Friday, August 10, 2012

Prepaid Arbitration

How do you settle disputes in the absence of a legal system? Or more bluntly, how do you get people to uphold their end of a deal without pointing a gun at their head?

The best answer I've found came from someone who named his avatar Judge Jude.  His avatar and the project we were mutually involved in passed into the aether long ago, so I can't provide any references.  I also haven't seen this idea anywhere else, but I only claim copyright for these words, if anyone wants to take the idea and implement it, please feel free.

There already is a mechanism for settling disputes without resorting directly to the legal system: arbitration.  All the "judges" you see on television, whether they were judges previously, are technically acting as arbitrators.  One feature of most arbitration is that the arbitrators only get involved after a dispute is arisen.  This can make it a contentious and expensive process.

Judge Jude's innovation was to get involved before the contract was signed.  His fee was a certain small percentage of the contract.  (How small can be an area of competition between different arbitrators.)  The contract wasn't binding until both parties and the arbitrator signed off on it.  This makes for great incentives.  The arbitrator has a huge incentive to make sure that everyone understands and agrees to exactly what they're getting into, so there won't be a dispute later on.  The better he does this job, the more satisfied his clients will be, the better his reputation, and the more he can charge.

What if a dispute does come up, and someone does not want to comply with the arbitrator's decision?  That person then gets blacklisted: the arbitrator will no longer adjudicate any disputes or sign off on any contracts for that person.  If they do that several times, they will soon find no one wants to do business with them.

Settling disputes before they arise will be key to prosperity on the Long Ascent.


  1. A good idea, but I wouldn't cut in such an arbitrator for a percentage. A flat fee, or hourly perhaps. Especially as money itself is likely to be a tenuous thing, going forward.

    1. Thank you very much for this comment. Paying by the hour is PRECISELY what is wrong with our present legal system. There is a huge incentive to make things more difficult so they take longer. This is why in many disputes the only winners are the lawyers.

      The problem with a flat fee is that if it is high, it discourages people from using the service, and if it is low, it discourages arbitrators from taking complex contracts. A uniform percentage ensures that each contract gets the attention it deserves. A $30 million deal really requires a lot more work than a $30 deal.

      A fixed percentage does not necessarily require money. For a trade of 200 bushels of apples for 200 sheep, the arbitrator could get a bushel of apples and a sheep for a 1% fee.