Author And In Collaboration with ADR Arbitration Chambers
Miss Ashita Alag
Mr S.K.Joy Ramphul
Interaction Between Blockchain Technology And Arbitration
I. INTRODUCTION
In the past few years, words such as cryptocurrency, bitcoins and blockchain have been doing the rounds. With the advent of this new manner of doing business, things are bound to get shaken up in the arbitration world as well. Since arbitration is relevant to any scenario where a dispute (specifically a business/trade/commercial/contractual) may arise, the advent of a new manner in which people interact with each other commercially will automatically become relevant to arbitration. It is another avenue where a dispute may arise, and hence may require a dispute resolution method (which can be arbitration). However, before going to the link between blockchains and arbitrations, it is important to understand what these terms mean and how they work.
Cryptocurrency in simple terms is a digital currency. However, it is different from Fiat Money (money which the government has declared as legal tender), in one very important way, i.e. cryptocurrency is decentralized. This means that it is not controlled by central banks or governments, and it operates outside this framework. Bitcoin is a type of cryptocurrency just like Namecoin, Ether, etc.
Each cryptocurrency is based on a different blockchain technology platform. Blockchain is essentially the mechanism that authenticates a cryptocurrency. Blockchain can be understood as a register that records the transfers or transactions done using cryptocurrencies. However, it is decentralized. Blockchain is akin to a ledger, but is not maintained by any one person. Everyone on that blockchain has access to it. It is continuously updated as transactions occur on the blockchain. To put it simply, transactions are conducted using cryptocurrencies, and these transactions are conducted on the blockchain. Blockchain is like the plane on which these transactions are conducted. Before any transaction is added to the blockchain/decentralized ledger it is validated by a network of computers and this is how blockchain authenticates cryptocurrencies. Hence, every blockchain updates an ever growing ledger to track the ownership of the underlying asset (the cryptocurrency). All members on the blockchain platform can access the ownership information contained in this decentralized ledger.
Smart Contracts are legal instruments that rely on blockchains and are self-executory in nature. These are e-instructions given in the form of a code which will execute themselves on fulfillment of a specified set of conditions. Smart Contracts essentially include instructions for doing something on the happening of a contingency. As soon as that contingency happens (condition is fulfilled), the instructions are executed. In a nutshell, Smart Contracts are different from traditional contracts in two major ways. Firstly unlike traditional contracts, Smart Contracts are not written in traditional languages such as English or German, but are expressed entirely in code. Secondly, Smart Contracts will self-execute upon happening of the contingency mentioned in the code and on receiving the trigger. For instance, if A and B enter into a Smart Contract, whereby A agrees to sell an item to B, upon payment by B to A, then ownership of the item would automatically transfer to B once he makes the payment to A.
Hence, it is the blockchain that gives practical use to cryptocurrencies and Smart Contracts. Although Cryptocurrency and Smart Contracts may exist in a void, they are useful only when they can be transferred and executed, and this can only be made possible on a blockchain.
II. BLOCKCHAINS AND THE LAW
There have been speculations that the blockchain technology and self-executing Smart Contracts might replace the need for lawyers. This is far from the truth. Technology has been developing for years, and law has been dynamic enough to stand the test throughout years. Law has found ways to interact with new technology. Moreover the fact that any new technology has to pass the test of law in order to exist, only goes on to show how the blockchain technology may bring with it new avenues for lawyers. In fact, lawyers might favour recommending Smart Contracts as a measure to overcome enforceability issues of traditional legal agreements that they may be hired to draw up. Lawyers who make such recommendations will have to understand the types of clauses that go into Smart Contracts and how they function. Smart Contracts include operational and non-operational clauses. Operational clauses contain some kind of conditional logic. Such clauses would require that on the happening of a certain event, or on the fulfillment of certain conditions, or at a particular time, some specific determinative action is required to be taken. Non-operational clauses are those clauses that do not have a such a conditional logic. For instance, a clause that defines governing law if disputes arise, or what jurisdiction should the dispute be in, etc. Non-operation clauses would require the lawyer to exercise personal judgment with a sound knowledge of the consequences while giving advice with respect to Smart Contracts. Hence, with the coming of the blockchain technology and Smart Contracts, lawyers will have to adapt themselves to this new technology and their role will only become even more important at the time of advising their clients with respect to entering into and drawing up the operational and especially non-operational clauses.
III. ARBITRATION AND BLOCKCHAIN
Blockchain has brought with it a new way of doing trade and as with any avenue where trade is involved, disputes are bound to arise. With the fast paced growth of cryptocurrencies, the need for an effective dispute resolution mechanism which is suited to unique nature of blockchains is bound to arise.
Arbitration has provided parties with a mechanism through which they can resolve their contractual disputes outside a court of law, and it has given them the freedom to choose their arbitrators, the governing law, the procedure, etc. It is by virtue of this flexibility and neutrality that arbitration has come to establish itself as a favoured dispute resolution mechanism for contractual disputes. Arbitration has established itself as the preferred dispute resolution mechanism especially international contractual disputes, as it tackles cross-border enforceability issues that come with other dispute resolution mechanisms. These are the characteristics that will make arbitration the go-to dispute resolution mechanism for disputes arising out of the use of decentralized digital assets as well.
1. WHY ARBITRATION IS IDEAL FOR SMART-CONTRACTS
Smart Contracts and arbitrations have one very important feature in common i.e. decentralization. Decentralization makes arbitration the most suited dispute resolution mechanism for disputes arising out of Smart Contracts. It is in this decentralized aspect of international arbitration, that its flexibility and ease of enforcement find place.
International Arbitration provides a decentralized substitute to domestic tribunals and also results in enforceable awards recognized under the New York Convention on Recognition and Enforcement of Foreign Awards. Going under the traditional mechanism, i.e. national courts, would not only go against the decentralized manner of functioning that persons functioning over blockchains recognize, but will also not assure a problem-free enforcement. This is strengthened by the fact that there is no single convention for recognition of national court judgments across the board, however with respect to arbitral awards we have the New York Convention to which almost 160 states are parties. It is well-recognized that the blockchain technology is fairly new and is a departure from the traditional way of conducting transactions. This specialized way in which trade is conducted, will also require experts who understand how blockchains, Smart Contracts and cryptocurrencies work and interact with legal obligations of the parties in question. International Arbitration provides parties with this flexibility of choosing experts as arbitrators who understand the complexities of this technology as well as of choosing an arbitral seat in a jurisdiction that is more supportive of this technological advancement.
Persons indulging in transactions over blockchain will have a preference for a manner of functioning that is decentralized, simple and fast right when they initiate a transaction. It is due to these preferences that they have chosen to trade over Smart Contracts rather than trading through traditional contracts. To begin with, they would have already moved away from traditional contracts involving paperwork and other complexities. It is only natural that such persons will look for a dispute resolution mechanism with the same characteristics. This need is met by arbitration more than it is met by another dispute resolution mechanism. Arbitration provides them with the greatest freedom to choose a convenient place for the arbitral process, to choose experts in the requisite field as arbitrators, to choose the procedure most convenient to them (in fact with the advent of online-arbitration, they may even pick that as the means of dispute resolution, if the dispute is not excessively complicated), etc. Moreover arbitration is widely accepted as the most efficient and effective means of resolving commercial disputes leading to an enforceable award. It will help parties of Smart Contracts to steer clear of having appearing state courts, which may, very often be a jurisdiction in another corner of the world, and face unfamiliar and in some cases unfair procedures of foreign courts. Hence, it can reasonably be concluded that expectations of parties to Smart Contracts will be met more by arbitration than by any other dispute resolution mechanism.
2. PRACTICAL INTERACTION BETWEEN ARBITRATION AND BLOCKCHAIN
While arbitration seems to be the most suited mechanism for resolution of disputes arising out of Smart Contracts, blockchain technology also provides the world of arbitration with the opportunity of further decentralization, and perhaps to move towards a digital dispute resolution forum. The interaction between blockchain and arbitration could help both the mechanisms grow and become more convenient for their users.
While critics may say that technology in today’s world changes at the drop of the hat and blockchains and Smart Contracts are buzzwords that would vanish as soon as they become viral; there is some merit in believing that decentralized ledger technology in the form of a blockchain is here to stay. Hence, it is beneficial if we tailor a dispute resolution mechanism to tackle disputes arising form the same. Introducing and pushing for arbitration in Smart Contracts, and adapting arbitration to the needs of disputes arising out of Smart Contracts, will be beneficial in the long run for both the world of blockchain and the world of arbitration.
a. Traditional Clauses in Smart Contracts
Simply because Smart Contracts are self-executory in nature and based on codes, does not mean that disputes will not arise. It is not enough for parties to enter into Smart Contracts containing instructions on taking a designated action on the happening of a certain event. It is also important for parties to link these Smart Contracts to traditional agreements, in the sense that parties must agree on a dispute resolution mechanism, an institution for resolution of the dispute, the law governing their obligations, etc. Although Smart Contracts might be the modern technology for doing business, including some of these traditional non-self-executing clauses in will help the parties in case a dispute arises. Without such clauses, parties will be met with uncertainty, and this uncertainty will go against their intention of implementing convenient ways of carrying out transactions. The parties would be in the dark with respect to the laws governing them, the forum to which the dispute has to be submitted, and they might even be dragged to national courts of one of the parties. To avoid these situations, it makes sense for the parties to include certain traditional clauses to ensure smooth functioning of their transactions in case a dispute arises. Such a mechanism will ensure that the operational clauses of a Smart Contract continue to function, and the instantaneous execution and convenience that Smart Contracts come with is not compromised; and at the same time, in case of a dispute, the parties are not left in the dark and they have a fixed dispute resolution mechanism/institution in place.
However, in case of Smart Contracts, it is not simply two parties entering into a contract and performing their parts. These contracts are self-executory and rely on blockchains. For instance, if A and B have a Smart Contract whereby A supplies goods to B, the host management arrangement or the administrator will operate through computers physically located in one country to trigger payments (determinative action) from B to A, on supply of the goods (happening of the certain event). If the Smart Contract between A and B provides for arbitration in London, and the agreements entered into between the parties and the administrator (A and the administrator, B and the administrator) provide for litigation/arbitration in Singapore, it could lead to certain complications. Disputes could arise due to various reasons such as non-delivery of goods, non-payment or a failure in the software to carry out the self-executing part of the Smart Contract, etc. One party could move against the other in London, and one party could move against the administrator in Singapore. Similarly, one proceeding could result in arbitral proceedings, and the other in litigation proceedings. This would only cause confusion and lead to multiple proceedings in different jurisdiction, which might even lead to conflicting awards/judgments.
Therefore, each blockchain can consider specifying certain standard traditional clauses for all Smart Contracts entered into by relying on that particular chain.
In order to avoid this, the solution of an umbrella dispute resolution clause has been proposed by Mr. Lee Bacon of Clyde & Co. One umbrella clause providing for the governing law and dispute resolution mechanism throughout the chain will avoid multiple proceedings and multiple awards. It will provide for uniformity in resolution of all the disputes arising from that particular blockchain.
In fact, such an umbrella clause will cut the time and costs parties would incur for entering into individual dispute resolution and governing law clauses. Assuming that for parties entering into Smart Contracts, convenience and speed of transactions is a priority, pre-decided traditional arbitration and governing law clauses which will help the parties get speedier and enforceable awards in case of a dispute, will only further this intention.
However, one of the very basis of arbitration is party autonomy. This party autonomy gives the users of arbitration the freedom to chose what law to apply to their transaction, the freedom to choose the seat for the arbitration, etc. By providing for a standard umbrella clause all across the blockchain, we might be attacking the autonomy of the parties trading over that blockchain. The questions whether it is fair to almost force parties to accept a certain seat or a certain governing law chosen by the blockchain for all its participants will have to be considered. However, the contrary, where all parties are free to choose their own specifications (considering that millions of people would trade by relying on one blockchain), leading to multiple proceedings for the same cause of action over differing jurisdictions is also not desirable. In fact, such a scenario will make using blockchains and Smart Contracts excessively inconvenient for its users. One way of finding an equilibrium can be that there can be a few variations in these traditional clauses to give options to entities trading on that blockchain in order to give them a certain degree of flexibility. For instance, it can be considered to give options between a few different institutions, that parties may opt for depending on locational convenience. A balance will have to be struck between absolute flexibility given to parties and the uniformity required through the blockchain with respect to disputes related to Smart Contracts on that blockchain.
b. Dispute Resolution Platforms on Blockchain
In recent times there have been many attempts to create platforms for dispute resolution in cases involving smart contracts on blockchains.
CodeLegit is one such platforms that conducted its first blockchain based smart contract arbitration in 2017. As per its website, its mission is to “…bridge the gap between technology and law by auditing the compliance of software code.” Among other things it provides for a blockchain arbitration library providing ready made smart contracts which include the Codelegit Arbitration Certificate. It provides for an appointing authority which will appoint the arbitrators and all communication for the proceedings occurs via email or through videoconferencing for the oral hearings. Disputes are referred to the arbitrator and during this the execution of the smart contract is paused. Once the decision is rendered the smart contract continues its execution as per that decision.
Kleros, is another platform and it titled itself as the “Blockchain Dispute Resolution Layer”. It purports to connect the parties requiring dispute resolution to skilled jurors. The smart contract must choose Kleros as the dispute resolution platform, and on the occurrence of a dispute, the dispute is submitted to Kleros that draws a Tribunal from the crowd. These jurors eventually cast their vote and the decision is enforced by the smart contract.
An example of how end-to-end blockchain based arbitration will work in its practicality has been presented by OpenLaw. A party can sell its product on a marketplace and it will create a legally complaint bill of sale that incorporates OpenCourt arbitration system. After the agreement is signed, any payments by the buyer are placed in an virtual escrow account. The smart contract enables either of the parties to trigger online arbitration. Once certain formalities are completed OpenCourt will send a smart contract notice of a confirmed dispute and then it will transfer all the digital assets to a virtual escrow account, thus, locking them until the arbitral tribunal renders a decision. The interface allows the party to submit a statement of facts, agree on the blockchain address of who they choose as the arbitrator, etc. The interface allows the arbitrator to review the statement of facts, render a decision which is automatically transferred through from the assets locked in the escrow.
Even though these and many more platforms provide for a simplified view of how dispute resolution in case of smart contracts might work, it is a start that will lead us to a more convenient process of resolving disputes involving smart contracts.
IV. WAY FORWARD
To push arbitration in the area of blockchains, we would need arbitration clauses tailored to the need of cryptocurrencies. Arbitral Institutions will also have to mould their rules and procedure to suit the needs of Smart Contracts. Smart Contracts present a whole new world for arbitration to make its way into. Arbitration and the blockchain technology have a lot in common in their manner of functioning and in the convenience they provide to their users. It is for that reason that arbitration can prove to be the most suitable dispute resolution mechanism for disputes arising out of the blockchain technology.
While the arbitral community will have to adapt itself to the challenges brought forward by the blockchain technology and prove to be the most suitable dispute resolution mechanism, those entering into Smart Contracts must also consider the advantages of including certain traditional non-operational clauses in their Smart Contracts which might come handy on a rainy day when a dispute arises. The situation is complicated by the fact that in Smart Contracts it is not just the two parties that may be involved, and the fact that the Smart Contract relied on a blockchain for its execution which may also falter only adds to the difficulties while dealing with dispute resolution. While the suggestion of a standard umbrella clause with standard clauses for all those trading over that blockchain to provide for uniformity has some merit, how this will play out with the inherent characteristics of party autonomy provided to the users of arbitrations is uncertain. While have standard clauses with a few variations to give options to the users of the blockchain, could be a manner of a sticking a balance between absolute uniformity and absolute party autonomy, how this plays out practically is yet to be seen.
Both arbitrations and blockchains have a lot to learn and gain from each other. Arbitration may be the most suited mechanism for blockchains, but it has to adapt itself to the challenges posed by this new technology to gain the faith of its users. Arbitral institutions will also have to go that extra mile to increase their presence in the blockchain world, so as to have more Smart Contracts rely on arbitration. Exciting times lie ahead, as we get to see the interplay between arbitrations and the blockchain technology and how they act and react with one another.
References:
1. Francisco Uríbarri Soares, ‘New Technologies and Arbitration’, in Indian Journal of Arbitration Law (Vol. VII Issue 1) (2018), at pp.84-103
2. Dena Givari, How Does Arbitration Intersect with the Blockchain Technology that underlies Cryptocurrencies?, Kluwer Arbitration Blog (May 5, 2018)
3. Derric Yeoh , Is Online Dispute Resolution The Future of Alternative Dispute Resolution? Kluwer Arbitration Blog (March 29, 2018 )
4. Dispute resolution in blockchain: do you need an umbrella? By Lee Bacon, Clyde & Co., availble at https://www.clydeco.com/insight/article/dispute-resolution-in-blockchain-do-you-need-an-umbrella
5. Whitepaper: Smart Contracts and Distributed Ledger – A Legal Perspective, Linklaters (August, 2017) available at: https://www.isda.org/a/6EKDE/smart-contracts-and-distributed-ledger-a-legal-perspective.pdf
6. How Smart Contract Arbitration Works, available at: http://codelegit.com/2017/06/24/how-smart-contract-arbitration-works/
7. CodeLegit Website: http://codelegit.com
8. Kleros Website: https://kleros.io
9. “OpenCourt: Legally Enforceable Blockchain-Based Arbitration”, available at: https://media.consensys.net/opencourt-legally-enforceable-blockchain-based-arbitration-3d7147dbb56f