How to file a lawsuit against a decentralized autonomous organization

Stephen D Palley, an attorney at Palley Law, PLLC, in Washington, D.C., represents both construction and technology companies in connection with litigation, insurance matters, and product design and development.

In this article, Palley discusses decentralized organizations and potential legal liabilities associated with blockchain technology applications.

Decentralized organizations (DAOs) are often mentioned in the same breath as “smart contracts” and “blockchain.” DAOs are touted as a new form of legal structure in which ownership, management, and control are autonomous, based on a set of previously passed regulations, and human involvement is limited or eliminated.

To a lawyer, this sounds more like a corporation, a legal fiction based on a set of legal rules that corporatizes an institution created by people (whether provided for by contractual agreement or enforced by law).

In addition, a business can sue or be sued, and enter into contracts that provide some liability protection for its human owners and agents through mergers.

DAOs are seen as a revolutionary organizational structure that completely abandons corporations, in which human rule is replaced by crypto and the organizational structure does not require any human involvement at all.

Slock.it, the creator of Ethereum, describes it this way:

A DAO is an autonomous organization that is completely independent of external forces: its software runs on its own and is not controlled by its creator, and its charter is recorded in the blockchain and cannot be changed. DAOs are formed by a group of like-minded individuals with specific goals... A DAO simply manages funds: it cannot create a product, write code or upgrade hardware on its own. To achieve this, it needs a service provider with a contract.

Interestingly, I am not discounting the practicality and potential benefits of implementing autonomous enterprise architectures in software, with or without blockchain and smart contract functionality.

However, when I read about DAOs, several questions and concerns come to mind. The first words that come to mind are "general partnership" and "unincorporated association".

Causes concern

One concern: If you don't create a legal structure for your artificial entity, the courts will impose one on you. As most lawyers will tell you, a regular partnership, unless properly formalized or purposefully structured, is going to suck.

In addition, ordinary cooperative members can also be held jointly and severally liable for cooperative obligations on an individual basis. A potential drawback of this structure is that they may not have assets from which to indemnify third parties.

This seems wrong and off topic to me, but it is a big problem for DAO creators or participants. Lacking funding or legal form, I hope the courts will see that the entity is not a made-up entity and allow the lawsuit against the individual members to proceed.

This is what I might say if I were representing someone who had argued with the DAO.

Real responsibility

What would happen if a DAO had no human members or participants?

The court will probably look at who designed the thing, and keep looking until it finds the originator, or the hands. Regardless of whether the judgment is ultimately collected, you can find someone holding this hot potato.

As a legal question, I doubt it really abstracts human agency, ownership, or control through a single entity. As a policy question, I’m not sure it’s a good idea.

Secondly, for DAOs operating in a world where legal relationships are formalised by contracts and enforced through courts, I don’t see a DAO being able to take action unless it is a corporation or has no corporate form and is merely an extension of its human members.

Going back to the above definition, let me reiterate this sentence:

To achieve this, it (the DAO) needs a service provider with whom it will sign an agreement.

If the DAO is not some form of corporate entity, how can it 'sign' the agreement? Who can the service provider sue if it is dissatisfied with the DAO's performance?

Take Action

Suing an unincorporated DAO starts with its members.

If you can't find the members, you can sue the DAO's founders: the person or entity that created the DAO in the first place.

How to avoid this? If you are creating a DAO, you need to consider whether this evolutionary structure would benefit from some basic enterprise architecture, and whether doing so would limit the functionality of the DAO in a meaningful way.

I also wonder if a DAO can do anything useful if it doesn’t actually have a recognized corporate form.

Further discussion on this topic can be found on the Ethereum Reddit .