Blockchain and the future of dispute resolution

June 2021  |  SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION

Financier Worldwide Magazine

June 2021 Issue

Technology continues to evolve exponentially. The first personal computer was released by IBM in 1981 – exactly, and only, 40 years ago. Since that time, the world has witnessed an explosive growth in the use and capabilities of artificial intelligence (AI) which has made an undeniable impact in practically every field, dispute resolution being no exception. These types of technology include ‘blockchain’ and ‘smart contracts’ – but what are these and how can they be used most effectively by the legal profession and their clients?

In simple terms, blockchain uses peer-to-peer networking to run a type of database which is similar to a diary or spreadsheet. It contains information about transactions which it records in a specific order, with each transaction generating a string of numbers and letters, dependent on the previous transaction. Computers run complex algorithms to validate the information that has been distributed upon which the transaction is written into a ‘block’. A series of blocks is the blockchain.

Blockchain can serve a number of functions, including to record transactions, as famously employed by Bitcoin. Commercial uses of blockchain span property and share ownership, which can be automatically transferred upon receipt of cleared funds, in addition to more bespoke spheres such as digital art and social media, with Jack Dorsey selling his first tweet for $2.9m as a ‘non-fungible token’ in March 2021. Smart contracts, which automatically enforce obligations without human intervention using coding, often employ blockchain technology to record and monitor performance.

On its face, code is seen as providing more certainty as compared to conventional language given it does not carry the same inherent linguistic ambiguities, which could reduce the need for litigation. Indeed, the very concept of a self-executing agreement appears to suggest that any need for third parties such as arbitrators or judges to enforce contracts could become obsolete as any sanctions for non-compliance could be baked in and automatically enforced.

However, in addition to opportunities, innovations also raise new potential areas of dispute, which all thorough and risk-averse lawyers will be programmed to automatically consider. Although hard to predict, questions are likely to arise as to whether legal concepts that inherently require degrees of subjectivity or flexibility to changing events, such as the boilerplate concepts of ‘good faith’ and ‘reasonableness’, could be adequately captured by this technology. Disputes might also arise in relation to which parties are responsible for coding errors, bugs, inaccurate data and delays.

Even more fundamental questions might arise, such as whether a smart contract is capable of being legally binding; many common law jurisdictions, for example, provide that a contract is only valid if certain principles are adhered to, such as legal certainty (including with respect to the identities of the contracting parties), and if the contract is entered into by a legal person with capacity to do so.

Such technology might also have a role to play in the process of dispute resolution itself. For example, the manner and form in which parties wish to settle disputes might be embedded into a smart contract itself. There have been a number of legal technology start-ups in this area, including the Miami Blockchain Group which released the ‘Smart Arbitration & Mediation Blockchain Application’ (SAMBA) in 2018. This was the first blockchain application developed specifically for the international dispute resolution community, with the intention to enable users and arbitrators to conduct the entire arbitration process – from initiating proceedings to issuing rewards – via blockchain.

In relation to issuing rewards, for example, blockchain can make use of ‘multi-signature wallets’. This technology is analogous to escrow accounts, whereby the arbitrator, jointly with the winning party, authorises a transaction in favour of such party. In turn, enforcement may become easier as it can be automatically executed, even in circumstances where the losing party disputes the outcome.

Similar applications, including Kleros, Mattereum and CodeLegit have since launched or are currently being developed. The flexibility of arbitration appears well suited to the needs of fast-developing technology such as blockchain, as proceedings can be easily tailored by the parties as compared to the slower pace of change in court proceedings. The common idea underlying each of these start-up technologies is that costs and delays will fall, with the need for couriers, hard copies and mailing removed, as documents can be drafted within portals and submitted directly to tribunals. Moreover, the ability of this technology to automatically impose and enforce procedural rules, such as those relating to statutes of limitations, submission deadlines and serving documents, could be extremely beneficial in ensuring neutrality and equal treatment between parties.

The recent coronavirus (COVID-19) pandemic has arguably accelerated the use of some of these methods, including virtual hearings, and accordingly hastened the proficiency of the legal profession and clients alike. For junior lawyers faced with the prospect of reviewing thousands of documents as part of a disclosure exercise, such technology might offer a welcome change on its face. For some technophobes or those worried about the consequential impact on jobs, the potential disruption might appear concerning, with the extreme prospect of wholly automated dispute resolution solutions seemingly not a world away.

Nonetheless there are a number of hurdles that blockchain technology would need to overcome before it completely disrupts the way in which disputes are run. Given the lack of regulation governing the use of blockchain in dispute resolution, there is a need to ensure that efficiency does not compromise other aspects of fairness. For example, the automated nature of blockchain technology might mean that flexible or innovative settlement terms are lost in favour of binary outcomes crystallised by one party losing in totality.

In September 2020, the Law Society acknowledged this concern and released a paper entitled ‘Blockchain: Legal and Regulatory Guidance’. This paper noted that “the novel nature of these mechanisms… may themselves be the source of dispute, increasing legal costs and risk for both parties”, recommending that authoritative guidance be developed and published regarding best practice standards. It further called on the London Court of International Arbitration (LCIA) to explain whether it envisages the need for specialist rules or deems its current regime sufficiently flexible.

Despite the potential benefits that blockchain technology can provide, in light of its associated ongoing uncertainties, parties should be advised to take steps to minimise risks. While each contract requires careful individual and contextual analysis, certain points must be universally considered at the outset. Arguably the most important of these, particularly given the naturally international context within which such contracts will be operating, will be those concerning choices of governing law and dispute resolution mechanisms.

Parties should ensure that they agree to these provisions in advance to ensure that the risks of satellite disputes are mitigated if the very nature of the contract itself becomes disputed. In particular, parties should check that the governing law chosen does not render their type of contract illegal or unenforceable. Moreover, if choosing arbitration, parties should decide whether it is more important to them to have a tribunal familiar with the technology or the underlying subject matter of the contract, as there is unlikely to be considerable, if any, overlap between the two.

Overall, the use of blockchain and other types of AI within commercial relations and dispute resolution are increasingly likely to become more prominent. Lawyers and clients alike should consider embracing these changes to stay at the forefront of legal innovation and technological evolution, together with staying alert to both its risks and opportunities.

 

Sarah Chaplin is an associate at Weil, Gotshal & Manges LLP. She can be contacted on +44 (0)20 7903 1346 or by email: sarah.chaplin@weil.com.

© Financier Worldwide

BY

Sarah Chaplin

Weil, Gotshal & Manges LLP

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