We consider a number of social behaviors dating back to several centuries as ghastly, vile, barbaric, crude…. But for some reason, we still accept and engage in the adversarial common law practice for reaching supposedly fair outcomes. In order to reach a fair deal, two parties each hire their own lawyers, who often take extreme, one-sided approaches to represent their clients to the best of their abilities — supposedly to achieve the best possible outcome for their client. This often involves repeatedly exchanging (or “turning”) incrementally negotiated documents over and over to try to achieve even the smallest advantage. The concept is that the best way to reach a fair deal is to have opposing counsel fight it out to ultimately find common ground — a tradition engrained in all aspects of the common law system of jurisprudence, from our criminal trial process to private contract. This strategy has worked well — for generations motivated by a competitive mindset. But to quote Bob Dylan: “Come mothers and fathers throughout the land, and don’t criticize what you can’t understand. Your sons and your daughters are beyond your command… for the times they are a-changin.”
Increasingly, a new generation is taking the lead in our world — the so called “Millennials” — who often come to the table with a mindset of achieving fairness rather than the advantage. According to many reports and commentators, Millennials prefer to quickly (or automatically) reach a mutually agreeable result rather than negotiate competitively. While generalizations are always dangerous, our experience confirms this phenomenon. So, when it comes to contracts, many would rather not have to read and incrementally negotiate them at all, than to try to one up their counterparty by being clever or coy through the use of linguistic shell games or intentionally vague expressions of intent. They see no benefit to such economically inefficient games, and instead just want and expect a fair deal. For what it’s worth, many non-Millennials agree, especially non-lawyers.
Interestingly, blockchain-based contracts are an obvious solution, albeit one that requires a behavior change. Blockchain-based smart contracts provide the most value when used to automate contracts that have standardized terms that are transparent and capable of being automated, stored, and controlled by one or more of the parties to the transaction, with very few modifications to the general provisions or “boilerplate.” Contracts having these characteristics, such as ISDA Master Agreements, insurance documents, residential real estate documents, and many supply chain-related contracts, are prime candidates for being automated through the use of a blockchain or a distributed ledger that is replicated across a network of connected nodes or computers (a “distributed ledger”). With recently developed protocols and encryption techniques, parties can still ensure that private information contained in those contracts (e.g., price) remains protected and accessible by only those persons who have been authorized by the transacting parties. The process to achieve consensus about standard provisions, including a review of agreements available in public repositories, and over time, those on the blockchain, will result in provisions that generate an outcome that is presumed or agreed in advance to be fair, and which eliminates the need or possibility of competitive negotiation — lest the parties wish to lose the value (in terms of time and money) of the efficiencies gained through use of smart contracts. In turn, this eliminates much of the friction that historically made certain kinds of transactions pointless to even contemplate because the transactional costs consumed the upside. In a functioning system, parties would instead focus only on those instances where the presumed-to-be-fair clause requires adjustment because of something truly unique about the instant transaction.
Take, for example, a neighborhood peer-to-peer sharing platform where neighbors share lawnmowers, steam cleaners, and other tools where usage and treatment can be tracked using RFID and other “Internet of Things” tags. A blockchain-based contract sets the terms under which neighbors pay, use, and take responsibility for items, and automates the payment based on usage under those open and transparent terms. Perhaps the steam cleaner will be charged based on the amount of water that runs through it or the lawn mower will be charged based on the number of turns of the blade. Everyone participates, pays, and takes responsibility in the same way under the same terms without the need to go through the traditional process of reaching a deal or negotiating terms — a process fraught with so much friction that historically made such micro-sharing impossible.
Blockchain-based transactions can also facilitate and ensure that parties are getting a fair deal — getting what they bargained for. Everledger is a startup that uses blockchain, smart contracts, and “machine vision” to reduce the risk of fraud for contracting parties. Take, for example, Everledger’s initiative to use blockchain to log unique identifiers in diamonds to ensure that conflict diamonds are not involved in a transaction where a conflict-free commitment has been made. The platform can also deter theft in diamond transactions using the same tracking technology.
Another startup in the blockchain-based smart contract space, OpenLaw, is building a platform for parties to create and execute legal agreements in a more transparent, standardized, and open manner. Also, because the contract terms are stored on the Ethereum blockchain, the information contained in those contracts that are intended to remain private are far more secure and protected from hacking as compared to the currently popular method of storing MS Word or PDF documents on a server.
We are in the very early days of blockchain impacting the way we practice law. But early examples where it has been implemented — from automobile insurance to sophisticated financial transactions to more modest peer-to-peer sharing of home products — suggest that the coming change could be dramatic. You may not yet understand the blockchain or the notion of smart contracts, but they are facilitating the world of fairness and transparency that the sons and daughters of Bob Dylan’s generation hold dear.
David Perla and Sanjay Kamlani are co-founders and managing directors of 1991 Group.