Revolutionizing the legal system through blockchain technology

The following article is a summary of an article entitled "Dispute Resolution + Multi-Signature = Today's Solutions" written by Pamela Morgan, founder of the New Zealand-based Bitcoin South Conference's licensed law firm. This information does not constitute legal advice and you should consult an attorney in your jurisdiction before acting on any information provided here.

Smart Contracts: What are they?

The concept of smart contracts is fun, cutting-edge, and new, and even us super geeks are excited. Just like what we expect from a kid, everyone wants their contracts to be smart. But what exactly does the term "smart contract" mean? If you talk to enough people, you'll realize there's no real consensus on this — especially in the cryptocurrency space. So, we have to define the concept before we go any further.

What is a contract?

At its core, a contract is simply an offer, a promise, and an exchange of value (the technical term for value exchange is consideration). Some contracts must be written down, but many do not. And no matter what you call it, if there is an offer, an acceptance, and an exchange of value, then it is a contract, and therefore the law governing contracts applies. Contract law has many nuances, and the basic information would require years of law school courses to explain, so it is obviously impossible to discuss it in detail here. However, all contracts contain three basic elements: offer, promise, and exchange of value (consideration, consideration).

How to make a contract smart?

Fully automated contracts of the future

Many people in the cryptocurrency 2.0 space believe in and are working on contracts that can be executed without human intervention. These contracts require a combination of coordinated and automated assets, processes, and systems.

The most suitable example we can find today would be something like Uber or Lyft. In practice, Uber or Lyft applications allow users (passengers and drivers) to create smart contracts. These applications provide a platform for the exchange of value, in this case, paid rides. Specifically, these applications allow consumers to create an offer that includes the ride requirement, the price, and the promise to automatically pay after the service is provided. It allows drivers to accept the offer and provide the ride. Both parties exchange something of value, the driver provides time and vehicle, and the passenger provides the fare. If all goes well, the passenger is picked up at a specific location and dropped off at the destination - no further action is required. This works well in the field of short-term, low-value transactions, but we have not seen widespread adoption of applications like (Uber or Lyft) for longer-term and/or higher-value contracts.

In the cryptocurrency 2.0 space, a number of companies are working on asset automation. The most interesting example I've seen is combining computer-controlled door locks with cryptocurrency transactions so that payment can be made to enter a building or home. I can see the benefits of this application in Airbnb, where exchanging keys and access permissions is cumbersome. I'm curious and excited about the future prospects of these technologies, but of course cryptocurrency today is not yet mainstream enough to serve these assets.

Semi-automatic contracts

Uber and Lyft are more like semi-automated contracts, but some aspects of the process still require human interaction. A construction contract is an example of a semi-automated contract. In the construction industry, a large amount of money is usually deposited into an escrow agent before construction begins. The construction contractor can receive payment after achieving key results or progress. When a key result is achieved, through human acceptance or other similar processes, the contractor can receive their due payment. This type of system can now be automated using Bitcoin transactions, specifically using delays (how long to lock) and multi-signature addresses. I will talk about this process and the creation of systems in another article.

Even if a contract cannot be fully automated, cryptocurrencies can make existing contracts smarter by introducing things like guarantees, multi-signature controls, and delayed execution. Even if some contracts are not fully automated, it is possible to make them smarter.

Smart Contracts Today

Regardless of the level of automation you use, all Bitcoin-related contracts must include two specific elements: provisions for dispute resolution and a multi-signature process.

Why you need government approval for your smart contracts

Although many projects in the cryptocurrency 2.0 space assume that governments have no role in smart contracts, the reality is that when a dispute arises, one party can always go to a local court and seek enforcement. Ignoring this possibility does not eliminate the fact that it exists, and not specifying a jurisdiction does not mean that all jurisdictions cannot govern the contract. On the contrary, not having a choice exposes the contract to multiple jurisdictions, which can lead to disputes, increased uncertainty, risk, time and expense. Choosing an appropriate legal framework, jurisdiction and adjudication process can actually reduce risk and uncertainty.

Dispute resolution, or how to get governments to accept smart contracts

How can governments be made to recognize smart contracts? The simplest answer is to include a written arbitration clause in every contract. Under the New York Convention (technically known as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards), commercial arbitration provides for private judgments to be enforced in public courts in more than 150 countries. The New York Convention requires member states to recognize and enforce most foreign arbitration awards. The details of the convention and other enforceable laws are beyond the scope of this article, but a valid arbitration clause must be: written, include the chosen law and procedure, define what disputes are (or are not) within the scope of arbitration, and the necessary provisions of the applicable rules.

Why do all this? If done properly (with a counterparty from one of these 150 countries), a local court must enforce the arbitration award. If we combine an arbitration clause with a well-conducted arbitration hearing, the local court does not need to decide whether your smart contract is valid or who won. The arbitrator you choose decides the matters related to your smart contract, including who won and who lost. The arbitrator then makes a decision (also called an award), which is binding on both parties. If the losing party does not want to voluntarily abide by the award, the winning party can take the award to the losing party’s local court and say “please enforce this”. As long as the arbitration was conducted properly, the local court must enforce the award and does not need to question the arbitration process. Even better, the arbitration clause allows you to tailor every aspect of the process: location, duration, language, medium (video or in person), etc., which further reduces uncertainty and gives the parties involved in the transaction greater control over the process.