This article is written by Sonali who is pursuing Certificate Course in International Commercial Arbitration and Mediation from Lawsikho.
Table of Contents
Overview
“It has become appallingly obvious that our technology has exceeded our humanity.” – These were the words of German Theoretical Physicist Albert Einstein who understood what’s happening today way before anyone else could have thought of.
With the ever-developing territory of technology, Blockchain and Artificial Intelligence (AI) have become new buzz words in the market recently in the last few years and the international arbitration field is also not oblivious of this fact.
The use of these technologies in international arbitration can be summed up in this statement by Steve Jobs on technology which states that –
“We are going to be able to ask our computers to monitor things for us and when certain conditions happen, are triggered, the computers will take certain actions and inform us after the fact.”
This statement can be fully understood on a perusal of what these new technologies have for the international arbitration community. In this article, we will deal with the interplay of blockchain and AI arbitration, how they function and their journey ahead.
What is AI Arbitration?
Defining AI
Artificial Intelligence (AI) is the continuous evolution of existing computer systems to do or execute what requires human intelligence. The tasks may include but are not limited to reasoning, problem-solving using huge data, communicating through language using words or signs, learning new things from past experiences, continuous adapting to new circumstances, perceiving the surrounding environment and decision making.
One of the main subsets of AI is machine learning which is used to provide more accurate results using structured and semi-structured data. It allows the AI tools to learn from past experiences automatically without explicitly programming anything. Whereas AI is concerned with enhancing the probability of success, machine learning is mainly focused on accuracy and patterns and making predictions based on given data.
Presently, AI tools that are highly based on machine learning are globally used in international arbitration for the following purposes:
- Efficient legal research.
- Selecting arbitrators, counsels and experts required.
- Facilitating the automation of procedures.
- Adjudication process (predictive justice).
Functions of AI in Arbitration
Today the main function of AI is to assist lawyers in the arbitral process. The work profile of AI ranges from general paperwork namely analysing data to doing specific tasks such as analyzing precedents and summarizing and translating evidence based on the inputs of the parties. Some AI tools used in international arbitration are Arbitrator Intelligence, Billy Bot, Lex Machina, Arbitrator Research Tool (ART), LexisNexis, Ross Intelligence, Litigate and Arbilex.
What is Blockchain Arbitration?
Defining Blockchain
A blockchain is a digital database for accounts of several transactions and a copy of every new transaction is being updated to every participant for transparency and decentralization of controlling power. A database having several participants is also known as Distributed Ledger Technology (DLT). The principal properties of DLT are:
- Transactions are encrypted.
- All participants agree on the validity of the transaction before submitting it into the network.
- Validated agreements cannot be changed.
- All transactions are time-stamped.
- It is programmable e.g. Smart Contracts.
There are four types of blockchain namely Public Blockchain, Private Blockchain, Consortium Blockchain and Hybrid Blockchain. Going by their inherent properties and traits one can understand that for international arbitration Private Blockchain and Consortium Blockchain is the optimum type to reduce the involvement of the outside public and increase the security and privacy of the network. Their basic attributes are:
- Private Blockchain: This is used within an organisation amongst limited and selected people such as supply chain management. The organization itself controls the security and accessibility of the network.
- Consortium Blockchain: Here more than one organization controls the network for exchanging information and for mining purposes (methodology used to validate a transaction for entering into a block).
The function of Blockchain technology in Arbitration
The relevance of blockchain technology in international arbitration has arisen from the advent of Smart Contracts. The terms of an agreement in a smart contract are written in the line with codes. As there is no central authority, the legal system or enforcement mechanism, it is a self-executing contract whose terms are encrypted and is updated among all participants in the decentralized blockchain network. They are trackable and irreversible.
The encrypted terms of the contract would include the arbitration clause in the coded form which will get triggered on the occasion of default such as breach of contract, delayed delivery, non-payment or non-performance of obligations by either of the parties to the smart contract. Thereafter, parties will exchange their submissions and communicate through the platform itself.
Upon completion of scrutiny of all evidence, the arbitrator will render an award in which the penalty awarded be settled automatically from the security deposits made by the parties and any advance payment already made in the contract. Therefore, there is no need for an enforcement mechanism.
Not only the use of blockchain can be kept for storage purposes and as a repository for storing documents but the entire process can be automated by using AI algorithms for decision making and other specific tasks as mentioned above in this article.
Here arrives an interplay of blockchain technology and AI Arbitration. Therefore, we will further see and analyse here the functionality, challenges on board and future prospects of this union in international arbitration scenarios.
How do they function together?
The interplay of Blockchain Technology and AI Arbitration
From entering into a Smart Contract to triggering of arbitration till serving of final award upon parties, the two concepts work harmoniously to achieve the ultimate goal of international arbitration of fast, efficient and less costly resolution of disputes of contracting parties.
Their roles can be differentiated into two categories i.e. procedural and legal. The AI tools help in executing the arbitral process more efficiently through appointing arbitrators and experts, summarizing precedents and previous judgments, efficient legal research for counsels etc. Similarly, blockchain technology helps in the legal domain stretching from signing a smart contract, automatic invoking of arbitration clauses to recognition/enforcement of final awards.
The benefit of this interplay
Accordingly, after delving into the individual benefits of both blockchain technology and AI arbitration, we can arrive at a conclusion that they together offer:
- Greater cybersecurity than cloud computing.
- More efficiency in the arbitral proceedings.
- More transparency in arbitral awards.
- Less risk of cognitive biases of arbitrators while adjudicating.
- Efficiency in recognition and enforcement of awards.
- Confidentiality of proceedings and outcome between the restrictive nodes of the blockchain network.
These benefits involve a unique blend of transparency and confidentiality. The transparency of arbitral awards due to AI tool’s predictive analysis aids the parties to predict the outcome in advance and prevent them from filing frivolous claims and settle accordingly. Simultaneously, the restrictions on participants of the blockchain network gives ample confidentiality to the matter.
Risks and Challenges associated
Enforceability of awards
To understand the glitches of enforceability, we can bifurcate the blockchain arbitration into “On-chain arbitration” and “Off-chain arbitration”. The former denotes the arbitration of disputes arising out of simpler contracts, more classic one which is fully automated and self-executing.
The latter refers to those arbitrations which are not fully automated and specific tasks such as the appointment of arbitrators, legal research or summarizing of documents submitted is done through AI tools to facilitate the arbitration process narrowly.
It is the off-chain arbitrations where the enforceability of an arbitral award is highly uncertain due to the following reasons:
- Article II of the New York Convention on the enforcement of the foreign arbitral awards, 1958 (NY Convention) requires the arbitral award to be in “written” form and signed by the parties for enforcement which is impractical in a coded award or on a virtual platform.
- However, Article 7 of the UNCITRAL Model Law on International Arbitration, 2006 incorporates the possibility of “electronic communications” within the scope of the telegraph and telefax as it is not an exhaustive list but the similar provision has not been incorporated in Article II(2) of the NY Convention till date.
- The seat of arbitration if not pre-decided may pose great hurdles in the enforceability of award as the participants of the blockchain network receive their copies in their computer system which may be situated in several places. Here, difficulty arises because the seat of the arbitration must be a signatory of the NY Convention to receive the benefit of enforcement in more than 166 countries.
Principles of Natural Justice
All the benefits mentioned above are true to a certain limit. They are most optimum for the document only based arbitrations and often do not take into consideration the oral hearings for adjudication which are an integral requirement for complex arbitrations. The traditional rule of principles of natural justice is an integral part of any dispute resolution mechanism which is undermined in the on-chain arbitrations. The evidence from third parties which sometimes may prove highly beneficial is totally ruled out of the proceedings due to the restrictive blockchain network.
Security of data
Generally, the hacking of a transaction involved in a public blockchain is almost impossible because of the availability of several nodes in the network and validation of every change in the block by mining. But in a private blockchain network when few parties are involved, it is much easier to hack into the few nodes to change information or temper with the evidence.
Is their future bright together?
With the time being, smart contracts are getting their recognition across the world through conventions and state laws. The UNCITRAL Model Law on Electronic Commerce, 1996 gives the concept of “functional equivalent approach” which means that if an agreement fulfils the traditional requirements of being in written form, it must be considered “in writing”.
This rule has been recognized in the US at the federal level under the model laws for the states naming Uniform Computers Information Transactions Act (UCITA) and Uniform Electronic Transactions Act (UETA). This approach will ultimately validate the coded arbitration agreement clauses as “in writing”. Further, the validity of electronic signatures and electronic records in interstate commerce is recognized under the federal Electronics Signatures Recording Act (E-Sign Act).
Similarly in India, Section 10A of Information Technology Act, 2000 validates the contracts formed through electronic means. Section 3 of the Arbitration and Conciliation Act, 1996 allows any communication through electronic means.
However, it is not clear what can be included in an electronic means but reference to Section 2(1)(t) of the IT Act, 2000 which defines “electronic means” can be sought. Also, to decide upon a seat of arbitration the courts enforcing the award need to base their judgment on the common principles of territorial nexus of the contract or the place of arbitration i.e. venue or institute where it was actually held.
Conclusion
Consequently, we can arrive at a situation where a full-fledged combination of blockchain and AI arbitration is currently infeasible due to uncertainty in enforcement laws, development of accuracy of AI tools, the impossibility of replacement of arbitrator with the AI pertaining to rules of principles of natural justice and safety issues.
Whereas we can continue with the use of AI tools for facilitating arbitral procedures and helping counsels for the better conduct of their case and using blockchain for storage and contractual purposes. This combination is an optimum strategy for time-bound and efficient arbitral proceedings in simple and classic disputes which does not require much human intervention in terms of oral hearings and personal opinions. Therefore, the coming days will see some drastic changes in this area and soon it will be omnipresent.
References
- https://www.britannica.com/technology/artificial-intelligence/Reasoning
- https://www.javatpoint.com/difference-between-artificial-intelligence-and-machine-learning
- http://arbitrationblog.kluwerarbitration.com/2020/09/26/future-of-ai-in-arbitration-the-fine-line-between-fiction-and-reality/
- https://www.lexology.com/library/detail.aspx?g=a38af5ee-2713-43b1-abb3-367955126604
- https://www.euromoney.com/learning/blockchain-explained/what-is-blockchain
- https://data-flair.training/blogs/types-of-blockchain/
- https://www.investopedia.com/terms/s/smart-contracts.asp
- https://techlawforum.nalsar.ac.in/demystifying-the-cryptic-relationship-between-blockchain-and-arbitration/
- http://arbitrationblog.kluwerarbitration.com/2018/11/12/the-marriage-of-artificial-intelligence-blockchain-in-international-arbitration-a-peak-into-the-near-future/
- http://cilj.co.uk/2020/12/16/blockchain-arbitration-the-future-of-dispute-resolution-mechanisms/
- https://techlawforum.nalsar.ac.in/demystifying-the-cryptic-relationship-between-blockchain-and-arbitration/
- http://arbitrationblog.kluwerarbitration.com/2019/08/21/enforceability-of-awards-from-blockchain-arbitrations-in-india/
- http://cilj.co.uk/2020/12/16/blockchain-arbitration-the-future-of-dispute-resolution-mechanisms/
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:
https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA
Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.
