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Digital-Age Contracting and the Dawn of a New Legal Order Featured

October 16, 2018 by Dr Ian Gauci
Humans and societies always find ways to reduce uncertainty, to innovate and to evolve. It is a continuous journey. Law is a natural outcome of people living and working together. It’s a continuation of our human history and evolution.
Humans and societies always find ways to reduce uncertainty, to innovate and to evolve. It is a continuous journey. Law is a natural outcome of people living and working together. It’s a continuation of our human history and evolution. Image: Pixabay

The rise of the Internet and the digital economy has had a profound, and as yet not fully mapped out, impact on our understanding of law and the limits of regulation. Its borderless nature undermines the central regulatory role that the nation-state had since early modernity. The disintermediation that it facilitated subverted existing hierarchies and disrupted well-established business models.

The technology enabling the next evolution of digital-age contracting is the Distributed Ledger Technology (DLT) known as Blockchain. Blockchain is an empowering machine, a decentralized database with information stored in a network of computers across the globe. It can tokenize physical assets, add digital certificates and digital identities. As an asset is tokenized, its transaction history can be traced on the Blockchain with a smart contract – enumerating its value and ownership – and allowing the individual to remain in control and be self-sovereign.

What is a contract and why do we have them in the first place?

In ancient times people did not have written contracts or the notion of contacts as we know them today, but they still traded. Even without contract law, a moral obligation was created between them – one party made a promise to another. In early forms of credit transactions, kinship ties secured the debt, for example when a tribe gave hostages until the debt was paid. Other forms of security took the form of pledging land.

As trade got more complicated, there were more disputes, conflicts and increased uncertainty. Society evolved and introduced forms of contract law, to strengthen and support these moral obligations, by creating corresponding legal obligations and thus increasing certainty.

New actors were also introduced, like courts and tribunals, so that when performance was not achieved these actors would come in to interpret the contract and deal with post-adjudication issues in case of conflict. In such instances, courts through the years have not only addressed grievances but also acted as a catalyst for the correct adoption of the law and the contractual provisions in different circumstances, and thus played a vital role in reducing uncertainty.

This brought about a new and important function of courts: Ensuring the public good and creating certainty and stability in the social order. As a result, the psychological need for individuals to trust each others’ commitments was reduced, because they could rely on the power of the state/court to enforce them in cases of a breach of faith. This trust is, in turn, the lynchpin of the freedom to contract.

The quest by humans to innovate, evolve and reduce the element of uncertainty is a perpetual quest, and in its latest iteration, has taken the form of “smart contracts”. Contrary to normal contracts, which build a mechanism to achieve trust but cannot guarantee an outcome, smart contracts offer a possibility of highly reliable communication about future outcomes – with more deterministic mechanisms and thus increased certainty.

The agreed outcome result occurs automatically, uncertainty about performance, and about judicial recognition in most instances would disappear with the use of smart contracts. If contract law exists to facilitate reliance through the ability to opt into predictable future consequences, then smart contracts seem to serve this function even more seamlessly.

Smart contracts are just one part of the larger trend of computerized technologies purporting to displace or replace human decision making, but they have the potential to be an employed for a higher purpose: an expression, a medium, for societal evolution. They offer a window into thinking about law at a theoretical level.

Even if one is uninterested in the details of the technology, smart contracts still illuminate foundational issues in the theory of contract and law. Law is a system and has its own legal-cultural context. But it is not a hermetically sealed system, it is in interaction with human actors and the wider society, of which courts are one of a crucial aspect, that law gains its meaning and purpose.

The theoretical question of whether technology can deliver or cannot deliver more certainty and consistency in the enforcement of contract law raises a pointed question about what function courts play when they adjudicate a contract case. And whether smart contract technology will eventually replace or reduce litigation, moral values, court remit and thus change the social norms and fabric of society, culture and ultimately the purpose of certain legal provisions as well as the crafting of future laws.

This definitely calls for a new way of thinking and formulating laws and controls which are future-proof and which cater for smart contracts’ unique capacity of creating new legal-structures and paradigms. We must be also be cognizant of how they might disrupt the way we currently think about society, the law and regulation. They will not totally replace contract law but will likely supplant a lot of its uses, whilst at the same time, create new legal and regulatory levers particularly for use in the digital economy.

This new paradigm is fuelled by technology/code/algorithms and we need to make sure that all of us, as constituents in these algorithms, can enjoy a technology that is safe and apt for use. As Buckminster Fuller (the lauded American architect, author and systems theorist) opined, we should be the architects of our future, where, as humans, we give a direction.

Lawrence Lessig, Professor of Law at Harvard Law School, has also pondered this, saying that “as architects, we can build, or architect, or code [crypto-legal structures] to protect values that we believe are fundamental, or we can build, or architect, or code [crypto-legal structures] to allow those values to disappear.”

I am more for the former approach: To preserve our values, and give technology and the expression of the individuals’ room to evolve, so that society can innovate, evolve and emancipate.

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Dr Ian Gauci

Dr Ian Gauci, GTG Advocates

Dr Ian Gauci is an advisor for the Maltese government, industry and various authorities including MFSA & MDIA. He has a keen interest in technology, Blockchain, DLT,Robolaw, Big Data, AI,... view profile


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