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 These days, I mostly post my tech musings on Linkedin.  https://www.linkedin.com/in/seanmcgrath/

Wednesday, September 20, 2017

What is Law? - Part 17

Last time, we talked about how the concept of a truly self-contained contract, nicely packaged up and running on a blockchain, is not really feasible. The primary stumbling block being that it is impossible to spell out everything you might want to say in a contract, in words.

Over centuries of human affairs, societies have created dispute resolution mechanisms to handle this reality and provide a way of “plugging the gaps” in contracts and contract interpretation. Nothing changes if we change focus towards expressing the contract in computer code rather than in natural language. The same disambiguation difficulty exists.

Could parties to an agreement have a go at it anyhow and eschew the protections of a third party dispute resolution mechanism? Well, yes they could, but all parties are then forgoing the safety net that impartial third party provides when agreement turns to a dis-agreement. Do you want to take that risk? Even if you are of the opinion that the existing state supplied dispute resolution machinery – for example the commercial/chancery courts systems in common law jurisdictions - can be improved upon, perhaps with an online dispute resolution mechanism, you cannot remove the need for a neutral third party dispute resolution forum, in my opinion. The residual risks of doing so for the contracting parties are just too high. Especially when one party to a contract is significantly bigger than the other.

Another reason is that there are a certain number of things that must collective exist for a contract to exist in the first place. Only some of these items can usefully be thought of as instructions suitable for computer-based execution. Simply put, the legally binding contract dispute resolution machinery of a state is only available to parties that actually have a contract to be in dispute over.

There are criteria that must be met known as Essentialia negotii (https://en.wikipedia.org/wiki/Essentialia_negotii). Simply put, the courts are going to look for intention to contract, evidence of an offer, evidence of acceptance of that offer, a value exchange and terms. These are the items which collectively, societies have decided are necessary for a contract to even exist. Without these, you have some form of promise. Not a contract. Promises are not enforceable.

Now only some of these "must have" items for a contract are operational in nature. In other words, only some of these are candidates to be executed on computers. The rest are good old fashioned documents, spreadsheets, images and so on.

These items are inextricably linked to whatever subset of the contract can actually be converted into computer code. As the contract plays out over time, these materials are the overarching context that controls each transaction/event that happens under the terms of the contract.

The tricky bit, is to be able to tie together this corpus of materials from within the blockchain records of transactions/events so that each transaction/event can be tied back to the controlling documents as they were at the moment that the transaction/event happened (Disclosure: this is the area where my company, Propylon, has a product offering.)

This may ring a bell because referencing a corpus of legal materials as they were at a particular point in time, is a concept I have returned to again and again in this series. It is a fundamental concept in legisprudence in my opinion and is also fundamental in the law of contracts.

So, being able to link from the transactions/events back to the controlling documents is necessary because the executable code can never be a self contained contract in itself. In addition, it is not unusual for the text of a contract to change over time and this again, speaks to the need to identify what everything looked like, at the time a disputed contract event occurs. Changes to contract schedules/appendices are a common example. Changes to master templates such as ISDA Master Agreements happen through time, are another common example.

A third reason why fully self-contained contracts is problematic is that ambiguity can be both strategic and pragmatic in contracts. Contract lawyers are highly skilled in knowing when a potential ambiguity in a contract is in their clients favor – either in the sense of creating a potential advantage, or, perhaps most commonly, in allowing the deal to be done in a reasonable amount of time. As we have seen, it would be possible to spend an eternity spelling out what a phrase like “reasonable time period” or indeed, a noun like “chicken” actually means. Contract law has, over the centuries, built up a large corpus of materials the help decide what “reasonable” means and what “chicken” means in a myriad of contracting situations. At the end of the day, both parties want to contract so both parties have an interest in getting on with it. Lawyers facilitate this “getting on with it” by being selective in what potential ambiguities they spend time removing from a draft contract and which ones they let slide.

I think of contracts like layers of an onion. At the center, we have zero or more computable contract clauses. i.e. clauses that are candidates for execution on a computer. Surrounding that, we have the rest of the contract : documents, spreadsheets etc. Surrounding that we have global context. It contains things like “the current price of a barrel of oil” or “Dollar/Yen exchange rate”. Surrounding that we have “past dealings” which relates to how the contracting parties have dealt in the past. Surrounding that again, we have hundreds of years of contract law/precedents etc. to help disambiguation the language of the contract.

As you can see, this ever-expanding context used to resolve disputes in contracts is tantamount to taking a snapshot of the world of human affairs at time T – the time of the disputed event. This is not possible unless the world is in fact a simulation inside a universe sized computer but that is a topic for another time:-)

One final thing. I have been talking about the courts as an independent third party dispute resolution mechanism. There is more to it than that, in that courts often act as enforcers of public policy. For example, a contract that tries to permanently stop party A from competing with party B in the future, is likely to be seen as against the public interest and therefore invalid/unconscionable. See https://www.law.cornell.edu/ucc/2/2-302 for an example of this sort of "public good" concept.

In conclusion, IT professionals approaching the world of contracts are entering a world where semantic ambiguity will resist any and all attempts at complete removal through computer coding. In the words of Benjamin Cardozo:

"the law has outgrown its primitive stage of formalism when the precise word was the sovereign talisman...it takes a broader view today." https://en.wikipedia.org/wiki/Wood_v._Lucy,_Lady_Duff-Gordon

IT people may bristle a little at the characterization of word formalism as “primitive” but the onus is on the current wave of contract technology disruptors who claim to be reinventing contracts, to show how and why the current ambiguity laden system, with its enormous and ponderous dispute resolution dimension – can be fully replaced by “smart” contracts.

My view is that it cannot be fully replaced. Enhanced and improved, yes absolutely. Insofar as discrete contract clauses can be made executable, I see great potential value in making these clauses "smart". But this is an evolution of the current approach to contracts, not a radical replacement of it.

I think I will end this series at this point. I never thought, back in March when I started this series that it would take me so many posts to outline my thoughts in this area. I will end by nodding in the general direction of James Joyce by ending this series with an internal reference back to the beginning of the series, thus creating a hermeneutic circle structure that feels appropriate for a topic as complex and fascinating as the exegesis of law.

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