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.