Kleros facing the traditional legal world

by | Mar 2, 2020 | Event, WO

Kleros facing the traditional legal world

by | Mar 2, 2020 | Event, WO

Talk – 02.03.2020.

During the Kleros Dispute Resolution Conference on March 2nd, 2020, William O’Rorke gave a talk about the legal environment of Kleros and the further legal challenge the project may face. Advising Kleros for its very beginning, I was glad to share with Kleros’ community what the project means for a lawyer, for what purpose it may be used and what its foreseeable limits to resolve online disputes.

What is Kleros ?

First of all, I would define Kleros by what it’s not :

  • 1. Kleros is  not an (online) arbitration or a jurisdictional court, in the lack of procedural safeguards ;
  • 2. Kleros is not an innovative way to apply the law in force. In Kleros, the legal corpus is specified by the customer or an agreement ;
  • 3. Kleros is not :
    • a financial instrument or a security and, especially, a derivative financial product. The French Market Authority have take a position on derivative product with digital assets for instance, that may apply to MakerDAO for instance ;
    • a gambling application as it does not  do fit with the scope of this reguation in the absence of alea (it can be hard to predict the issue of a case, but it’s not an alea by itself).

Positively, Kleros may be defined as « a digital decision-making protocol based on crypto-economic mechanism » whereas one of its many applications can be an online dispute resolution system.

Dispute Revolution Conference

What consequences?

Kleros is both a digital protocol – that is not regulated – and an application or a platform which is subject to various regulation such as :

  • hosting provider or content editor liability : as an hoisting provider, Kleros Court will not be held liable for the harmful content that may be post during a case. Nonetheless, Kleros will need to, after being warn or obtain knowledge of this content, “acts expeditiously to remove or to disable access to the information” (European directive on e-commerce,  art. 14) ;
  • consumer law, when used by individual or legal entity outside its professional capacity, or commercial law when dealing with client such as exchange plateform (Ethfinex for instance). Consumer law all provide for a series of obligations to be fulfilled by the application/platform for the benefit of the user: prohibition of unfair terms, such as total exclusion of liability, attribution of jurisdiction, obligation to provide information, withdrawal period, etc. This obligations are usually reflected in the terms & conditions ;
  • GDPR regulation that require, among other things, to ensure the security and confidentiality of personal information, and to allow data subjects to exercise their rights (rectification, erasure, etc.).
    For Kleros, be “based on crypto-economic mechanism” means relying on “economical truth” (game theory consistent) as the driving force behind decision making. On the one hand, this choice from other value systems, such as morality (what is proper/improper) or judicial (in accordance with current law and procedure) “truth” ; on the other hand, this driving force is obviously very powerful and at the basement Bitcoin uncorship protocol, or free and unfettered markets. Nonetheless, it could be at the same time, the weakness of Kleros : what happened if irrationnal market behavior or manipulation affects decision making?

But one thing is clear: this limit is, to date, barely explored in the few real cases in which we have been able to participate, and would deserve more extensive research/experimentation.

Is Kleros may replace current dispute resolution systems ?

 As an unequal pyramid, the vast majority of disputes remain beyond the most visible systems of conflict resolution: state justice (1.) or digital arbitration solutions (2.). On that ground, where could Kleros fit in? Its advantages or disadvantages?

1. State justice: court of 1st degree, court of appeal, supreme court, etc.

This means of conflict resolution has the advantage of having political and institutional legitimacy as well as a highly developed and sophisticated legal and procedural corpus. While its usefulness in criminal matters, or for major disputes (divorce, real estate, etc.) is not in doubt, it nonetheless has major limitations: significant costs, duration (often several months or even years), paper.

Let’s be clear, without adequate procedural guarantees and application of the law in force, Kleros is not relevant to compete with.

2. Online dispute resolution services: current services represent a digitalization and modernization of archaic services : paper-based, time-consuming, expensive and indecipherable).

These services cover more litigation, and are more suited to the digital world. However, they constitute only an upgraded version of the existing system. In other words, they are an incremental innovation in dispute resolution, not a cutting-edge technology.

If we stick to online arbitration, the lack of procedural guarantee disqulified Kleros. More broadly, we can assume that Kleros does not follow the same purpose as current ODR due to its economic background.

3. “No-name” dispute resolution systems: all after-sales services, content moderation, marketplace disputes, in-game court, etc. → Kleros can be an appropriate mid-way and (more) neutral solution between the claim and the referral to a judge.

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