Introduction

 

In its most nascent form, a dispute arises because of difference in perception between individuals. They can be classified as a family dispute, business or even boundary dispute. The one thing that humans have effectively done in so many years of existence is to set up an effective dispute resolution mechanism. Early days it used to be the kings who acted as mediators between his subjects, followed by courts (family and criminal), followed by third-party arbitrators and even International Courts to handle inter-country disputes.  

When we look at our classification of disputes, it is not hard to see that business disputes would be larger in number, followed by family and then countries; after all, there are about 190 countries, how many disputes can each have with the other? Now, even family disputes are something which will seldom come to court as it is understood that the elders or well-wishers of the family will act as arbitrators and find an amicable solution. That leaves us with the business disputes which, by and large, is the largest classification.

Here comes the challenge too. In the book “The World is Flat”, the author Thomas L. Friedman argues about a future where globalization will in-effect dissolve boundaries and members of one country freely working with or for the other. If that has not already happened then it has happened now. Today freelancers on the internet can do a job for someone wanting their service in another country. That also means that disputes arising now can be international in nature. Therefore, you will see that many contracts will already have clauses which read something like this: 

(a) In the event of any disagreement or dispute between the parties arising out of any matter relating to or arising out of this Agreement, the Parties shall, in the first instance seek to resolve the matter by discussions between their respective representatives designated especially for this purpose. In the event these representatives are unable to resolve the disagreement or dispute within seven (7) business days, it shall be referred for resolution to a committee comprising a senior management (Vice President level or above) representative from each Party.   

(b) If the disagreement or dispute is not resolved pursuant to the above Clause within 30 days from the date it first arose, or if either party believes that it is unlikely to be resolved in this matter, any such dispute shall be finally referred to arbitration. Such arbitration shall be conducted under the Rules of Arbitration, by one arbitrator appointed in accordance with the said rules. The place of arbitration will be XXXXXXX. The language of the arbitration shall be English.   

I am sure many would have seen similar agreements or contracts. In case of international disputes, most likely, the place of dispute resolution will be the buyer’s jurisdiction (the place marked by XXXXXX). If the contract value is for a few thousand dollars, do we see a service provider actually going to the international destination to fight his case? Not likely. But does he or she want a fair treatment? The answer is yes. 

The challenge is not just such international disputes, even in many Asian countries or countries where the judicial system and processes are not streamlined, the process itself may take a number of years. So, there is hardly any faith in the judiciary to solve even a domestic dispute within a reasonable time, not to mention the cost again. The picture is quite disconcerting for the party which has been wronged and to add to that the monetary loss. 

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So, what do such people do?

They just give up and hop on to the next work. The money is obviously written-off. But if the question is what do they need? - well, such people hope for a sturdy, well-managed, experienced jurors led resolution, within a reasonable time frame. But do we have such a solution? Yes, we do. 

We are talking about Kleros, a dispute resolution mechanism on the blockchain. Since the inception of the blockchain in 2008, not many would have thought that one day an online court could be built on the blockchain. This is as innovative as innovation can be! Pinakion is the token which will power the Kleros economy. 

The very fact that this is a blockchain based solution, means that the decentralized nature of operation should benefit even the remotest of user capable of finding an internet connection. Justice is online!  

Let’s get to know Kleros a bit more.

Kleros leverages the technologies of crowdsourcing, blockchain and game theory to develop a justice system that produces true decisions in a secure and inexpensive way. 

Even in traditional cases and courts, the case is presented to people who are knowledgeable in law but not really in the matter that is disputed. The dispute could be something to do with website development or a case related to a blockchain itself, the mediator (court, judges, lawyers, etc.) may not be conversant with the technology and hence a possibility of the ruling going wrong. Even if the mediators do read and attempt to learn the dispute in question, it is going to take a lot of time. So, the fear is that one end the ruling may be incorrect and on the other end it may take a long time.

Kleros attempts to handle these issues in particular. The solution has a court and sub-court system which allows users to select one of them as they get into a contract. This is future-proofing should a dispute arise. These are the parameters that the user can select: 

• Number of jurors 
• Category of contract (sub-court) 
• Outcomes (Options will be provided)

The very fact that the user has selected a sub-court, means that the persons knowledgeable in that particular business engagement will be the jurors and available to them. Also, on the other side of the justice system, Kleros ensures that good jurors are incentivized and the system is built in such a way that wrong-doing, bribing or fraudulent take-over by 51% majority of the jurors is made expensive if not impossible. The system, therefore, works as knowledgeable individuals, with high levels of honesty, resolving a dispute and, in turn, earning from the correct ruling.  

In a nutshell, the system creates effective jurors and presents them to solve issues of parties requiring their intervention. So, the users are happy and so are the jurors. 

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But what about cost? Is it cost – effective than the traditional courts?

In the traditional court system, the costs incurred are direct and indirect ones. The direct ones are easy to figure out and they are lawyer’s cost, documentation cost, case registering cost and of course, cost of travel to and from the hearing location. These would be more or less the costs across the world. Now, what we don’t see are the indirect costs and these are the simple ones like food at the location or during travel to the location, cost of bringing along witnesses, if any, and the more complex ones like opportunity cost of losing work time to court and the mental stress which diverts our focus from work to resolving the issue. Not to mention if the cost of the dispute itself is low, the mental stress would be even more.  

Let’s look at Kleros and how it fares. Since this is a blockchain solution, travel cost can be undone. Also, since it is not the complainant or the disputing party which is selecting the jury, but a fairly robust system based on reputation, the lack of standard lawyer costs in traditional systems are also taken care of.  

The cost that therefore remains is the arbitration fees which can be worked out in any of the following ways:

1. It can be straightforward and ask the disputing party or the appealing party to pay the fee OR  

2. Both parties pay the fees and the winning party is reimbursed the fees (so virtually no expense for the wronged party). In case, one party refuses to pay the arbitration fees, the smart contract will automatically assume that the party which has paid has won and implements the smart contract OR 

3. Both parties pay the fees and the appellant pays a further stake equal to the arbitration fees. This ensures that frivolous cases do not come to the court. If the appellant wins, the fees and stake is reimbursed 

So, how much is the fees?

Appeal Fees = Number of Jurors * Fees per Juror

Depending on the sub-court selected the Juror fees can vary. So, in effect, the arbitration cost is the only direct cost for the users. Even if the case is international in nature it still can be contested. That should give some confidence to potential users about the system. 

Now, there is a possibility that the case is re-appealed if either of the party is unhappy with the outcome. In such cases, the jurors are not paid and the system selects twice the current number of jurors plus one. In such a case, the appeal fee is computed as:

New Appeal Fees = New number of Jurors * Fees per Juror – Juror fees already paid in the previous instance 

The increase is number of Jurors also ensures that appellants do not keep on appealing as the fees will rise exponentially. This also prevents any form of wrong-doing on the part of the appellant trying to bribe the known Jurors after the first instance. 

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How will this benefit small businesses? Will it help large corporations too?

Small Businesses

Small businesses do not have a coterie of lawyers waiting to handle legal problems. They simply cannot handle the cost of retaining such lawyers. Kleros, therefore, forms a better alternative not only for handling the dispute but also the cost of dispute. Both (handling dispute and cost) have been explained earlier. 

For example, a company supplying stationery to other small companies may not find the revenue earned enough to fight a case in a traditional court, should a dispute arise. However, Kleros powered justice system works just fine for them.

Large Businesses 

Now large companies can, in fact, retain a coterie of lawyers. Also, the number of disputes itself would be really high to warrant managing a huge team of lawyers. Do they need so many lawyers? Traditionally speaking – yes but solution wise – no. What is the solution? Now, such companies can decide to split the cases handled as “Large Scale with Low Value” and “Small Scale with Large Value” and can put the retained lawyers on the latter. For the former ones, they can go through Kleros. Of course, with the success of Kleros, they may even think to migrate part of the latter to the system. 

So, how does it work? Let’ take some examples.

Online Retailers

 

Now, these are companies which manage millions of orders every day. Out of the million customers receiving their orders, many may have disputes ranging from returns to delayed delivery to damaged delivery. Interestingly, it is not the online retailer who is the actual seller rather it is the smaller sellers who are using the online medium to reach customers. Such instances can be handled through the Kleros smart contracts between the buyers and sellers and the outcome could be to “fully reimburse the buyer” or “release payment to the seller” or in good faith “share the cost”, where the buyer and seller were both hit by a natural calamity at the location of delivery.  

Kleros smart contract can be enabled through the online retailer’s portal itself where the buyers place their order from.

Airlines

 

Here is another instance of large-scale issues: the missing bags in air travel. Statistics show that in 2016, six bags were mishandled for every 1000 passengers or 21.6 million bags mishandled in total. It cost airlines world-wide USD 2.1 billion. Now, just imagine 21.6 million cases to be dealt with in just one year. 

This is where Kleros comes to play. At the time of booking the ticket, the front end can enable a smart contract between the traveler and the airlines as a deposit (or insurance) for baggage management. If at the end of travel and a month thereof there is no dispute then the insurance money minus handling fees can be returned to the user and the airline. However, if a dispute arises then the same can be managed through Kleros with the option being “Give airlines a week to return baggage”, “Airline Pays (which could be smart contract to compute cost)” or “Customer Error” (in cases where customers have forgotten their luggage in the aircraft). So, in such cases, the insurance or deposit is returned to the winning party along with the said amount or baggage. If however, arbitration is required then the customer can pay the requisite arbitration fees online to get the process started. In the absence of Kleros, the arbitration fee is something the customer would have paid their own lawyer anyway.  

Benefits – Airline can now have a better working capital because it need not block funds for baggage handling as the completion of travel with no claims returns back the fees. So, they can plan the capital month-on-month instead of year-on-year. Customers are happy as the online arbitration system or the online system minus the arbitration takes care of the cost of mishandling, should it arise. 

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How does Kleros ensure fairness through its incentivization system?

The main participant of a dispute is the Juror and hence it becomes imperative to pay them for their efforts as much as incentivize them for being honest. The Kleros system is based on Thomas Schelling’s Game Theory. Thomas came up with the Schelling Point concept wherein the absence of communication people tend to coordinate their behavior. The same concept is used here. The Schelling Point for Kleros is honesty and fairness. 

The arbitration fees collected is what is distributed to the Jurors. The Jurors voting coherently, without each knowing what the other has voted, get their deposit back (which they paid to arbitrate the dispute) while the incoherent ones lose it. This lost deposit is redistributed among the coherent ones. Also, to prevent abstaining from voting by not revealing vote (which could be construed as being bribed) is also penalized and is considered a larger penalty as compared to voting incoherently.

In cases of appeal, depending on the levels of appeal, the tokens are redistributed at each level. In case of a level where no one voted coherently, the tokens are given to the winning party.  

Despite the system’s main intention of honesty and fairness, in some cases, honest jurors may appear incoherent. However, in most cases such jurors should make money and therefore, the net effect being that they continue to earn more for staying honest. 

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Use Cases 

Case 1: Ghostwriter 

Here is a case presented in video form of a ghostwriter.