CONTRIBUTOR: CHIKEZIE M. IWU ESQ.
INTRODUCTION
Despite the self-executing nature of smart contracts, the belief that disputes in this area are non-existent is a misconception.[1] While smart contracts offer numerous advantages such as task automation, enhanced security, and reduced costs disputes are still inevitable.[2] Potential conflicts may arise concerning the contract’s validity, including issues of legal capacity, or its non-performance.[3] Coding errors, for instance, can lead to unforeseen execution problems and if the contract no longer reflects the parties’ agreement, there is a risk of non-execution.[4] In such cases, determining liability can be challenging, especially given the decentralized nature of blockchain, which can obscure the chain of responsibility.[5] Technological risks, such as cybersecurity threats, further complicate questions of liability and legal concepts like “reasonable efforts” or “good faith” are difficult to encode, leading to potential interpretative challenges.[6]
As blockchain technology and smart contracts evolve, a distinct category of disputes is emerging, necessitating appropriate resolution methods.[7] This raises the question of whether these disputes should be addressed by state courts or through alternative dispute resolution (ADR) methods, particularly international arbitration.[8]
Marina Kasatkina (2022) in “Dispute Resolution Mechanism for Smart Contracts” highlights the inevitability of disputes regarding smart contracts, emphasizing the need for effective mechanisms to address these issues. As technologies such as blockchain continue to integrate with real-world entities, legal issues naturally arise due to the complexities of societal norms and expectations. Notably, smart contracts differ from traditional contracts, which are typically understood as negotiated terms reflecting a mutual agreement or “meeting of the minds.”[9]
This article will explore arbitration as the suitable dispute resolution method essential for effectively managing conflicts in the realm of blockchain and smart contracts.
CONTEXTUALISATION
Blockchain
Blockchain technology is a distributed ledger technology that records transactions across a network of computers in a secure, immutable, and transparent manner.[10] Its unique features, including immutable recordkeeping, secure transaction system, transparency, and stakeholder consensus, have made it attractive to global institutions, governments, the private sector, and international economic and socio-political stakeholders.[11]
Smart Contracts
A smart contract is a computer program executed by participants within a blockchain network.[12] This concept is analogous to the functionality of web services, where data can be sent and received via an interface for subsequent processing and display.[13] The key distinction with smart contracts is that any participant can create a smart contract and define a set of invocable routines, known as “methods,” for interaction with other participants
Smart Legal Contract
According to the Accord Project, a Smart Legal Contract is defined as a digital agreement that is both human- and machine-readable.[14] This innovative contract format integrates natural language with computable components, ensuring comprehensibility for signatories, lawyers, and contracting parties, while also allowing for interpretation and execution by computers.[15]
Dispute Resolution Mechanisms
A dispute mechanism is a structured process that addresses disputes or grievances that arise between two or more parties engaged in business, legal, or societal relationships. Dispute mechanisms are used in dispute resolution, and may incorporate arbitration, conciliation, conflict resolution, mediation, and negotiation.[16]
DISPUTE RESOLUTION MECHANISMS IN BLOCKCHAIN TRANSACTIONS: THE ROLE OF ARBITRATION IN THE BLOCKCHAIN
The initial consideration when evaluating dispute resolution mechanisms for smart contracts should be whether traditional courts can effectively adjudicate disputes arising from these agreements.
Over time, arbitration stands out as a well-suited mechanism for resolving disputes related to smart contracts.[17] Parties engaged in blockchain disputes can select arbitrators with specialized technical knowledge, ensuring a comprehensive examination of the code and a nuanced interpretation of the contract terms. This expertise-driven approach enables a more precise and efficient resolution of conflicts originating from code-based agreements.[18]
Arbitration has played a significant role in addressing blockchain-related disputes. A notable development is “blockchain arbitration,” where blockchain technology is integrated into the alternative dispute resolution (ADR) process. This gives rise to two distinct approaches: “on-chain” and “off-chain” arbitration.[19]
Off-chain arbitration looks like the traditional arbitration proceedings and does not provide for the automatic enforcement of the award. This method can be governed by arbitration rules specifically designed for blockchain and smart contracts.[20] For instance, Poland has established the first arbitration court for blockchain within the Chamber of Commerce for Blockchain and New Technologies.[21]
On-chain arbitration, on the other hand, utilizes technological solutions to ensure that the equivalent of a traditional arbitral award is automatically enforced by the smart contract.[22] From this perspective, blockchain technology and smart contracts could contribute to the emergence of a new Lex Cryptographia[23]. Currently, several platforms offer “on-chain” arbitration services, including Kleros[24], Juris, Confideal, Mattereum, and CodeLegit.[25]
THE NEED FOR ALTERNATIVE DISPUTE RESOLUTION MECHANISMS IN BLOCKCHAIN DISPUTES.
Blockchain technology, characterized by its decentralized and code-driven nature, presents unique challenges in dispute resolution. Two critical aspects underscore the need for specialized mechanisms, particularly arbitration, in addressing conflicts within this innovative ecosystem:
- Smart Contracts as Self-Executing Agreements: Smart contracts, which are encoded agreements that automatically execute predefined terms when certain conditions are met, form the backbone of many blockchain applications. These self-executing contracts facilitate trustless and efficient transactions, reducing the need for intermediaries. However, their reliance on code introduces complexities that can lead to disputes.[26]
- Pseudonymous and Cross-Border Blockchain Transactions: Blockchain transactions are pseudonymous, meaning they are not directly linked to real-world identities.[27] This pseudonymity, coupled with the cross-border nature of blockchain transactions, complicates jurisdictional matters and dispute resolution.
Why Arbitration for Digital Disputes?
Arbitration is uniquely suited to efficiently and effectively resolve digital disputes for several reasons:
- Global Enforceability: Arbitral awards are enforceable worldwide under the New York Convention. Including a well-drafted arbitration clause in smart legal contracts can address jurisdictional issues arising from the decentralization of blockchain.[28]
- Technical Expertise: In disputes involving complex technical questions related to the operation of code, parties can benefit from selecting arbitrators with the necessary technical understanding.[29]
- Confidentiality: For parties concerned with protecting proprietary information, confidential arbitration is preferable to public litigation proceedings.[30]
- Emergency Relief and Expedited Procedures: Many arbitral institutions have procedures for appointing emergency arbitrators within days to issue urgent interim relief. Some institutions have also developed procedures specifically for smart contract disputes. Additionally, the flexibility of arbitral procedures allows for expedited resolution of disputes.[31]
CHALLENGES IN BLOCKCHAIN & DISPUTE RESOLUTION – OBSTACLES TO OVERCOME
Although Alternative Dispute Resolution (ADR) has significantly contributed to resolving blockchain-related disputes, numerous challenges persist. Key issues include the enforcement of awards, determining the arbitral seat, addressing potential security vulnerabilities in arbitral platforms, and the methods for appointing arbitrators. These challenges necessitate careful consideration for the future of blockchain dispute resolution.[32]
Given these difficulties, it appears more prudent to adopt hybrid solutions that combine “off-chain” and “on-chain” arbitration. A landmark Mexican court decision on May 28, 2021, exemplifies this approach. The court, for the first time, enforced an arbitral award that was not solely based on the arbitrator’s judgment but also utilized a technological tool for decentralized dispute resolution—the Kleros protocol.[33] This case is notable for integrating blockchain arbitration into a traditional award, suggesting a potential pathway for hybrid solutions compatible with the conventional arbitration framework.
What is more, is that conflicts of laws regarding the applicable laws and the jurisdiction of courts to resolve disputes arising from commercial relationships also present further complexities.[34]
Furthermore, on April 22, 2021, the UK Jurisdiction Taskforce (UKJT), a government-backed initiative chaired by Sir Geoffrey Vos, Master of the Rolls, and led by LawTech UK, published the Digital Dispute Resolution Rules (the Digital DR Rules). The aim of these rules is to enable the rapid resolution of blockchain and crypto-related legal disputes, offering users a procedural framework and a choice of either arbitration or expert determination.[35] This stands as a pivotal roadmap to fostering a more efficient, specialized, and technologically adept approach to handling the unique challenges presented by blockchain and cryptocurrency disputes.
SHORTCOMINGS OF THE TRADITIONAL ARBITRATION INSTITUTIONS AND BLOCKCHAIN ARBITRATION
There are various limitations associated with off-chain arbitration. Firstly, courts are restricted to enforcing secondary transactions or monetary remedies in cases where a smart contract has caused harm, as they lack the authority to alter the terms of the original smart contract recorded on the blockchain due to its immutable nature.[36]
The primary drawback of on-chain arbitration relates to the enforceability of awards. Arbitral decisions made in online settings may not be recognized and enforced under the New York Convention, as it specifically applies to agreements documented “in writing,” potentially impeding the legal validation of such awards.[37]
Another concern pertains to the trustworthiness of procedures in non-face-to-face interactions as lack of trust between parties can lead to hesitancy and withholding of crucial information, undermining the effectiveness of the arbitration process.[38]
Furthermore, there’s the challenge of parties not being well-versed or comfortable with the relevant technology, which can hinder their participation in the arbitration process.[39] The expertise of arbitrators in the pertinent technology can significantly impact the resolution of disputes, emphasizing the importance of selecting arbitrators with specialized technical knowledge.
CONCLUSION
The intersection of blockchain technology and traditional dispute resolution mechanisms presents a complex yet intriguing legal landscape. Despite the self-executing nature of smart contracts, disputes are inevitable due to issues such as coding errors, cybersecurity threats, and the decentralized nature of blockchain networks. These disputes necessitate effective resolution mechanisms, with arbitration emerging as a particularly well-suited method.
However, challenges persist in both traditional and blockchain arbitration. Issues such as the enforcement of awards, the technical expertise of arbitrators, and the trustworthiness of procedures require careful consideration for the effective resolution of blockchain disputes. As blockchain technology continues to evolve, ongoing research and innovation in dispute resolution mechanisms are essential. By addressing the complexities and leveraging the strengths of both traditional and modern methods, the legal community can effectively manage conflicts in the realm of blockchain and smart contracts, fostering a more stable and predictable legal environment for all stakeholders involved.
- Zoe Can Koray, Blockchain, Smart Contracts and Alternative Dispute Resolution. Available at https://www.gide.com/en/news/blockchain-smart-contracts-and-alternative-dispute-resolution accessed 21 May 2024 ↑
- Yannick Gabuthy, Blockchain-Based Dispute Resolution: Insights and Challenges. Available at https://www.mdpi.com/2073-4336/14/3/34 accessed on 21 May 2024 ↑
- Riikka Koulu, Blockchains and Online Dispute Resolution: Smart Contracts as an Alternative to Enforcement. Available at https://script-ed.org/article/blockchains-and-online-dispute-resolution-smart-contracts-as-an-alternative-to-enforcement/ accessed on 21 May 2024 ↑
- William Brown, LIMITATIONS OF CODE IN CONTRACTS: WHAT WE CAN LEARN FROM THE PLAIN ENGLISH MOVEMENT. Available at file:///C:/Users/USER/Downloads/1148-Article%20Text-4225-3-10-20221208.pdf accessed on 21 May 2024 ↑
- Ibid ↑
- Op cit fn, 1 ↑
- Adhip Ray, Dispute Resolution for Smart Contracts: Challenges and Opportunities. Available at https://www.winsavvy.com/dispute-resolution-smart-contracts/ accessed 21 May 2024. ↑
- Ibid ↑
- Marina Kasatkina, ‘Dispute Resolution Mechanism for Smart Contracts’ (2022) 16:2 Masaryk University Journal of 115 Law and Technology. Available at https://www.ceeol.com/search/article-detail?id=1090108 accessed 21 May 2024. ↑
- Ravikiran A.S, What is Blockchain Technology? How Does Blockchain Work? [Updated]. Available at https://www.simplilearn.com/tutorials/blockchain-tutorial/blockchain-technology ↑
- Ibid ↑
- The concept of smart contracts was first introduced in the mid-90s by Nick Szabo. Nevertheless, their implementation remained theoretical until blockchain development. For an overview see Nick Szabo, ‘Formalizing and Securing Relationships on Public Networks’ (1997), http://jour nals.uic.edu/ojs/index.php/fm/article/view/548/469 , accessed 21 May 2024 ↑
- Ibid ↑
- Accord Project, Smart Legal Contracts. Available at https://docs.accordproject.org/docs/accordproject-slc.html accessed on 21 May 2024 ↑
- Ibid ↑
- Wikipedia, Dispute mechanism. Available at https://en.wikipedia.org/wiki/Dispute_mechanism#cite_note-1 accessed on 21 May 2024 ↑
- Norton Rose Fulbright, Arbitrating Smart Contract Disputes. Available at https://www.nortonrosefulbright.com/en/knowledge/publications/ea958758/arbitrating-smart-contract-disputes accessed on 21 May 2024 ↑
- Arun S, NAVIGATING BLOCKCHAIN DISPUTES: ARBITRATION’S ROLE IN THEFUTURE OF DECENTRALIZED INDUSTRIES. (Indian Journal of Integrated Research in Law) available at NAVIGATING BLOCKCHAIN DISPUTES: ARBITRATION’S ROLE IN THE FUTURE OF DECENTRALIZED INDUSTRIES (ijirl.com) accessed on 21 May 2024 ↑
- Galantay, Andrew. (2022). New Technology Arbitration: Blockchain Arbitration and Data Arbitration. Available at https://www.researchgate.net/publication/365615362_New_Technology_Arbitration_Blockchain_Arbitration_and_Data_Arbitration accessed on accessed on 21 May 2024 ↑
- Katarzyna Szczudlik, “On-chain” and “off-chain” arbitration: Using smart contracts to amicably resolve disputes. Available at https://newtech.law/en/articles/on-chain-and-off-chain-arbitration-using-smart-contracts-to-amicably-resolve-disputes accessed on 21 May 2024 ↑
- Op cit fn.1 ↑
- Despoina Kottaridou, The use of arbitration for the resolution of disputes arising from the use of blockchain technology. Available at https://repository.ihu.edu.gr/xmlui/bitstream/handle/11544/30149/THE%20USE%20OF%20ARBITRATION%20FOR%20THE%20RESOLUTION%20OF%20DISPUTES%20ARISING%20FROM%20THE%20USE%20OF%20BLOCKCHAIN%20TECHNOLOGY.pdf?sequence=1 accessed on 21 May 2024 ↑
- Lex Crytographia can be defined as a set of rules administered through smart contracts and decentralized organizations. ↑
- Kleros Court is a decentralized application built on top of Ethereum that works as a decentralized third party to arbitrate disputes in a fast, inexpensive, reliable and decentralized way. ↑
- Georgantzidou Maria, Arbitration of Disputes involving Smart Contracts and Blockchain Technology. Available at https://repository.ihu.edu.gr/xmlui/bitstream/handle/11544/30227/1104210006%20%20Dissertation%20FINAL.pdf?sequence=1 accessed on 21 May 2024 ↑
- Arun S, NAVIGATING BLOCKCHAIN DISPUTES: ARBITRATION’S ROLE IN THEFUTURE OF DECENTRALIZED INDUSTRIES. (Indian Journal of Integrated Research in Law). available at NAVIGATING BLOCKCHAIN DISPUTES: ARBITRATION’S ROLE IN THE FUTURE OF DECENTRALIZED INDUSTRIES (ijirl.com) accessed on 21 May 2024 ↑
- Immunebytes, Pseudonymity and Anonymity: Be Untraceable in the Blockchain World. Available at https://www.immunebytes.com/blog/pseudonymity-and-anonymity-be-untraceable-in-the-blockchain-world/ accessed on 21 May 2024 ↑
- New York Convention, Enforcing Arbitration Awards under the New York Convention. Available at https://www.newyorkconvention.org/media/uploads/pdf/6/6/66_nyc-experience-prospects.pdf accessed on 21 May 2024 ↑
- Steven C. Bennett, Use of Experts in Arbitration: Alternatives for Improved Efficiency. Available at https://go.adr.org/rs/294-SFS-516/images/73%202%20-%2010-Bennett-Expert%20Submissions%20In%20Arbitration.pdf accessed on 21 May 2024 ↑
- BBaC, Emergency Arbitration: A Rapid Solution for Urgent Matters. Available at https://broderickbozimo.com/emergency-arbitration-a-rapid-solution-for-urgent-matters/ accessed on 21 May 2024 ↑
- Ibid ↑
- Op cit fn.1 ↑
- Wolters Kluwer, Arbitration Tech Toolbox: Is a Mexican Court Decision the First Stone to Bridging the Blockchain Arbitral Order with National Legal Orders? https://arbitrationblog.kluwerarbitration.com/2022/03/04/arbitration-tech-toolbox-is-a-mexican-court-decision-the-first-stone-to-bridging-the-blockchain-arbitral-order-with-national-legal-orders/ accessed on 21 May 2024 ↑
- David S. Stern, THE CONFLICT OF LAWS IN COMMERCIAL ARBITRATION. Available at https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=2540&context=lcp accessed on 21 May 2024 ↑
- Simon KenyonDan JewellChloe MearsSam Gokarn-Millington, The UKJT Digital Dispute Resolution Rules – Keeping Pace with Change. Available at https://www.dlapiper.com/en-be/insights/publications/2021/05/the-ukjt-digital-dispute-resolution-rules accessed on 21 May 2024 ↑
- Pietro Ortolani, The impact of blockchain technologies and smart contracts on dispute resolution: arbitration and court litigation at the crossroads. Available at https://www.researchgate.net/publication/333169372_The_impact_of_blockchain_technologies_and_smart_contracts_on_dispute_resolution_arbitration_and_court_litigation_at_the_crossroads accessed on 21 May 2024 ↑
- Op cit Fn. 28 ↑
- Op cit Fn, 30 ↑
- Ibid ↑
- Norton Rose Fulbright, Arbitrating Smart Contract Disputes. Available at https://www.nortonrosefulbright.com/en/knowledge/publications/ea958758/arbitrating-smart-contract-disputes accessed on 21 May 2024 ↑
