To prevent legal disputes arising in connection with the conclusion and execution of contracts, blockchains and smart contracts offer the possibility to simplify business transactions considerably. An overview of potential dispute resolution options.
Blockchains and Smart Contracts are technologies of multiple use. Nevertheless, legal disputes cannot be completely avoided even by using such innovative technologies. How could a suitable solution look like that meets the specifics of blockchains and smart contracts? For thousands of years, international merchants have been settling their disputes by means of (private) arbitration, long before a state justice system in the form we know today existed.
This dispute resolution method can also make a useful contribution in the age of block chains and smart contracts, especially since block chains and smart contracts are often used across national borders. At the same time, the course of such arbitration procedures should be adapted to the specifics of block chains and smart contracts. In the following we would like to give some preliminary considerations.
Process efficiency as the top priority
With a view to the desired efficiency gains through the use of block chains and Smart Contracts in the processing of business transactions is also used with regard to the settlement of disputes must primarily be ensured that this is also as far as possible runs efficiently. It does not seem to be very target-oriented, e.g. a trading platform for to use high frequency trading of crypto currencies, resulting in legal disputes that have to be conducted in court for years.
Efficient dispute resolution requires customized procedures, competitive
cost structures, but also competent decision makers. State
court proceedings, with formalized procedures and standardized cost regimes, and non specially trained decision makers for block chain disputes, but only help limited to cope with these problems. As an alternative, therefore, private arbitration proceedings. In other industries where efficiency is of the utmost importance, such as shipping or trade, arbitration proceedings have long been part of the to the standard repertoire. We want to show, how the blockchain-industry can benefit from this could benefit.
Arbitration in general
Arbitration proceedings are private, i.e. non-governmental proceedings for the binding decision of legal disputes. The decision, the so-called arbitral award, is made by private decision-makers, the arbitrators. Arbitration proceedings thus replace the recourse to a state court. In principle, anybody can be considered as an arbitrator; a legal background is not necessary, but often exists. The arbitrators are selected directly or indirectly by the parties. These parties can ensure that the decision-makers in question have the necessary professional qualifications.
The arbitral proceedings are also primarily based on the agreement of the parties and can be adapted relatively freely and flexibly to the needs of the parties, unlike state court proceedings. With regard to the details of the procedure, reference is often made to pre-formulated rules (e.g. the arbitration rules of the International Chamber of Commerce in Paris).
Special features of arbitration
In contrast to state court proceedings, arbitration proceedings are limited in all rule to a single instance. The decision of the arbitral tribunal can therefore not comprehensive reassessment to a higher authority. This reduces the Cost expenditure often considerable.
How can arbitration proceedings be tailored to the needs of the block chain and the be tailored to industry? Theoretically, the respective participants could Designing processes yourself. However, this would not be economically efficient. We therefore plead especially for the creation of special arbitration rules for the block chain industry and the establishment of an automated and self-regulated enforcement system (enforcement).
Arbitration Rules for the Block Chain Industry
To meet the need for efficiency, blockchain arbitration rules should
primarily make arrangements for an accelerated conduct of the arbitration proceedings.
This includes, inter alia, short deadlines for the drafting of legal documents, which can only be can be extended in exceptional cases. Ideally, arbitration tribunals should have only one person (single arbitrator). It should also be considered to appoint only certain admit evidence, such as electronic or physical documents, but not witness statements An oral hearing would be unnecessary in many cases.
Such an accelerated conduct of arbitration proceedings would undoubtedly lead to a very efficient resolution of the dispute. However, this results in the risk of a substantively incorrect decision. It may happen, for example, that one party can legitimately prove its claims only through witnesses. For this reason, it might be considered to follow the procedure outlined above with a second instance, in contrast to traditional arbitration, with a more comprehensive procedure before a tribunal of three arbitrators and a full oral hearing including the questioning of witnesses. For the normal case of a single instance, the usual cost savings would remain. In the exceptional case that witnesses or experts play an important role, a decision can be reached that is correct in terms of content.
Comparable to the block chain industry are also the industries already briefly mentioned
Shipping and trade rely on efficient dispute resolution through arbitration.
Their special arbitration rules could therefore serve as models for block chain arbitration rules
Automated and self-regulated law enforcement
What is still missing for efficient dispute resolution is the possible enforcement of an arbitral award. If the losing party does not accept the award, the winning party must take legal means for the so-called enforcement of the arbitral award. In principle, the (international) enforcement of an arbitral award is usually easier than the (international) enforcement of a court decision. For the block chain industry, however, the efficiency of enforcement could be further optimized by means of automated and self-regulated enforcement.
In particular, (especially private and permissioned) block chains could be programmed in such a way that an arbitral award between users of the block chain is directly enforced on the block chain. In the initial phase of the proceedings, the parties send the amount in dispute to the wallet address of the Smart Contract, which is programmed in such a way that after the announcement of the arbitral award, the certain amount of crypto currency is automatically transferred to the winning party and debited to the losing party. The details depend on the respective application of blockchains and smart contracts.
Switzerland as a venue for blockchain arbitration
Even though arbitration is a private form of dispute resolution, it is possible, to a certain extent, to rely on the support of state legal systems, for example when it comes to questions of the appointment of the arbitral tribunal, the taking of evidence or the enforcement of arbitral awards. Arbitral awards can also be reviewed by state courts, albeit to a very limited extent, for serious procedural errors. The parties regularly establish the relevant connection to a legal system by choosing a so-called seat of the arbitration court
(place of arbitration).
Switzerland is an internationally very popular place of arbitration in general and offers in particular also as arbitration for block chain disputes. In addition to a legal environment that allows the parties a great deal of freedom in the design of the arbitration proceedings, Switzerland has a large number of qualified arbitrators. In addition, Switzerland has extensive technical know-how in the block chain area with some important professional block chain and crypto currency associations, which in turn ensures qualified arbitrators especially in block chain disputes.
Private arbitration is therefore a general standard for dispute resolution in the block chain industry. The parties can do little wrong with the choice of a Swiss arbitration venue, regardless of whether the enforcement of arbitral awards in the block chain industry requires the support of governmental agencies at all.
For further information on this topic, see our article “Arbitrating Blockchain and Smart Contract Disputes-Lessons to be Learnt from Commodities and Shipping Arbitration”, in: Franco Maziero (eds.), International Arbitration in the Age of the Technological Revolution, Volume 2, Brazil (to be published in 2021).
Authors: Andreas Wehowsky and Dr. Johannes Landbrecht
Andreas Wehowsky is a lawyer with a focus on arbitration and state court proceedings. He is currently writing his dissertation in the field of international arbitration at the University of Zurich before returning to Zurich to work as an attorney for a law firm specializing in international disputes.