The emergence of Blockchain as a disruptive technology in not just the commercial industry, but also in real estate, health care, content distribution, etc., has drawn an inquiry on the applicability of the technology as a means of dispute resolution.
The phrase ‘one size fits all’ very much applies to the description of Blockchain, as it is one of the trending subjects of the 21st century.
This is because it has a diverse and transformative potential in application in most aspects of human interaction. Regulators, academics, legal practitioners, and technology enthusiasts are all promoting the inclusion of the blockchain in various industries with arguments of numerous advantages.
This article is based on THE LEGAL PRACTICALITIES OF THE USE OF BLOCKCHAIN AS A FORM OF ONLINE DISPUTE RESOLUTION by T. Koroye.
To read more about ODR; What is ODR (Online Dispute Resolution)? What does ODR mean?. You might also find Artificial intelligence in ODR interesting too, Artificial Intelligence Acceptability in Online Dispute Resolution
The Technology Known as Blockchain
Blockchain is the foremost Decentralized Ledger Technology (DLT) that allows network members to share, store and transmit information in a continuous manner in the form of ‘blocks’. These blocks contain series of data from past transactions accessible to participants of the network with either a private or public key.
Satoshi Nakamoto introduced the concept of Blockchain in 2008 in a paper on bitcoin and the great financial revolution introduced by cryptocurrencies. However, this sparked interest in the technology itself and stretched beyond financial activities to include governance, real estate, entertainment, and voting, etc.
The types of blockchain depend mainly on the members of the network with access to the block. blockchains, therefore, divide into permissioned and permissionless, each, in turn, divided into public and private.
Blockchain performs on two principal mechanisms. The first is known as a decentralized and distributed network that ensures that the technology can survive data breaches and other malevolent attacks as there is no regulatory central authority. The second is consensus approval where new blocks are added on validated approval by members of the network.
These two mechanisms make blockchain a well secure technology for sensitive data storage and protection.
Introduction of Blockchain into Online Dispute Resolution
It is imperative to state that Smart Contracts are an essential aspect of blockchain, as they possess the computerized transaction protocol that executes the terms agreed on by participating parties in the network.
Legal scholars who hold more traditional views have postulated that Smart Contracts can never be legal contracts as they lack the foundations of a contract, such as a consensus ad idem, offer, acceptance, and intention to enter into a legal agreement. Thus they fail to qualify under the provisions of the New York Convention.
Nevertheless, the UNICTRAL model law has made a profound interpretation of Article II to include any form of communication. The communication carried out through blockchain is through algorithms, and the subsequent signing in by parties with their private keys.
This can transcribe the intentions of parties to be interpreted to cover the legal concepts of offer and acceptance.
Consequently, developed states are on the verge of incorporating blockchain into the state-recognized ODR platforms. An example of this is the application of blockchain technology by the Chinese government to the Hangzhou Westlake Court with planned cooperation by the Hangzhou Blockchain Technology Research Institute.
The aim is to use blockchain technology in preventing digital evidence tampering. In addition, the Guangzhou Arbitration Commission has issued the first arbitral award based on the ‘Arbitration Chain’.
Applying Blockchain to Online Arbitration
As aforementioned, blockchain is a buzzing topic in today’s legal sphere. Legal practitioners and technology enthusiasts deliberate on the nexus between the two spheres, especially concerning international commercial arbitration.
Arbitration practitioners have argued that blockchain is not a suitable platform to conduct arbitral proceedings, stating that the technology is “quite slow and expensive to store massive volumes of data.”
However, while the use of a public permissionless blockchain might be slow to store such data, private permissioned blockchain is the best suited for online arbitration. It has the potential to process thousands of transactions per second with low costs.
Within the bitcoin system, users have formulated a private adjudication system that works essentially with two digital keys (public or private). Therefore, the parties can have access to the coins without dispute.
However, in case of a conflict, parties can contact a private adjudicator who will have a third access key into the network. He/she will assess the facts through the blocks and trace the origin of the dispute, to determine the case.
Blockchain is, therefore, argued to be the most practical and advanced form of online arbitration due to its technical and decentralized attributes.
Because Smart Contracts are self-executing and dispute resolution is rendered obsolete, the necessity of third-party enforcement might be approached with skepticism.
However, Smart Contracts are liable to disputes due to a number of issues such as a human error in coding, which definitely makes third-party adjudicators a necessity. More about blockchain and smart contracts here.
The Legal Practicalities of the Use of Blockchain for Online Arbitration
Aside from the technical inhibitions in the complete adoption of blockchain, such as technical know-how, space for retention of data, protection of confidential information, etc., blockchain is not currently used in all earnest for international offline commercial transactions. This is due to the legal ambiguities, some of which have been previously hinted at and addressed above.
These legal uncertainties span from the question of the legality of smart arbitration contracts (and if they fall under the ambit of forced consent of parties who decide to use blockchain as an online platform) to the enforceability of the arbitral awards.
Thus, legal uncertainties arise from the initiation of the arbitration agreement through blockchain to the recognition of the award by the State.
In this article, we will focus on the ambiguities in the applicable law of arbitral proceedings (lex situs) and the practicability of the enforcement of the award.
I. Lex Situs in Blockchain Arbitration
An essential and admirable feature of Blockchain is its decentralized nature, as it operates on a peer-to-peer operational system above any regulatory authority. This, however, poses a legal uncertainty as to the governing law applicable to the international commercial dispute, also referred to as lex situs.
Most international arbitration statutes recognize this as provided in Article 14 of the International Chamber of Commerce (ICC) Arbitration Rules and Article 16 of the London Court of International Arbitration (LCIA) Arbitration Rules.
This position is recognized in the case of Hiscox v. Outhwaite where the House of Lords held that the seat of the award is where the contract was signed. The seat of arbitration will determine the level of state intervention in the arbitration process and the arbitrability of the subject matter. It will also determine the degree to which the arbitral award can be challenged.
Legal jurists, hence, have criticized the practicality of the use of blockchain as a platform of online arbitration. This is because Smart Contracts are enabled through distributed nodes that cut across multiple legal jurisdictions, especially in instances of international contracts. Consequently, they obfuscate the actual lex situs.
In rectifying this uncertainty, scholars have proposed that the arbitrators can apply the principle of ex aequo et bono by resolving the dispute on what is deemed fair and just in the case of no clear applicable law. Hence, arbitrators in blockchain assume the powers of amiable compositeur to carry out their duties.
This position has been criticised due to the very nature of the technology itself, as it excludes parties through “forced consent” from expressly vesting arbitrators the powers to apply the principles of ex aequo et bono.
legal jurists also propose the adoption of the jurisdiction of the fifth party in the arbitration agreement, referencing the provider of the online arbitration service, as the lex situs of the dispute.
This theory proposes that the service provider maintains a degree of responsibility as owners and maintainers of the service, and therefore, can be accorded the appropriate seat of arbitration.
II. Enforcement of the arbitration award
As stated earlier, the New York Convention stipulates in Article V the prerequisites of a valid arbitral award. It states that the award must be written for it to be recognized and enforced in another state.
This is necessary because the enforcement of an award requires judicial assistance from the state where the award is to be recognized. States are empowered to decline enforcement of an award in its jurisdiction on the ground of public policy.
Blockchain, however, provides automatic execution of the arbitral award through Smart Contracts for online disputes relating to cryptocurrencies. Advocates for the inclusion of blockchain argue that this is a redeeming factor of the technology as it is an effective and practical implementation of the award without encumbrances.
Legal scholars, who are of the view that this is a deviation from traditional commercial practice, have criticized this. They claim that it will automatically enforce the award (this mostly involves the transfer of cryptocurrencies from one wallet to the other) by bypassing the public policy position of the state.
This school of thought also argues that such enforcement will disregard the principle of favor debtors. This principle protects the interests of the debtor of the award to ensure that his rights are not violated in enforcement.
As contractual relations become autonomous through novel technological platforms, the role of dispute resolution is also expected to adapt to these changes.
While legal skepticism and uncertainties are obstructing the adoption of blockchain as ODR or its implementation in offline transactions, all developed states are anticipated to incorporate it in their state recognized ODR platforms.
To overcome these uncertainties, the “Oracle” can be used in the blockchain platform to serve as an interface between technology and the real world, which can restrict the automatic nature of blockchain during arbitral proceedings. This makes it more suitable to resolve offline commercial issues. In turn, it resolves most of the highlighted legal issues.
You may find other research such as Decentralized Justice: A Comparative Analysis of Blockchain Online Dispute Resolution Projects to be of interest too.