutory law, court decisions), setting the legal framework for both the validity of the contract and for filling gaps. Within that framework, the contract itself will establish certain legal (contractual) rules to apply between the parties.

If a dispute arises between Alice and Bert about whether the estate is free of defects or not, two issues of subjective evaluation need to be determined to resolve that dispute: (i) what is the factual condition of the estate; and (ii) does that condition legally qualify as a “defect”?

Under the old law, in order to have these evaluations performed and thereby to resolve the dispute, Alice will resort to a state court having jurisdiction or – if the parties have so agreed – to arbitration. The court (or arbitral tribunal) will judge upon the matter under the applicable substantive law. The rules of the substantive law will tell the judges (or arbitrators) what circumstances shall qualify as a defect and what legal remedies are available to Alice in that case. They will then establish the factual circumstances and match those against this legal benchmark. Ultimately, they will hand down their judgment. Should the losing party not abide by the judgment, the relevant state will lend the prevailing party its state power to enforce the judgment (or arbitral award) against the other and thereby give force to the rule of law. This old law – familiar to all of us – thus fulfils at least two distinct societal functions. First, it aims to establish justice in a material sense. Second, it aims to replace the rule of power by the rule of law in monopolizing the right to use power at the state level and by lending this power to private parties to enforce their rights.

However, one may ask whether (or to what extent) this old law really does justice to the parties as viewed by them. In applying the substantive law, courts and tribunals apply rules and values that – at least in democratic states with a parliamentary system – a given majority of the public (i.e. everyone) deems generally just for comparable cases. So the rules and values which apply between Alice and Bert under the old law in our example are not necessarily their individual rules and values, but rather an average of everyone’s rules and values. Even more problematic, these general rules and values are ultimately construed by only a very limited number of judges or arbitrators applying their individual value systems when matching an individual case against the legal norms. The justice done to Alice and Bert through the old law in applying these general, public rules and values might thus be phrased “Macro-Justice”.

In the new law world, Alice and Bert might not enter into a written contract to engage in their transaction. They might instead rather simply embed the rules for their transaction in computer code and submit themselves to that code within a blockchain-based smart contract. The code for the basic transaction (without a dispute about defects being in the picture) is very simple and consists of only two conditions and one consequence:

If (condition 1) Alice owns the money,

and if (condition 2) Bert owns the estate,

then (consequence) title to the money shall be transferred from Alice to Bert and title to the estate shall be transferred from Bert to Alice.

If both the title to the money (e.g. in crypto-currency) and the title to the real estate (e.g. in a blockchain-based land registry) are registered on a blockchain, Alice and Bert can prompt the computers linked to their blockchain-based smart contract to prove the two conditions for their transaction by checking and confirming the relevant entries. In case the blockchain establishes that proof, it can – by the same token – automatically effectuate the desired consequence of the transaction by simply changing the blockchain entry of the entitlement to the estate from Bert to Alice against changing the entry of the entitlement to the money in the amount of the agreed purchase price from Alice to Bert. So, the blockchain-based smart contract can automatically establish objectively measurable legal or factual preconditions and can also automatically effectuate the desired legal outcome. It thereby replaces the need for enforcement familiar from the old law world. It rather enforces itself.

But can this “new law” also deal with the subjective, evaluative elements of law needed to resolve the dispute from our example, namely, what the status of Bert’s estate factually is and whether this status legally qualifies as a defect, possibly halting the transaction or providing for a reduction of the purchase price? At first glance it seems that these subjective, evaluative elements cannot be captured by the logic of computer code, being the binary logic of 1 or 0, or “yes” or “no”. However, the blockchain technology is apt to include also those subjective elements: Alice and Bert could simply link to their blockchain a pool of natural persons acting as a swarm of jurors (or “arbitrators”) and add to the code of their smart contract two additional conditions:

If (condition 1) Alice owns the money,

and if (condition 2) Bert owns the estate,

and if (condition 3 - new) Alice claims defects,

and if (condition 4 - new), more than X % of the swarm arbitrators vote against the presence of defects,

then (consequence) title to the money shall be transferred from Alice to Bert and title to the estate shall be transferred from Bert to Alice.

Should Alice claim defects, she and Bert would electronically present their case to the swarm arbitrators and ask them to cast their votes on the question of a defect being present or not. The aggregated voice of the pool of swarm arbitrators would then function as a binary switch on the blockchain-based smart contract: only if the majority of the swarm of arbitrators (as pre-defined by Alice and Bert in their smart contract code) finds that the estate is free of defects and votes accordingly when prompted to do so, will the transaction be automatically effectuated by the exchange of the title entries into the relevant registries on the blockchains attached, just as in the case where no dispute arises. By including the vote of a pool of jurors, the subjective, evaluative element of the law is thereby transferred into the objective, binary world of code within a smart contract.

This technical possibility brings across fundamental changes to what we believe “law” is and how its societal function to serve justice can best be achieved:

First, in their smart contract, Alice and Bert may include specifically those rules and values that they individually deem just and fair to govern their transaction. They may for example define what shall qualify as a defect. They may also opt for common sense, a given custom, principles of equity or fairness, or certain technical criteria to apply instead of the legal rules of the old law.

Second, they can themselves choose the number of arbitrators to form their pool. By choosing a large pool of arbitrators, they may make use of the law of large numbers to outweigh possible biases in the individual judgement of a single judge or arbitrator. By the same token, the fact of using the subjective assessment of many jurors might replace the democratic vote of the many (“everyone”) which is ultimately the source of the rules of the old law. Alice and Bert may also choose the composition of the arbitrators within their pool: factors like age, experience, gender, nationality, language, education, qualification and many more may guide the parties’ choices. When it comes to education and qualification of the arbitrators one can easily imagine that Alice and Bert may deliberately not choose traditional lawyers, but laymen whom they deem fit to rule on the dispute (e.g. people who own real estate themselves, who have experience with real estate transactions or even simply a random group of “Joes Public”) to form their pool.

Lastly, Alice and Bert may also define for themselves the method or quorum to apply to their pool’s decision. They could opt for a simple or qualified majority to set the switch in their smart contract, or they could apply more sophisticated methods like a weighted majority, giving a higher weight to the votes of certain fractions of the pool (e.g. those older than age X, or all women on the pool, or all with an educational level of Y and higher) than to the votes of others.

Such a system of a swarm of arbitrators to resolve disputes within a self-enforcing smart contract would do away with most familiar features of the old law: Alice and Bert would not need a classical contract in written form, they would simply submit to computer code as form of their contract. They would also not need the rules of the old law, but could choose their own rules to apply. They would further not need any lawyers nor litigation: a pool of laymen or specialists of any other kind making use of the rule of the large number might do just as well for them to resolve their dispute, thereby providing justice. And finally, they would not need any state power to enforce the rule of their law: the smart contract would enforce itself.

Being very distinct from the old law but serving comparable functions, we can call this system to effectuate private transactions and to resolve disputes “new law”.

Ironically, this “new law” resembles in many of its features much older legal systems than the law of democratic parliamentary systems referred to as “old law” here, namely the dispute resolution systems of tribal societies where also often a pool of jurors decides based on equity considerations.

From a legal philosophical perspective, the question arises whether this “new law” provides a superior level of justice to the parties concerned than the old law could. It arguably does: by giving Alice and Bert full discretion as to (i) their rules and values to apply to their transaction (instead of “everyone’s rules” as in the old law), (ii) the number and composition of the people to judge on these rules and (iii) the methods to guide these judgments, the new law provides for a tailor-made, party-chosen, personalized justice. We could call this form of justice “Micro-Justice”.

Apparently, this new law also poses important (old law) questions which must be answered to fulfil its possible promises: how can a transaction be halted or reversed if it is proven that the smart contract was not fulfilling the parties’ will, but that one party acted under duress or erred when submitting to the code? How can the swarm arbitrators be incentivized to take part in swarm decision processes without biasing them? How can due process and the quality of the decision-making of the swarm arbitrators be secured, justifying the vote of the swarm to rule (e.g. against bribery or attempts of hacking)? Should the social merits of the “old law”, in the sense of a social contract safeguarding fundamental legal principles and fundamental rights, not set limits to the freedom of private parties to opt out of them, even in situations where at first glance no public interest issues might be at stake? How can (and should) the interfaces between the real world (real estate, money etc.) and the new law world (blockchain-based distributed ledgers) be organised and governed?

It is important to find convincing answers to these – and many adjacent – legal questions. However, this should not blur the fact that the prospect of customized Micro-Justice, including the use of swarm arbitrators to resolve disputes, can be highly appealing to private parties. The idea of Micro-Justice for, and as defined only by, the parties concerned, may therefore be capable of challenging the mere promise of Macro-Justice which the old law has to offer for private transactions – and thereby challenge the old law itself.

Andreas Hacke is a Partner at Zwanzig Hacke Meilke & Partner, and a Visiting Lecturer at the University of Oxford.