Sep 2, 2020

The Legal Practicalities Of The Use Of Blockchain As A Form Of Online Dispute Resolution (Part 2) | T. Koroye



THE LEGAL PRATICALITIES OF THE USE OF BLOCKCHAIN FOR ONLINE ARBITRATION.

Asides the technical inhibitions in the complete adoption of blockchain (such as technical know-how, space for retention of data, protection of confidential information, etc.),[1] blockchain is not currently used in all earnest for offline commercial international transactions due to the legal ambiguities; some of which have been previously hinted on and addressed earlier on in this work. The legal uncertainties span from the questionability of the legality of a smart arbitration contract (and if it falls 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, the legal uncertainties arise from the initiation of the arbitration agreement through blockchain, to the recognition of the award by the State. This work will however, limit itself to the ambiguities to 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 decentralised nature, as it operates on a peer-peer operational system, above any regulatory authority.[2] 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 recognise this, as provided in Article 14 of the International Chamber of Commerce (ICC) Arbitration Rules[3] and Article 16 of the London Court of International Arbitration (LCIA) Arbitration Rules.[4]  This position is recognised in the case of Hiscox v. Outhwaite[5] 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 into the arbitration process (concerning the arbitration theory employed by the State) and the arbitrability of the subject matter (as was held in the case of Soleimany v. Soleimany[6]). The seat of arbitration also determines the degree to which the arbitral award can be challenged.

 

Legal jurists hence have criticised the practicality of the use of blockchain as a platform of online- arbitration as Smart Contracts are enabled through distributed nodes, which cut across multiple legal jurisdictions, especially on instances of international contracts, consequently obfuscating the actual lex situs.[7] 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, on instance of no clear applicable law.[8] Hence, arbitrators in blockchain assume the powers of amiable compositeur[9] to carrying out their duties. This position has been criticised due to the very nature of the technology itself, as it excludes parties through “forced consent”[10] from expressly vesting arbitrators the powers to apply the principles of ex aequo et bono.[11]

 

Another theory proposed by legal jurist is 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.[12]  This theory proposes that the service provider maintain a degree of responsibility as owners and maintainers of the service, and therefore can be accorded the appropriate seat of arbitration.[13] This position has been given judicial credence in the cases of re Tezos Securities Litigation[14] and Alibaba Group Holdings Ltd v. Alibabacoin Foundation et al[15] where the U.S Courts, in determining issues relating to cryptocurrency and blockchain, held inter alia that ‘the physical location of the verifying nodes’ is an important factor in determining the jurisdiction of the court.[16] This writer finds this theory persuasive, as it provides a practical resolution to this legal debacle.

 

II.               Enforcement of the award.

As stated earlier, the New York Convention stipulates in Article V the prerequisites of a valid arbitral award, stating that it must written for it to be recognised and enforced in another State.[17] This is necessary because the enforcement of an award requires judicial assistance of the State where the award is to be recognised.[18] States are empowered to decline enforcement of an award in its jurisdiction on the ground of public policy. Blockchain, however, provides an automatic execution of the arbitral award through Smart Contracts for online disputes relating to cryptocurrencies.[19]

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.[20] This has been criticised by legal scholars who are of the view that this is a deviation from traditional commercial practice as it automatically enforces the award (this mostly involves the transfer of cryptocurrencies from one wallet to the other) by bypassing the public policy position of the State.[21] This school of thought also argue that such an enforcement will disregard the principle of favor debitoris[22] which protects the interests of the debtor of the award to ensure his rights are not violated in enforcement.[23]

 

CONCLUSION/RECOMMENDATION.

As contractual relations become autonomous through novel technological platforms, the role of dispute resolution is also expected to adopt to the changes. The procedure of ‘old wine, new bottle’ approach proposed by traditionalists is ill fitted here, as with new frontiers comes new challenges. An example is the blur of boundaries between procedure and execution in Smart Contracts. As legal jurists propose, the use of blockchain creates more problems than it actually aims to resolve due to its uncertainties from its ambiguous definition to concept of decentralisation.[24]

Regardless of legal skepticisms, Blockchain has been adopted as an ODR platform to resolve online disputes concerning cryptocurrencies. This, however, has not been implemented into offline transactions despite its numerous advantages. Reasons for this are not farfetched, as blockchain is riddled with legal uncertainties. The technology has been related to the Wild West where there exists little or no regulations, and all innovators are in a virtual race to the most reliable.[25] This writer, however, opines that this is a necessary process to streamline the technology into a more favorable legal platform. Traditional commercial practice emerged through centuries of practice by traders, referred to as lex mercatoria.[26] This organic evolution is also the essential trigger of the internationally accepted concept of arbitration. This legal Darwinism is essential for regulation standards that are intricately interwoven with Blockchain and its services, as not all old wines fit into new bottles. This is essential because the proposals from jurists that Blockchain should be ‘centre-regulated’ negates the entirety of the technology itself, as it operates on a decentralised, peer-to-peer assessed medium.

This writer agrees with the suggestion of the use of the ‘Oracle’[27] in the blockchain platform to serve as an interface between the technology and the real world, to reflect the data and agreements of parties that are not encoded into the Smart Contract.[28] This can include parties’ agreement on the use of arbitrators on instance of conflict, choice of law applicable, seat of arbitration and the enforcement procedure.[29] These updates can act as the necessary restrictions of the automatic nature of Blockchain during arbitral proceedings, making it more suitable to resolve offline commercial issues, resolving most of the highlighted legal issues.

In conclusion, blockchain is relatively a new technology, and the extent of its potential, either alone or mixed with another sector such as arbitration, are currently unknown. The unknown, however, will so remain, if depths are not pushed. Blockchain will revolutionise the commercial world, and as consequence, the legal world as well.

 

 

 

BIBLIOGRAPHY.

CASES.

  1. Alibaba Group Holdings Ltd v. Alibabacoin Foundation et al No. 18-02897, Southern District of New York
  2. Hiscox v. Outhwaite [19911 2W.LR. 1321 (C.A.)
  3. re Tezos Securities Litigation 17-CV-06779-RS,D.N.D.Cal.
  4. Soleimany v. Soleimany [ [1999]  3  All  ER 847

 

 

STATUTORY INSTRUMENTS.

  1. United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, 330 UNTS 38
  2. United Nations Commission on International Trade Law [UNCITRAL Model law on International Arbitration UN Doc A/40/17, Annex I

 

 

BOOKS

  1. Bercovitch J, Kremenyuk V, Zartman W I. ‘The SAGE Handbook of Conflict Resolution’, (1st edn,  SAGE, 2008)
  2. Duchateau M et aul, Evolution in Dispute Resolution : From Adjudication to ADR (Governance & Recht), (Eleven International  Publishing, 2016
  3. Fiadjoe A, Alternative Dispute Resolution; A Developing World Perspective (Taylor & Francis Group, 2004)
  4. Katsh E and Rifkin J, Online Dispute Resolution: Resolving Conflicts in Cyberspace, (Wiley, 2001)
  5. Laudon K C, E-Commerce: Business. Technology. Society, (13th edn, Harlow: Pearson, 2019)
  6. Newcombe A and Paradell L, Law and Practice of Investment Treaties: Standards of Treatment, (Kluwer Law, 2009)
  7. Reisman W. M et al, International Commercial Arbitration, (2nd edn, West Academic, 2015)
  8. Solovay N and Reed C K, The Internet and Dispute Resolution: Untangling the Web, (Law Journal Press, 2003)
  9. Vide CR, Favor Debitoris: Ana´lisis Crı´tico (Temis, Madrid 2010).

 

JOURNALS

  1. Dahiyat E A R, ‘A Legal Framework for Online Commercial Arbitration in UAE: New Fabric but Old Style, (2017) 26 ICTL 272
  2. DiMatteo L A and Poncibo C, ‘Quandary of Smart Contracts and Remedies: The Role of Contract Law and Self-Help Remedies’ (2018) 26 European Review of Private Law 805.
  3. Ebner N and Zeleznikow J, ‘No Sheriff in Town: Governance for Online Dispute Resolution : Governance for Online Dispute Resolution’, (2016) 32 Negotiation Journal 297
  4. Exon S N, ‘Ethics and Online Dispute Resolution: From Evolution to Revolution’, (2017) 32 Ohio St. J. on Disp. Resol. 609, 616
  5. Goldenfien J and Leiter A, ‘Legal Engineering on the Blockchain: ‘Smart Contracts’ as Legal Contract, (2018) 29 Law Critique 141
  6. Gurkov A, ‘Blockchain in Arbitration Development: Multi-Signature Wallet Showcase’ (2018) 2 IJODR 63
  7. Johnson M E and Loone P, ‘ Court's second '07'08 ADR case challenges arbitrator supremacy’, (2008) 26 Alternative DR,  5
  8. Katsh E, Rifkin J and Gaitenby A, ‘E-Commerce, E-Disputes and EDispute Resolution: In the Shadow of "eBay Law"’, (2000) 15 OMiO ST. J. DiSp. RESOL. 705
  9. Lainer T J, ‘Where on Earth Does Cyber-Arbitration Occur? : International Review of Arbitral Awards Rendered Online, (2000) 7 ILSA Journal of International & Comp. Law, 1
  10. Low K F K and Mik E, ‘Pause The Blockchain Legal Revolution’, (2020) 69 ICLQ 135
  11. L.Q H, ‘Online Dispute Resolution Systems: The Future of Cyberspace Law’, (2001) 41 SCLR 354
  12. Mania K, ‘Online Dispute Resolution : The Future of Justice,’(2015) 1, ICJ, 76
  13. Micheler E and Heyde Lv, ‘Holding, Clearing and Settling Securities Through Blockchain/Distributed Ledger Technology: Creating an Efficient System by Empowering Investors’, (2016) 11 J. Int'l Banking & Fin. L. 652, 653
  14. Mik E, ‘Smart Contracts: Terminology, Technical Limitations and Real World Complexity, Law, Innovation and Technology’, (2017) 9 LITJ 269, 280
  15. Ortolani P, ‘Self-Enforcing Online Dispute Resolution: Lessons from Bitcoin’, (2016) 36 OJLS, 602
  16. Ortolani P, ‘The Impact Of Blockchain Technologies And Smart Contracts On Dispute Resolution: Arbitration And Court Litigation At The Crossroads’, (2019) 24 Unif. L. Rev, 430
  17. Rabinovich-Einy O and Katsh E, ‘Digital Justice: Reshaping Boundaries in an Online Dispute Resolution Environment’, (2014) 1 IJODR 5.
  18. Shaikh Z A and Lashari I A, ‘Blockchain Technology the New Internet’, (2017) 6 IJMSBR 4
  19. Shehata I, ‘Three Potential Benefits of Blockchain for Arbitration’, (2018) 31 YAR 32
  20. Smith S S, ‘Implications of Next Step Blockchain Applications for Accounting and Legal Practitioners: A Case Study’, (2018) 12 AABFJ 78
  21. Xuhui F,  ‘Recent ODR Developments in China’, (2017) 2 IJOR 35
  22. Young B, ‘World Wrestling Federation Entertainment Inc. v. Michael Bosman: ICANN’S Dispute Resolution: ICANN’S Dispute Resolution Policy at Work’, (2000) 3 I N.C.J.L & Tech
  23. Yu H, ‘A Theoretical Overview of the Foundations of International Commercial Arbitration’, 2008, 1(2) CONTEMP.ASIA ARB. J. 255

 

 

INTERNET SOURCES.

  1. Ashish Chugh, ‘Why We Don’t Need Blockchain to Manage Cases in International Arbitration’, (Kluwer Arbitration, 2018) http://arbitrationblog.kluwerarbitration.com/2018/05/13/dont-need-blockchain-manage-cases-international-arbitration/?doing_wp_cron=1586980451.5285389423370361328125 accessed 10th April 2020.
  2. Association for International Arbitration, ‘Electronic Consumer Dispute Resolution’, (Arbitration-Adr, 2020) https://www.arbitration-adr.org/resources/?p=serviceproviders&a=show&id=40 accessed 1st April 2020.
  3. BENOAM, (Benoam, 2020) https://benoam-tech.com/ accessed 8th April 2020
  4. Chamber of Digital Commerce, ‘“Smart Contracts” Legal Primer Why Smart Contracts Are Valid under Existing Law and Do Not Require Additional Authorization to Be Enforceable’ (Digital Chamber, January 2018), https://digitalchamber.org/wp-content/uploads/2018/02/Smart-Contracts-Legal-Primer-02.01.2018.pdf  accessed 8th April 2020.
  5. Chris Skinner, ‘The Wild West of Crypto’, (The Finanser, 2019) https://thefinanser.com/2019/12/the-wild-west-of-crypto.html/ accessed 10th April 2020
  6. Chandru Ganesh, ‘Arbitration as a Dispute Resolution Mechanism for the Domain Name System’, (WIPO, 1999) https://www.wipo.int/amc/en/domains/ accessed 8th April 2020.
  7. Civil Justice Council, ‘Online Dispute Resolution for Low Value Civil Claims, (UK Judiciary, 2915) https://www.judiciary.uk/wp-content/uploads/2015/02/Online-Dispute-Resolution-Final-Web-Version1.pdf   accessed 8th April 2020.
  8. Crunchbase, ‘eQuibbly’, (Crunchbase, 2012) https://www.crunchbase.com/organization/equibbly accessed 9th April 2020
  9. ebay, ‘Dispute Resolution Overview’, (eBay, 1995),  https://pages.ebay.com/services/buyandsell/disputeres.html  accessed 8th April 2020
  10. Emmanuel Gaillard, ‘Transcending National Legal Orders for International Arbitration’, (ICCA, 2013) https://www.arbitration-icca.org/media/8/37646744616595/gaillard_20131001_eg_book-congress-series-no-17_transcending-national-legal-order.pdf accessed 10th April 2020
  11. Fabian Frank, ‘Consent Management on the Ethereum Blockchain’, (Univeristy of Twente, 2018)  https://essay.utwente.nl/76745/2/Frank_MA_BMS.pdf accessed 10th April 2020
  12. Fredrik Milani, ‘Blockchain Oracles’, (University Of Tartu, 2019) https://comserv.cs.ut.ee/home/files/Mammadzada_MasterThesis_ITM.pdf?study=ATILoputoo&reference=B913660BDAEE6C01D5D887A09A79331E898F990F accessed 11th April 2019
  13. FINRA, ‘Arbitration Process’, (Finra, 2014) www.finra.org/ArbitrationAndMediation/Arbitration/Process/ accessed 9th April 2020
  14. Graham Ross, ‘Challenges and Opportunities in ODR’, (Mediate, 2003) https://www.mediate.com/Integrating/docs/ross.pdf accessed 9th April 2020
  15. Ibrahim Shehata, ‘Arbitration of Smart Contracts Part 2- Recommendations for the Future Landscape Smart Contracts’, (Kluwer Arbitration, 2018) http://arbitrationblog.kluwerarbitration.com/2018/08/27/arbitration-smart-contracts-part-2/ accessed  8th April 2020
  16. ICC, ‘Arbitration Rules’, (ICC, 2017) https://iccwbo.org/dispute-resolution-services/arbitration/rules-of-arbitration/ accessed 9th April 2020
  17. ICANN, ‘Domain Name Dispute Resolution Policies’, (ICANN.ORG, 2020) https://www.icann.org/resources/pages/dndr-2012-02-25-en accessed 8th April, 2020
  18. Internet-ARBitration, (Net-ARB, 2005) https://www.net-arb.com/ accessed 8th April 2020
  19. Ihab Amro, ‘Online Arbitration in Theory and in Practice: A Comparative Study in Common Law and Civil Law Countries’, (Kluwer Arbitration, 2019)  http://arbitrationblog.kluwerarbitration.com/2019/04/11/online-arbitration-in-theory-and-in-practice-a-comparative-study-in-common-law-and-civil-law-countries/ accessed 8th April 2020
  20. Jelena Madir, ‘Smart Contracts: (How) Do They Fit Under Existing Legal Frameworks?’, (SSRN, Dec 2018) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3301463  accessed 8th April 2020 
  21. LCIA, ‘LCIA Arbitration Rules’, (LCIA, 2014) https://www.lcia.org/Dispute_Resolution_Services/lcia-arbitration-rules-2014.aspx
  22. Michael Crosby et al, ‘BlockChain Technology: Beyond Bitcoin’, (Berkeley, 2015)  https://scet.berkeley.edu/wp-content/uploads/BlockchainPaper.pdf accessed 8th April 2020
  23. Osinachi Nwandem Victor, ‘Online Dispute Resolution: Scope And Matters Arising’, (Elsevier, 2015), <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2592926> accessed 8th April 2020
  24. Satoshi Nakamoto, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ (Bitcoin 2008) https://bitcoin.org/bitcoin.pdf accessed 9th April 2020
  25. Stephan W. Schill, ‘Lex Mercatoria’, (OPIL, 2014) https://opil.ouplaw.com/view/10.1093/law:epil/9780199231690/law-9780199231690-e1534 accessed 10th April 2020
  26. SquareTrade, (Square Trade, 2020) http://www.squaretrade.com accessed 9th April 2020
  27. The Mediation Room, (the Mediation room, 2020) http://www.themediationroom.com. accessed 8th April 2020
  28. UNCITRAL, ‘Technical Notes on Online Dispute Resolution’, (UNCITRAL, 2020)  https://www.uncitral.org/pdf/english/texts/odr/V1700382_English_Technical_Notes_on_ODR.pdf accessed 3rd April 2020
  29. WIPO, ‘Alternative Dispute Resolution’, (WIPO, 2020), https://www.wipo.int/amc/en/ accessed 8th April 2020
  30. WIPO, Guide to the Uniform Domain Name Dispute Resolution Policy (UDPR), (WIPO, 2020) https://www.wipo.int/amc/en/domains/guide/ accessed 28th March 2020
  31. US Census Bureau, ‘E-stats’, (Us Department of Commerce, 2019) www.census.gov/eos/www/2007/2007reportfinal.pdf , accessed 8th April, 2020

 

 

 



[1] Graham Ross, ‘Challenges and Opportunities in ODR’, (Mediate, 2003) https://www.mediate.com/Integrating/docs/ross.pdf accessed 9th April 2020

[2] Supra 82

[3] ICC, ‘Arbitration Rules’, (ICC, 2017) https://iccwbo.org/dispute-resolution-services/arbitration/rules-of-arbitration/ accessed 9th April 2020

[5] [19911 2W.LR. 1321 (C.A.).

[6] [1999]  QB  785,  [1999]  3  All  ER 847

[7] Ibrahim Shehata, ‘Arbitration of Smart Contracts Part 2- Recommendations for the Future Landscape Smart Contracts’, (Kluwer Arbitration, 2018) http://arbitrationblog.kluwerarbitration.com/2018/08/27/arbitration-smart-contracts-part-2/ accessed  8th April 2020.

[8] Supra 67

[9] Certain arbitration rules operate an even more subtle distinction, providing that the arbitral tribunal decides, if the parties so agree, in amiable composition or “ex aequo et bono“, i.e., “from what is good and just” (see, e.g., Article 21(3) of the ICC Rules or 35(2) of UNCITRAL Rules.

[10] Forced Consent because parties are unable to negotiate the terms of acceptance with the arbitrators. For further reading on forced consent in blockchain technology : Fabian Frank, ‘Consent Management on the Ethereum Blockchain’, (Univeristy of Twente, 2018)  https://essay.utwente.nl/76745/2/Frank_MA_BMS.pdf accessed 10th April 2020

[11] Alexander Gurkov, ‘Blockchain in Arbitration Development: Multi-Signature Wallet Showcase’ (2018) 2 IJODR 63

[12] Chandru Ganesh, ‘Arbitration as a Dispute Resolution Mechanism for the Domain Name System’, (WIPO, 1999) https://www.wipo.int/amc/en/domains/ accessed 8th April 2020.

[13] Supra 93

[14] 17-CV-06779-RS,D.N.D.Cal.

[15] No. 18-02897, Southern District of New York

[16] Ibid.

[17] Supra 9

[18] Supra 93

[19] Jake Goldenfien and Andrea Leiter, ‘Legal Engineering on the Blockchain: ‘Smart Contracts’ as Legal Contract, (2018) 29 Law Critique 141

[20] Supra 9

[21] Supra 9

[22] Carlos Rogel Vide, Favor Debitoris: Ana´lisis Crı´tico (Temis, Madrid 2010).

[23] Supra 9

[24] Kelvin F. K. Low and Eliza Mik, ‘Pause The Blockchain Legal Revolution’, (2020) 69 ICLQ 135

[25] Chris Skinner, ‘The Wild West of Crypto’, (The Finanser, 2019) https://thefinanser.com/2019/12/the-wild-west-of-crypto.html/ accessed 10th April 2020

[26] The term lex mercatoria or law merchant is used to designate the concept of an a-national body of legal rules and principles, which are developed primarily by the international business community itself based on custom, industry practice, and general principles of law that are applied in commercial arbitrations. For further reading: Stephan W. Schill, ‘Lex Mercatoria’, (OPIL, 2014) https://opil.ouplaw.com/view/10.1093/law:epil/9780199231690/law-9780199231690-e1534 accessed 10th April 2020.

[27] Fredrik Milani, ‘Blockchain Oracles’, (University Of Tartu, 2019) https://comserv.cs.ut.ee/home/files/Mammadzada_MasterThesis_ITM.pdf?study=ATILoputoo&reference=B913660BDAEE6C01D5D887A09A79331E898F990F accessed 11th April 2019

[28] ibid

[29] Supra 93.


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