Technological developments such as blockchain and Artificial Intelligence (AI) are not only disrupting the way we transact on markets and conclude contracts. They are also fundamentally changing the processes and modes of law enforcement and dispute resolution. In doing so, they accelerate trends that were already visible before the advent of these technologies, especially the trend towards alternative forms of dispute resolution compared to the traditional model of litigating disputes before the courts.
In a recent paper we identify and analyze key developments and regulatory challenges of digital dispute resolution. We discuss digital enforcement and smart contracts, internal complaint handling mechanisms, external online dispute resolution and courts in a digital world.
Dispute resolution innovations originate primarily in the private sector. New service providers have high-powered incentives and face fewer institutional restrictions than the courts. We demonstrate that with smart contracts, digital enforcement and internal complaint handling mechanisms a new area of ‘dispute resolution by contract’ or ‘dispute resolution without a neutral third party’ dawns. Increasingly, and with the help of sophisticated technologies, parties will design contracts which are complete and self-enforcing or which can be enforced digitally. This takes the idea of a privatization of dispute resolution to its extreme. Not only will parties do privately what formerly involved the participation of a public official, ie, the judge. Parties will also dispense with the involvement of a neutral third party (conciliator, mediator, arbitrator) in the dispute resolution process. They will, increasingly, be able to ‘do it themselves’.
There are huge benefits associated with this development. Disputing parties can save a lot of dispute resolution costs, and they can craft deals and settlements which optimally satisfy their individual preferences. At the same time, it also seems clear that not all parties benefit from this development to the same degree. Those who have the resources and skills to optimally deploy the new technologies will be its greatest beneficiaries. Large businesses will gain the upper hand in digital dispute resolution, and the overwhelming majority of consumers will have to be content with a small, and decreasing, share of the cooperative surplus or even be ripped off.
Hence, the greatest challenge associated with digital dispute resolution probably will be private power and its control. This challenge is already significant when problematic practices which harm certain segments of the population occur in public. It becomes huge if and to the extent such practices are difficult or even impossible to detect and police. However, that is exactly what happens with smart contracts and, to a lesser degree, also with digital enforcement and internal complaints-handling mechanisms. The situation is tricky especially because even the disadvantaged party will often not realize the extent to which it has been on the losing side of a transaction. If a settlement proposal has been computed by a smart algorithm, how are we to check its fairness? And if you agreed to a smart contract which truly appears to reflect your preferences, why should you complain if it is automatically enforced? Mandatory consumer protection rules are not worth much if they are undermined factually without regulators noticing what is going on.
Hence, what is at stake eventually with digital dispute resolution is the rule of law. Powerful private actors increasingly use new technologies to maximize their share of the cooperative surplus from private transactions, thereby potentially violating public policies and laws designed to protect market institutions and weaker parties.
There is no simple fix to this problem. In finance, the ‘next big thing’ on the horizon is government-run digital currencies (‘govcoins’). In essence, these are public Bitcoins, digital currencies issued and guaranteed by states. Governments would regain control over currencies and payments which they are about to lose with private, blockchain-based currencies.
Something like this is also conceivable with private blockchain-based transactions more generally. Smart contracts could become ‘govcontracts’, at least to a certain extent. To be sure, this would be a radical step. Money used to be public before blockchain arrived. But contracts were always a private matter, at least in market economies. However, as an ultimate remedy or ‘nuclear option’, taking control of (certain elements of) private transactions by the state via the control of the necessary digital infrastructure should not be ruled out.
Horst Eidenmueller is Statutory Professor for Commercial Law at the University of Oxford.
Gerhard Wagner holds the Chair for Private Law, Business Law, and Economics, Humboldt University of Berlin.