This article is written by Keshav K Varkhedkar, pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from Lawsikho.com.
There has been intense debate and discussion among legal fraternity in recent times about the use of latest and emerging technologies on the future of the legal industry. The words like smart contract, artificial intelligence, blockchain have entered the sphere of technologies and they are becoming instrumental in changing the shape of the society. This article is supposed to throw light on the philosophy of smart contracts, the type of disputes we may encounter when there is an intersection between coding followed in smart contracts and contract laws. Let us therefore understand what smart contracts are and how they work.
Smart contracts are defined as the contracts which have a set of promises specified in digital form within which the parties perform on these promises. The contracts either might be written entirely in code or a split model e.g. contract in code incorporating by reference the terms of natural language agreement or a natural language contract with some encoded performance e.g. Payment mechanism.
The typical characteristics of a smart contract are that it is in computer form-code, data and running programs. The contractual clauses are embedded as computer code in software. The performance of the contract is achieved through technology for example the release of payments and other operations are triggered by technology and once the actions are initiated they cannot be stopped i.e. they are irrevocable. Arbitration is no exception in this trend of amalgamation between technology and law.
Use of modern technology in arbitration
The on-line world today has overcome the physical limitations of space and it has enabled us to learn and socialize in new and efficient ways. The reach of the technology is widespread and it is time to acknowledge its potential as a powerful tool to solve more disputes and new types of disputes however the legal industry has its own reasons and apprehension to welcome these new technologies. This is due to the fact that it adopts a conservative position regarding the exercise of the profession. There is an inbuilt fear in the mind that adoption of these new technologies may seize the role of a traditional lawyer but today clients are demanding more transparency, simplicity and accessibility to dispute resolutions with lesser cost implications. The new technologies and arbitration can have a very good synergy between them. On one hand the introduction of new technologies can bring necessary efficiency and transparency in the arbitration proceedings and at the same time the arbitration itself could prove to be a trusted tool to resolve new disputes.
In the subsequent para we will discuss blockchain technology which is one of such technology and which has potential to bring necessary revolution in the arbitration proceedings.
The definition of a blockchain is that it is an open distributed ledger that can record the transactions between the two parties efficiently. This decentralized platform stores and distributes digital data across the number of networks in a highly secure manner. As per the strictly legal definition it is a transaction validation mechanism which does not require any intermediary assistance. It is based on a decentralized chain of transactions, each one being added as a block and linked together by chaining the hash of the previous block. Due to this peculiar feature, the technology possesses some special features such as security, permanence and accessibility.
The technology is so robust that it is almost impossible to tamper with the same. If a person wishes to tamper with the information in the Block chain, he or she must control a significant proportion of the computation power (typically51%) to produce one false block and faking transactions back is almost impossible.
This technology can be linked with other technologies. Smart contract is one such example where a set of coded contractual clauses that sit on the blockchain and enable self-enforcement of parties rights and obligations.
The checking and verifying the authenticity of facts, data, processes, evidence, reputation can be done with great simplicity and ease by using blockchain technology.
Impact of blockchain technology on arbitration
It is a moot question whether the use of Blockchain technology in arbitration will have the desired impact or not since full automation of any process requires careful procedural design translated and adjusted to programming language. We can think of automated dispute resolution platforms with such emerging new technology which will help us to handle the dispute resolution proceedings with more efficiency and security.
The arbitration clause needs to become a smart arbitration clause as a starting point. The clause needs to be translated into a block of codes and stored on the block chain. The validity of the original arbitration agreement can be preserved by using this technology. The arbitration clause is a passive clause. The arbitration clause can be physically independent from the main agreement in an analog environment however in an automated environment that would not be the case because the clause would be programmed in such a way that it will get activated depending on a particular event constituting breach of parties’ agreement. For example, if there is a contract between the two parties for supply of goods at a particular price the arbitration clause would get automatically activated if the goods are not delivered or the price has not been paid as per the terms and conditions of the contract.
The use of Block chain technology will facilitate complete automation of various processes like submissions of claims, counter claims, submissions of evidence or communication with the tribunal to list a few. The nature of the processes in arbitration mechanism need to be studied thoroughly so that we are able to find the same outcome in a block chain based platform. The block chain based platform however would exclude oral hearings and the arbitrator’s decision on the case.
Benefits of using blockchain technology in arbitration
As we have seen in preceding paras the Block chain technology can help us in verifying the authenticity of facts, data, processes, evidence reputation etc. Some of the possible uses of this technology in the arbitration proceedings could be as under:
- It would be easily possible for the arbitrators to verify the existence of evidence and facts in Blockchain. Due to the inbuilt advantage of timestamping being the basic function of Block chain it will permanently register the time when a particular action took place. For example, this could be any action regarding the appropriate time when the transfer of assets has taken place or the fact that an action occurred like delivery of material at any port. This feature of the block chain technology is very useful for the arbitrators to verify that an event which is the subject matter of the argument has actually taken place at a particular moment in time. This feature will be of great help to arbitrators from an evidentiary perspective as it will save time, money and time consuming discovery proceedings.
- The technology will be of great help for the recognition of international awards. It is possible to store a duly rendered award in an arbitration proceeding. The existence of such an award could be verified by the jurisdictional authority once this information is stored in the block chain. This feature of the technology will enable the arbitrators to give reference of such awards in their reasoning while making their own awards on the subject matter of dispute.
- There could be a reputational system stored in the block chain which could reduce the conflict of interest for the arbitrators. This system may help to solve major challenges such as lack of impartiality and independence from arbitrators.
- Further the reputational system could be controlled by the parties themselves with the help of the block chain technology. The reputational score of the arbitrator can be calculated by the party itself with the help of the technology based on certain parameters and the party can decide who is the best arbitrator to be appointed for the subject matter under dispute. Thus selection of arbitrators will be based on a reputational system in the market and will not be dependent on a system where the reputation is controlled by the centralized authority based on short listing of arbitrators.
- The arbitrators will be in a position to express their awards in codes by using this technology thus bringing desired efficiency in the enforcement of awards. The drafting of an award could be in such a way that it will get automatically enforced after a certain set of conditions have been met.
- Such awards will promote more trust and reliance in the efficiency of the arbitration process.
- It will save costs for the parties and avoid unnecessary judicial scrutiny and intervention.
Implementation of blockchain technology : distant dream or reality
There are no legal barriers in implementing block chain technology in arbitration proceedings however intense debate is presently going on whether the technology would be really of any help to solve legal disputes in arbitration. There is also apprehension whether computers would be able to solve legal disputes in arbitration. It is a misplaced fear. The international laws and national laws of almost all the countries envisage that the arbitrators must be human. This is mainly because the use of technology to act as an arbitrator would certainly lack the key human characteristics of feelings, morality, and ability to explain the logical deductions of the decisions.
The use of technology will be of great advantage to arbitrators as they will be able to optimize their role. The arbitrators will not be required to spend countless hours through complex contract clauses, evidences, and international case laws. The technology would help them to maximize their efficiency. The technology will have the capacity to review thousands of cases and decisions in merely seconds.
However, following challenges will have to be faced and suitably resolved before use of such technology start delivering the desired results
parties to the contract should invariably check that the law of the chosen seat does not make the smart contract illegal or unenforceable and the disputes arising are arbitrable and the codified arbitration agreement will be upheld and enforced by the courts.
Parties will have to identify the arbitrators who are both legally capable to handle the disputes as well as familiar with the Block chain technology. This may restrict the pool of potential arbitrators to the extent that the whole arbitration agreement drafted as per the requirements of smart contract becomes meaningless and unworkable.
In near future we are certainly going to witness the use of Block chain technology in the legal market and hopefully in the arbitral world. There may be some reluctance in the beginning for the adoption of new technology due to the fear of losing importance in the entire process however many major international law firms have started adopting new technology and getting familiar with the nitty gritty of the same.
The introduction of new technologies can certainly ease some of the issues faced by the arbitration such as High Cost and Lack of Efficiency.
Technology is no longer a luxury and it is increasingly becoming a necessity. Technophobic mindset prevailing today will have to be forgotten and we should see the introduction of such technologies as an opportunity rather than a threat.
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