Law and Autonomous Systems Series: How to Resolve Smart Contract Disputes – Smart Arbitration as a Solution

Recent developments in ‘smart’ digital technologies, in particular blockchain technology, are changing and challenging the framework in which business is conducted. A prominent feature of the decentralized world of blockchain is that there are no external authorities, whether public or private, which can dictate or verify any of the transactions that are added to the system. This characteristic makes the system favourable for application by businesses as it does not require the involvement of third parties, thereby making the execution of the entire transaction more efficient and less burdensome.

The recent development of ‘smart contracts’, that leverage blockchain technology, has particularly significant implications for traditional contract law and dispute resolution mechanisms. What makes the regulation of smart contracts particularly complex is their cross-border nature, given that they are generally operated by computers located in different jurisdictions. This may make it more difficult to identify the law or jurisdiction applicable to the contract. The existing legal framework governing smart contracts needs to be further elaborated to address this issue.

Furthermore, these new forms of contractual relations may require new models of dispute resolution. This is where ‘smart arbitration’ could step in to replace traditional judicial dispute resolution proceedings, which are typically lengthy and often followed by delayed execution. Traditional arbitration models are also inadequate to address the particularities of smart contract disputes: smart contracts require redress mechanisms that enable resolution of disputes without the need to leave the digital world, and without the necessity to file lawsuits before an ordinary court. A principal advantage of specific smart arbitration rules in comparison to traditional arbitration rules is that they could directly allow for documents and pleadings to be shared using the blockchain, as a verification mechanism.

In this regard, the development of smart arbitration requires close cooperation between lawyers on the one side and computer, mathematical and cryptography experts on the other side. Recent developments in this respect include new decentralised dispute resolution platforms, such as CodeLegit, which conducted the first blockchain based smart contract arbitration. Given the blockchain-based nature of smart contracts, it is essential to define the chosen method of dispute resolution at the outset. The question is whether a master dispute resolution agreement may be the best option: this could ensure that the same law and dispute resolution procedure are followed through the entire blockchain.

One of the challenges of enforcing smart arbitration is whether it can be envisaged in the contract as the only method to resolve a dispute. Under the applicable EU Law, in particular EU Directive 93/13/EEC on unfair contract terms and related European Court of Justice case law (see Mostaza Claro v Centro Móvil Milenium SL), this seems to be prohibited. In contrast, such a clause would be considered legal under United States law (see DIRECTV, Inc. v, Imburgia). A further challenge is ensuring that the award rendered by the arbitrator(s) is enforceable. In this regard, it is important that the arbitration provision is embedded in the code of the smart contract. Bearing in mind diverse national approaches towards the regulation of smart contacts, parties need to ensure that the law of the chosen seat of arbitration does not render a smart contract illegal or unenforceable.

 

About: Shawn

Shawn Shah is an expert legal analyst, lawyer, and journalist.


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