[Prakarsh and Shruti Mishra are third year students enrolled at the National Law Institute University, Bhopal.]
Any discussion on the issue of blockchain arbitration must begin with an understanding of the technology involved. Blockchain technology is not as new as it is perceived to be. The whitepaper released under the pseudonym of Satoshi Nakamoto brought this technology to fore, originally designed as a public ledger, more than a decade ago in 2008. This technology ever since its inception has rapidly been utilised for several other applications ranging from healthcare, blockchain governance, to even blockchain music.
One of the more notable aspects of this development has been the advent of blockchain in the realm of dispute resolution. The first ever arbitration court for blockchain was established at the Chamber of Commerce of Blockchain and New Technologies in Poland, Europe. Recently in 2020, Japan designed a blockchain based digital court to settle legal disputes. This Digital Court is vested with the responsibility to decide issues of agreement breaches. Based on the submissions of the party and the assessment of the underlying contract, the system would generate an outcome on who deviated from its contractual obligations.
This emergence of blockchain in ADR is a natural concomitant of the increasing relevance of technologies such as smart contracts. A smart contract is usually defined as a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. They are executed when the underlying conditions of the contract are met.
Such contracts, as opposed to the traditional contracts in writing, are entirely based on coded language. The legal validity of such contracts could be a cause for concern especially in Common Law jurisdictions where emphasis is often placed on the ‘written’ nature of the agreement entered into between ‘persons’. As these legal technicalities may restrict the scope of smart contracts, it potentially leaves greater scope for the more ‘flexible’ and ‘less formal’ arbitral proceedings to take over adjudication of disputes arising out of smart contracts. This flexibility is rooted in the concept of party autonomy and the fact that Arbitration does not involve as many procedural restrictions as in litigation. The parties can themselves choose an Arbitrator who would be best suited to understand the nitty-gritties of such technology. While the approach of Common Law jurisdictions towards the validity of such smart contracts might raise concerns at the stage of enforcement, it is settled in the realm of National and International arbitration that the arbitration agreement has a separate standing from the main contract. Hence, a mere challenge to the validity of such contracts cannot restrict the jurisdiction of the Arbitral tribunal.
How Would Blockchain Arbitration Help?
The idea of implementing an automated system of enforcement of party obligations through smart contracts has garnered substantial support. As such, the utility of this technology can be legally secured if similar systems of automated dispute resolution are brought into existence. A brief outline of the procedure is given below.
Once a party defaults, the automated arbitration clause would be triggered. This automation would include the exchange of the party’s submissions, including claims, counter-claims, evidence, appointment of the arbitrator and other communication in a blockchain based platform. Once information is stored on the Blockchain network, it is nearly impossible to tamper with. This is because different copies of the blockchain are stored in multiple ‘nodes’ which verify the information amongst themselves. If a person wishes to change the information, he will have to do so individually for each copy, which itself is an arduous process given the hashing technology used by blockchains. In simple words, hashing technology gives every set of data a specific number which is used to verify the data’s integrity. As a result, even slight tampering with the data would result in a change of the hash number. Blockchain technology due to its immutability is also an efficient way of storing the evidence as the likelihood of the evidence getting tampered with is zero. Its efficacy can also be found in the operation of Read how the Chinese Internet Courts.
How Does Blockchain Arbitration Work?
Blockchain arbitration would be incorporated as a clause within the smart contract, written into blocks of codes and stored on blockchain. This is similar to arbitration clauses found in traditional contracts, with the only difference being that this happens through the pre-coded programming language of the smart contract. The inclusion of an arbitration clause would necessarily imply the consent of the parties to arbitrate the dispute. Such a clause would operate on conditional programming with events such as failure to make payment or delivery or inconsistent performance of obligations triggering the activation of the choice to arbitrate. Once the submissions are made, the Arbitrator would render the award and the smart contract would automatically reward or penalise the party based on the outcome by settling the fee from the initial payment that was already made under the smart contract. In other words, the parties would deposit a sum as security under the contract, from which compensation shall be deducted based on the outcome of the case. This demonstrates the immediate enforceability of the arbitral award. We already have an example in the form of the Aragon court that is using a similar modus operandi.
Blockchain could also act as an efficient repository or database of awards for arbitrators to take reference from. However, the question persists as to whether blockchain technology would take over only some aspects of the arbitration proceeding or the entire procedure. Essentially, is there is a possibility that the entire procedure of arbitration is transformed into a blockchain based AI algorithm system?
There are two possible ways in which blockchain can be used to conduct arbitration. First, where blockchain is only used as a storage medium for all the documents to be securely kept. Basically, this entails the preservation of legal submissions, with an arbitrator presiding over the Tribunal. The choice of arbitrator would either be left with the parties or read within the understanding of the smart clause. As mentioned before, blockchain is a good repository for storing documents as it is immutable and cannot be tampered with. This enhances the efficiency of the proceedings. Secondly, it is possible that the entire process is automated, and an AI generated outcome be made on the basis of the submissions made by the party. Decisions made by AI and human reliance on the same is not something that is unheard of. One such example may be of RoboAdvisors. RoboAdvisors in the realm of finance and banking are automated programmes wherein the user feeds his data and preferences to the code, and the code then determines the most suitable options for him. In the U.S., RoboAdvisors have been given equivalent legal recognition as human advisors. They have to comply with the Securities and Exchange Commission guidelines and have the same liability as that of a human advisor.
Similarly, there are platforms such as OpenLaw that provide specially designed software which generate decisions based on the submissions and precedents in the area of dispute. These systems are largely based on Blockchain technology for storage of data and details of transactions. Thus, automation of arbitral proceedings based on pre-set precedents and analysis of subsequent input is not too far in the future.
Currently, AI might not be the most accurate in such complex decision-making processes, however, a code that can analyse facts to match similar instances recorded in the database and provide a decision is within the realm of possibility. Such automation will not only get rid of human bias but also address issues of efficiency. The use of blockchain also ensures confidentiality and records every submission with a timestamp. Parties that have simpler factual circumstances than others may refer to an automated arbitral proceeding to get an instant decision.
The different elements regarding applicable law, seat of arbitration, convention compliances such as the requirement of ‘an arbitration clause in writing’ under the New York Convention and other statutes may raise multiple red flags to the use of automated dispute resolution process. However, the validity of smart contracts has started gaining recognition by jurisdictions across the world. The UNCITRAL Model Law on Electronic Commerce 1996 allows States to follow the concept of ‘functional equivalent approach’. This implies that if an agreement qualifies the requirements of a traditional agreement ‘in writing’ and fulfils the necessary purposes, it can be interpreted as being ‘in writing’. In the U.S., functional equivalence has also been recognized at the federal level by adoption of the Uniform Computer Information Transactions Act (UCITA) and the Uniform Electronic Transactions Act (UETA) as model laws for the States. It is therefore reasonable to conclude that a smart arbitration clause would qualify as an agreement ‘in writing’. The concerns surrounding the choice of arbitrator and seat of arbitration would largely be covered by the concept of Party Autonomy. Parties to a dispute would have already chosen, by way of their implicit consent, that their dispute be governed by the provisions of this clause. In this event, it is required that the parties be aware of the content of the smart contract they are entering into.
Secondly, an inclusion of advanced technology would also mean development, maintenance, implementation and regulation costs. This may increase the overall costs involved in the entire process. Another concern over a complete automation of such an arbitration would be the lack of human intelligence and meta-cognition in AI generated decisions. However, disputes arising out of smart contracts are largely similar in terms of the facts involved and may not require a distinctive element of assessment on a case to case basis.
Overall, the fusion of Blockchain Technology, AI and Arbitration is entirely possible in the near future. As States begin to recognise recognize the inevitable integration of technology in every aspect of human life through suitable sui generis legislations, the chances of them being able to keep their head above water amongst the growing global competition would increase substantially.