Smart Contracts & The Future of ADR

Smart contracts are revolutionizing the way we settle disputes, bringing about a modern and efficient solution for mediators and their clients. By utilizing digital agreements that transform into action when invoked, smart contract technology has already been implemented in many sectors - giving rise to new opportunities across industries along with debatable risks. In today's Legal Cut post, we explore what these groundbreaking ‘contracts' signify; exploring how they operate and how they are being used in ADR.

Initially, we note that this is a complex topic and this article only touches the surface of smart contracts and ADR. Throughout the article, we have linked fantastic scholarly articles from leaders in the field that take a deeper dive into these topics. 

What is a smart contract?

Smart contracts powered by AI are self-executing contracts that use artificial intelligence algorithms to enforce the terms of an agreement between parties. They are stored on a blockchain network, which is a decentralized and tamper-proof ledger that ensures the transparency and security of transactions.

Said another way, smart contracts are digital agreements or protocols that, when triggered, execute functions automatically and securely. 

This technology has already been implemented in various industries and is now beginning to be adopted by mediators as a way of streamlining dispute-resolution processes. Let’s take a closer look at what smart contracts are, how they work, the benefits they offer mediators and their clients, as well as the potential risks associated with using them.

How Smart Contracts Work

At its core, a smart contract operates based on coded commands that are written into the agreement between two parties. The code can include any number of specific conditions that must be met for the contract to be executed. For example, if both parties have agreed to complete a task within one month, then the code can specify that if this condition is not met within one month then certain actions must be taken (e.g., payment must be made). This automation ensures that both parties adhere to the terms of the agreement without needing to manually check each other’s progress along the way. It also helps ensure compliance since all transactions are stored securely on a distributed ledger system (similar to blockchain).

And while there are certainly some drawbacks (for example, see Michael Buchwald's University of Pennsylvania Law Review Article on Smart Contract Dispute Resolution), smart contracts may be heralded for benefits. For example, smart contracts can provide increased transparency since all transactions related to the agreement will be stored securely on a distributed ledger system (built on blockchain technology); meaning that any changes or updates can easily be tracked by both parties involved in the dispute resolution process. This can support increased trust as the secure, transparent, and tamper-proof nature of blockchain technology and smart contracts can help to increase trust between parties.

What do smart contracts have to do with ADR?

Quite simply, by leveraging the power of AI, smart contracts have the potential to revolutionize the dispute resolution process (not unlike nearly every other facet of law practice). 

With a smart contract, the idea is that contract disputes need less (or no) human intervention; instead, the idea is that they are resolved automatically by accurately executing agreed-upon terms in real-time. Just think of a world where payments are released promptly and with minimal effort - leading to greater efficiency for all parties involved.

For example, if the contract states that payment is to be made upon delivery of goods, the AI-powered smart contract will automatically release payment once the delivery is verified or automatically enforce the terms of a settlement agreement. For example, if a dispute resolution agreement requires one party to pay a certain amount to the other party, the AI-powered smart contract could automatically enforce the payment once the conditions of the agreement are met.

So how can a smart contract work with ADR?

In the event of a dispute, a smart contract powered by AI could be programmed to automatically trigger a dispute resolution mechanism, such as mediation or arbitration. For example, in an employment setting, if an employee disputes their bonus (that is part of a smart contract), the AI-powered smart contract can automatically refer the dispute to a designated mediator or arbitrator for resolution or by accessing a database of mediators and selecting one based on certain criteria, such as expertise, availability, or proximity. The smart contract could also be designed to communicate with the designated mediator to provide them with the necessary information about the dispute and to facilitate the mediation process.

And the smart contract could go even further, by having AI algorithms that monitor the progress of the mediation process and automatically enforce any settlement agreement that is reached. For example, if the mediator reaches a settlement agreement that requires one party to pay a certain amount to the other party, the AI-powered smart contract could automatically enforce the payment once the conditions of the agreement are met.

For an idea about how this technology is being used in cryptocurrency/DAOs, see the article by Frederico Ast and Bruno Deffains "When Online Dispute Resolution Meets Blockchain: Decentralized Justice." 

Also, see our previous blog post about smart contracts in the workplace here as well as an insightful article by Professor Amy Schmitz about smart contracts in arbitration here. 

Smart Contracts and ADR

But what about when a smart contract goes sideways? Consider the idea of building an ADR procedure into the blockchain. 

As one of the leaders in this field, Professor Amy Schmitz explains, "The problem is that no amount of computer code can eliminate conflicts." 

In an American Arbitration Association article, Professor Schmitz aptly elaborates:

 An oracle, or third-party fact verification system, could incorrectly detect rain, the code may be flawed, there may be disputes about what qualifies as “rain” (mist, fog, sleet), etc.  Furthermore, parties may fight about the delivery of defective goods, leaving parties with no choice but to attempt litigation to recoup losses.10  Aside from resetting – i.e., shutting down – the whole “if/then” system, these kinds of disputes present a challenge for immutable blockchain architectures.  Accordingly, parties are wise to plan and build arbitration into their smart contracts, to have a dispute resolution plan should smart contracts go awry.  

In her insightful article, she suggests a dispute resolution plan for smart contracts that fall sideways. 

Her guidance? 

Consider addressing smart contract dispute resolution within the contract itself, such as building arbitration into a smart contract's code (ensuring an expert decisionmaker). And think ahead - should the arbitration be an online process (to account for cross-border disputes) through online dispute resolution (ODR)? Should disputed funds be placed in escrow during arbitration? 

Not surprisingly, organizations like JAMS have already anticipated smart contracts and actually even proposed rules and procedures for smart contracts and AAA provides a webinar on the topic, as well. 

As an alternative to arbitration, Irene Kafeza suggests mediation. In her article, An Intelligent Mediation Platform for Smart Contracts, she discusses building an online mediator into blockchain as a software tool that monitors the execution of e-contacts and that can interfere when an alert is generated. She further explains:

An alert can be generated either automatically by the e-contracting system where the mediation process will be initiated by the system or the alert can be triggered by one of the parties. In addition, a human supervisor may be introduced to intervene when needed and ensure the system remains compliant with the design principles. In such a case automated smart contracts are directly linked with the dispute resolution mechanism.

The mediator software is responsible for proposing a fair deal to both parties. Initially, the mediator reveals successful solutions to similar cases based on the data mining module [that searches for related cases]. If the parties agree to select one of these cases then the problem is solved and the accepted report is generated. If not then each agent of each party is entering the negotiation platform. Following for example an alternating offers protocol, the offers of both sites are sent to the mediator software that will return with a proposal that optimizes the differences between the two parties. The mediator module extends the traditional agent negotiation by introducing an entity that is aware of all related information. This entity also has the trust of both parties. Each party is represented by an agent that has a utility function that wants to maximize. An example negotiation system can be formed on BDI agents. Agents can be formed following the belief-desire-intention model. Each agent based on its beliefs selects an appropriate action. Agents execute actions based on a set of rules. The mediator is a special agent responsible for the collaboration of the agents while parties are the agents that negotiate.

And then there is a whole other discussion on crowdsourced online resolution systems ("CODR"), also discussed in the Ast and Deffains article. 

Potential Risks Associated with Smart Contracts in ADR

Although there are many advantages associated with using smart contracts in ADR, there are also potential risks involved in their use as well. For example, since all transactions related to an agreement are stored securely on a distributed ledger system, malicious actors (such as hackers) can gain access to this information without authorization from either party involved in the dispute resolution process — thereby compromising any confidential information included in these transactions (such as financial details). Additionally, it is important for entities who wish to use smart contracts in their practices to ensure that they understand how contract law applies to digital agreements to avoid any potential legal issues down the line should a dispute arise between two parties after an agreement has been concluded via a smart contract system.

Conclusion

Smart contracts have already begun revolutionizing how we resolve disputes thanks largely due to their ability to automate tedious tasks while ensuring compliance from both parties involved in an agreement—all while offering increased transparency throughout negotiations. As with any technology, for those wishing to incorporate smart contract technology into an ADR practice, it is important to understand the potential risks associated with using such systems as well as how contract law applies to written digital agreements before getting started with implementing this technology into dispute resolution processes. 

By staying ahead of the curve, we can gain a competitive advantage and provide our clients with the best possible service.

Interested in ADR with Moxie Mediation? Contact us to schedule your mediation or arbitration today.