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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

 

 

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.

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[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.