The issues in ODR are numerous. They influence many aspects of ODR, such as feasibility, utility, ethical implications, and acceptance in legal and economic communities.
All of these issues are discussed and examined to see how we can overcomes the drawbacks of online dispute resolution (ODR) for global adoption and acceptance.
The following article is extracted from the United Nations Economic Commission for Europe Forum on Online Dispute Resolution – Geneva, 6-7 June 2002,” Online Dispute Resolution: an Overview and Selected Issues” by Thomas Schultz.
- Obstacles to Binding Online Arbitration
- Effectiveness of Non-Binding ODR Methods
- Financial Structure of ODR Providers
- Technological Architecture of ODR Systems
You may want to quickly refresh your knowledge on ODR here; Online Dispute Resolution: An Overview and on Arbitration here; Online and Offline Arbitration: What is the Difference?.
Obstacles to Binding Online Arbitration
In the current state of legislation and practice, there are many obstacles to resolving a dispute through arbitration proper provided online. Obstacles arise at almost every stage of the process: the agreement to arbitrate, the arbitration procedure, and the recognition and enforcement of the award.
Validity and laws affecting the dispute
Agreements to arbitrate online face problems of validity and enforceability. First, most national laws and international conventions still require the arbitration agreement to be in writing.
Their current interpretation does not include its being recorded by electronic means. But agreements to arbitrate online are usually entered into online.
Although it is certainly time to recognize that an electronic document can be the functional equivalent of a paper document. This leads to some technical difficulties.
The electronic document must include the identity of the parties, the agreement itself, and the content of the agreement. This information must be stored in a manner allowing its accessibility for further evidence and its admissibility as evidence.
This information must be stored using a technology that permits long-lasting compatibility and which excludes any serious risk of manipulation of the stored data. This raises technical issues, which causes legal controversies as the technological means employed may be characterized differently under different laws.
Enforceability of dispute awards
The second issue is their enforceability. Many arbitration laws limit the arbitrability of disputes where the parties have substantially different bargaining powers. They seek to protect tenants, employees, or consumers.
Since the near future of ODR is likely to involve primarily business-to-consumer (B2C) transactions, many current arbitration laws are obstacles to the development of online binding arbitration.
This problem may be overcome by using unilaterally binding arbitration agreements that would bind only the stronger party, leaving the weaker party free to decide whether to litigate or arbitrate.
But, in some cases, unilaterally binding clauses have also been held not enforceable on the basis that if one of the parties is not bound, none are.
The arbitration procedure faces obstacles of due process and electronic evidence. With due process, the problem is that one of the fundamental characteristics and advantages of ODR is speed, which implies simplified procedures and less formalism. But too few opportunities to be heard are a possible jeopardy to due process.
Exactly how much one can expedite an arbitration before violating due process requirements, meaning the award risks being set aside in court, is not a clear matter.
As electronic evidence is concerned, the issue is how to create a communication scheme allowing proportionate and effective means for the receipt of evidence. The basic principles are that the communication scheme will permit the production of documents that authenticate the identity of the parties at the time of the transaction and during the ODR procedure.
This shows that a file or program has been entirely transmitted to the buyer in the case of an online contract. And it shows the contents of a record have not been manipulated.
Recognition of the dispute award
Finally, online awards face problems of recognition and enforcement. For instance, under the New York Convention traditionally interpreted, the party moving for recognition or enforcement must supply an award that is in writing, signed by a majority of the arbitrators, and is either the authenticated original or a duly certified copy.
These conditions could be met if electronic documents qualify as writing and if an electronic signature is used because it authenticates the sender as well as the content.
But these solutions do not correspond to the current wording of the New York Convention, nor to its common interpretation. In addition, the question arises of who should send the award to the authority in charge of recognition or enforcement.
If it is the moving party, the is a risk of manipulation, because the document has been in the electronic storage of the moving party. Even if the document would be ‘frozen’ in its repository by technological means to ensure its authenticity, this does not inspire much trust.
The award could also be sent by the arbitral institution or the arbitrator(s), but they may no longer be available at the time of the recognition or enforcement. Another solution is to have the award sent by a trusted third party, such as a cybernotary or a centralized registry record.
This last solution may be the best, because such a third party could easily be state-controlled and would thereby run less risk of ceasing activity. Finally, the award must be notified to the parties, but the current email protocols are not able to produce proof of receipt.
For the perspective of UNICENRNREAL on recognition of awards, here.
Effectiveness of Non-Binding ODR Methods
Several problems encountered in online binding arbitration disappear when the process is made nonbinding. Globally, non-binding methods of out-of-court dispute settlement are subject to only a few legal formalities. They do not significantly restrict the parties’ access to state justice. Non-binding means not binding like a judgment: the case outcome can be binding like a contract, or not binding at all.
In non-binding arbitration, this usually means the parties have a right to demand a trial de novo. The most common forms of non-binding ODR are negotiation, mediation, recommendation, and non-binding arbitration, such as the Uniform Domain-Name Dispute-Resolution Policy (UDRP). But if non-binding methods are characterized by their formal liberalism, they are also characterized by a specific problem: the enforcement of their case outcomes.
If the losing party in a non-binding ODR procedure is unwilling to comply with the case outcome, one of two things can happen. If the decision is not binding at all, there is usually nothing the winning party can do to have the decision enforced.
If the decision is binding like a contract, the winning party will have to enter a judgment to enforce the outcome. This will produce costs and delays that may be high enough to deter the winning party from seeking enforcement.
Yet other solutions may be at hand:
one can either still hope for unforced compliance or one can implement alternative mechanisms of producing binding force. Unforced compliance to a case outcome produced after sound online proceedings is in fact not unlikely.
Non-binding arbitration may very well be seen as both an “advisory opinion” and a place to vent. As an advisory opinion, it helps the parties to reassess their own opinion on their position. They can test their arguments in a “trial run” and evaluate the likely outcome of adjudication.
As a place to vent, it may provide some catharsis. It may help alleviate anguish and aggression through expression and revelation. For both of these effects to take place, it is important that the parties feel they have obtained a fair hearing, and they have been handed down a decision from an expert third party who is truly impartial.
The most striking examples are UDRP decisions, the compliance rate of which is extremely high.
Possible solutions for increasing effectiveness of ODR providers
The same opinion applies a fortiori to negotiation and mediation: the parties have had a place to vent, in mediation an impartial third neutral has heard their position, and they have agreed to the decision. Alternative mechanisms of producing binding force are of one of two kinds: they can either create incentives to perform or they can provide for the self-execution of the case outcome.
In both cases, the principle is that the ODR provider ensures control of the resource that is valuable to the parties, usually money, but it could also be a reputation or a domain name.
Currently, the main form of creating incentives to perform is to trustmark web traders. A trustmark is a logo displayed on the website of the trader informing the customer that the trader has committed to complying with a number of qualitative standards or best business practices, including for instance a redress mechanism.
The trader can commit to comply with all case outcomes of a specific ODR procedure. If the trader does not execute the outcomes the trustmark is removed.
This presupposes that the allocation and the removal of the trust mark is controlled by the ODR provider, either directly or indirectly by networking with the controlling entity. The incentive to execute the decision is in this case created by the possible removal of the trustmark.
How strong this incentive would actually be is difficult to assess because the importance of a trustmark for a website is not easy to evaluate. A trustmark is meant to increase the trust and confidence of customers in a web trader. Most people using the net declare that they would be reassured by a trustmark.
Some governments advocate for them, and many authors emphasize their importance for e-commerce. But how important is this really for the trader?
Whether it is important enough to confer jurisdiction to an ODR provider, remains doubtful. Mechanisms for the self-execution of decisions are for instance escrow accounts, judgment funds, transaction insurance mechanisms, links with credit card companies, and technological tools which enforce the decision.
With an escrow account, the buyer first submits payment to the escrow company, who verifies the payment and then authorizes the seller to ship the merchandise. The escrow company tracks the shipment and a set number of days after reception pays the seller. The escrow company acts as a secure third party holding an account on which the money transits.
Control of funds by ODR provider
In the system of judgment funds, the fund is collected prior to the dispute resolution procedure. When an agreement is reached or when a decision is rendered, the awarded sum of money is taken from the judgment fund. If the ODR provider controls this fund, he can execute the outcome of his procedure himself. The ODR provider can also ensure the parties when a solution to the dispute is reached, the provider pays the winner directly, and afterward reclaims this sum of money from the losing party.
Credit companies can operate as self-execution mechanisms in this manner: the ODR provider makes a contract with the credit card company to which the right to charge-back is determined by the outcome of the ODR procedure.
The cardholder is allowed to chargeback the trader if the ODR panel has decided so. Technological tools for the self-execution of ODR case outcomes are only possible in very specific circumstances.
The UDRP provides such a mechanism: ten days after the decision (subject to a party bringing court proceedings), the domain name is canceled or transferred by the registrar of the domain name who is contractually bound to do so.
The technological tool that does this is the control by ICANN of the database that converts domain names into IP addresses. If a domain name registrar wants his domain names converted into IP addresses, he has to accept the conditions set by ICANN, among which is the commitment to execute all decisions rendered by an ICANN-approved dispute resolution institution.
If the dispute is of low economic value, it is unlikely the losing party would seek to litigate after a decision has been self-executed.
Financial Structure of ODR Providers
In addition to the requirements of due process proper to arbitration proceedings, the providers of ODR must ensure that their financial structure does not cause problems of independence. In the current context of ODR, the funding of the provider seems to be the major problem regarding independence and impartiality. The problem is that a for-profit ODR provider and most providers are for-profit, must produce a viable income, keep user fees low enough to be proportionate to the amounts in dispute, and not be funded by a source that would raise legitimate concerns about independence.
External sources could be a university, governmental or non-governmental organization, or consumer association. Such funding provides the best guarantees for independence and impartiality because it is largely independent of vested interests. But, such a source of funding seems difficult to secure.
Bilateral user fees
Bilateral user fees are easy to implement, but they are problematic in usual B2C and customer-to-customer (C2C) cases. They are either too low to cover the actual costs of the provider, fees, and costs of the neutral included, or they are too high compared to the disputed amount. Such funding is a reasonable solution in B2B cases and in large B2C cases, but these cases are probably still infrequent in ODR.
Unilateral user fees
When the fees are charged unilaterally on the business or when they are charged bilaterally but on widely unequal terms, a sufficient income can easily be produced while keeping the fees low for the consumer. However, an appearance of bias inevitably arises. But even in case of problematic funding, there are safeguards that can be implemented to limit the risk and appearance of impartiality.
Such safeguards can be implemented at least at the levels of the panel composition, the architecture of the provider, and the dispute resolution process at large.
The panelists must be selected in a manner that balances the different interests that inevitably arise in such a procedure. The provider may wish to favor one type of party, for instance, the complainants if they are the party who chose the provider.
Each party has an interest to choose a certain type of panelist. The best solution in this respect maybe a three-member panel appointed from a panelist roster which applies strict rules of independence. The architecture of an ODR provider may offer some guarantees of independence, for instance by providing an appellate process by being trustmarked or by displaying a balanced stakeholder representation.
Monitoring the ODR Provider
The process must for instance be organized according to strict procedural rules, and it must be globally transparent. The publication of the case outcomes also allows the monitoring of the general activity of a provider. But, the publication of case outcomes is a controversial issue.
First, it is controversial because it may deter some parties from participating while being a positive incentive for others. On the one hand, some businesses may not want to disclose some of their disputes, because it means bad publicity. On the other hand, consumers may prefer that web traders are named and shamed.
Second, the publication of case outcomes is controversial because it may facilitate forum shopping. Forum shopping is rationally selecting an ODR provider who tends to rule in the favor of the party who selects the provider.
This party being either the complainant or the party with the highest bargaining power. If the parties are able to choose the provider they wish, and in cyberspace they are not limited by geography, this will certainly produce a price competition. But it will also produce a competition to attract future cases (to increase income or reputation).
Attracting future cases is done in part by showing a practice of ruling in favor of the party who selects the provider. The publication of case outcomes can then be used to monitor the practice of the ODR providers, and the party who can choose will avoid ODR providers which have an unappealing practice.
This in turn will lead to a race to the bottom in accommodating the desires of the party who chooses the provider.
This negative by-product of the publication of case outcomes may, however, be avoided by implementing still another safeguard: an ODR provider clearinghouse. The parties could refer to a central authority, the clearinghouse, which would select the appropriate provider for their case.
Technological Architecture of ODR Systems
From a technological point of view, ODR is simply a specific web service. As such, the likelihood of its use and effectiveness is at least partly determined by its technical features and architecture.
Most services offered on the web must be easy enough to use in order to be available to as many people as possible. It must be adaptable to persons who may not be using standard equipment or may be disabled. It must be able to interoperate with other web services, and it must properly secure sensitive data and communication.
This obstacle is especially significant for countries where technology is less accessible. But divides also exist in countries where the internet is more commonly used.
Such divides exist between low-tech users and high-tech users, between parties who can afford substantial investments of time and costs in dispute resolution, and between repeat players and one-shot players.
Obviously, the fewer people excluded by such a divide, the more such a system will be used and will be successful.
If an ODR service is to be accessible by low-tech users, it must be exploitable by tools as elementary as possible. For instance, parties must be able to participate in an ODR procedure even if they only master email.
If it is to be accessible to parties who can only afford small investments in time and money, the system must be operational without the parties having to study in detail how the system works and without them having to acquire expensive software or hardware.
If an ODR service is intended for one-shot players, it must be very easy to figure out what the system offers, how one must proceed, and what its advantages are. In other words, for a system to meet the largest possible users, its architecture must be as simple as possible.
In addition, the simplicity of the architecture of an ODR service induces trust. It allows the costs to remain relatively low. It levels the playing field, and it eases the monitoring of the procedure by the parties.
Simplicity is a necessary condition for an ODR system to be easily accessible and to be successful.
But in many cases, it may not be a sufficient condition. Some parties and some disputes require specific communication capabilities.
In addition, evolution can be expected regarding the disputes handled, the technology at hand, and the parties involved.
ODR systems must be adaptive, in terms of system architecture and applications to new conditions of interaction with users.
Drawbacks of ODR systems
The particularities that ODR systems have to be able to adapt to are for instance spontaneity, typing and technical skills of the parties, time zones, emotional stress, socioeconomic and cultural differences, or the scale of investments by the parties that is reasonable and feasible.
In some cases, real-time communication sessions, be it by email or web-based communication tools, are best because they force the parties to be more spontaneous.
In other cases it creates power imbalances, such as when parties have different typing skills. Sometimes, holding conversation in a turn-based and delayed manner, like one day between each communication, is best because the parties live in very different time-zone or because it reduces the risk of the parties overreacting to statements of the other party.
Sometimes videoconference is needed because it reveals details of cultural and ethnic background, age, and gender. Moreover, complex proceedings will be easier to implement in ongoing relationships where both parties are repeat-players.
An evolution that can be expected, and to which ODR systems will have to adapt, is that ODR methods will be used in more diverse contexts and in more complex disputes with higher amounts at stake.
Requirements for successful application of ODR
ODR is likely to extend to multiparty and multi-issue disputes. It will have to allow witnesses, legal counsels, and experts to participate. As a consequence, more sophisticated and powerful applications will be developed, and ODR systems must be adaptable enough to use them rapidly.
Sometimes the parties and the dispute require a higher intervention of what Katsh and Rifkin call the “fourth party,” applications that help the third party “enforce, draft, survey, evaluate, schedule, store, and discuss.”
An ODR system must also be able to interoperate with other systems. Information has to be exchanged with web traders and possibly with courts.
The ODR proceedings have to be linked with prior and subsequent events and procedures. Evidence has to be gathered, and the enforcement authority has to be contacted. For these communications, data exchange standards are necessary.
The data collected on the website of the trader can easily be used by the ODR provider, and the agreement or decision can easily be sent to a court or any other entity.
Sometimes cases have to be transferred from one provider to another or from a mediator to an arbitrator. Such data exchange standards are technically called “Exchange Markup Languages,” or XML88 and in the ODR context ODR-XML. Much work has been done to promote the interoperability and transferability of cases by the Joint Research Commission of the European Commission.
Finally, an ODR system must be secure enough to protect the parties’ interests and induce confidence in the dispute resolution mechanism. The features to be protected are the transmission and storage of information. The risks against are the access of the information and a fortiori, its alteration.
There are several tools to protect the transmission of information. Emails, for instance, can be protected by digital signatures, by the Secure Multipurpose Internet Mail Exchange Protocol (S/MIME), and by Pretty Good Privacy (PGP).
Unfortunately, digital signatures and S/MIME require a certificate which is often too expensive for small transactions. PGP is difficult to install by laymen. Web-based communication may be easier to protect by using the Secure Sockets Layer (SSL) which secures the Hypertext Transfer Protocol.
For the protection of stored data, the most frequently used devices are firewalls, some of which are freeware.
Globally, secure emails are used less frequently in ODR systems than protected web-based communications and firewalls. Security is still a major aspect of online confidence and trust.
But although it is true that absolute security online is not possible, that it is always limited in time, that a system is only as secure as its weakest link, and that, on the internet, everything can be faked, one must keep in mind that in the offline world security is never perfect either.
ODR still has probably as many obstacles as it has advantages, and these obstacles would benefit from being addressed before the current enthusiasm disappears.