Arbitrating smart contract disputes

Настоящая публикация посвящена чрезвычайно актуальным вопросам, связанным со смарт контрактом, а также технологией блокчейн. В частности, авторы рассматривают определение понятия смарт контракта и риски возникновения споров при его исполнении. Особенное внимание уделяется роли, которую может играть арбитраж в разрешении таких споров. Составление арбитражных оговорок – предмет особого интереса, в том числе:

What are smart contracts?
Smart contract dispute risks
Why include an arbitration clause?
Drafting arbitration clauses

Smart contracts and the blockchain technology that they use are hot topics in almost every industry sector. This update explains:

what smart contracts are;
the types of dispute that may arise when code and contract law intersect; and
the role that arbitration can play in resolving them.
What are smart contracts?

Despite the hype, there is a lack of understanding of what smart contracts are and how they work. They are best described as “a set of promises, specified in digital form, including protocols within which the parties perform on these promises” (Nick Szabo, Smart Contracts: Building Blocks for Digital Markets, 1996).

A drinks vending machine is a straightforward, early example embodying the characteristics of a smart contract. When money is paid, an irrevocable action is put into motion; money is retained and a drink is vended. The transaction cannot be stopped in the middle of the process. The terms are, in a sense, embedded in the hardware and software that runs the machine.

The key characteristics of the modern conception of a smart contract are as follows:

Digital – it is in computer form: code, data and running programs.
Embedded – contractual clauses (or equivalent functional outcomes) are embedded as computer code in software.
Performance mediated by technological means – the release of payments and other actions are enabled by technology and rules-based operations.
Irrevocable – once initiated, the outcomes which a smart contract is encoded to perform cannot typically be stopped (unless an outcome depends on an unmet condition).
Smart contract dispute risks

Many technologists believe that smart contracts replace contract law and courts and tribunals with code. There is a misconception that, because they perform automatically and their performance cannot be stopped, they remove the potential for disputes. At least for the moment, this is wishful thinking. Although smart contracts provide huge potential benefits in terms of reducing transaction costs and increasing security, disputes can and will arise.

Why include an arbitration clause?

Smart contracts give rise to a number of dispute resolution challenges that make including a robust dispute resolution system key.

Difficulty identifying someone to sue
Smart contracts can be executed pseudonymously. In those cases, it may be difficult to identify someone against whom to bring a claim. There may also be evidential difficulties in pinpointing who is responsible for loss that is caused by bugs in the operating system, corrupted messages or defective code.

Uncertainty over jurisdiction and governing law
As smart contracts operate via distributed nodes (computers) which may be based all over the world, it may be difficult to determine the applicable governing law and jurisdiction. It also increases the risk of satellite disputes over such issues.

Novel enforcement issues
One of a smart contract’s key characteristics, and what many see as an advantage, is that they are irrevocable and the transaction is indelibly recorded on the blockchain. However, this creates problems when a party is entitled to terminate or unwind a transaction and the record no long reflects the legal position.

Arbitration is likely to emerge as the preferred means of resolving smart contract disputes for a number of reasons, and smart contract disputes will, in turn, drive innovation within arbitration, as arbitral bodies and arbitration law and procedures adapt to meet the needs of new types of dispute.

Protecting proprietary information
Some smart contract disputes are likely to involve evidence about proprietary software and hardware. Where that is a risk, and the source code and other proprietary information becoming public may have material commercial ramifications for one or both of the parties, it is preferable to agree that disputes will be resolved by confidential arbitration and to limit disclosure.

Tribunals with specialist technical knowledge
Some smart contract disputes will be fairly standard contract law disputes, but others will be of a highly technical nature – for example, where the code does not operate as expected. The courts in many jurisdictions are adept at getting up to speed with technical issues quickly, but the parties to a smart contract can agree an arbitration clause which enables them to appoint someone with, for example, an understanding of coding. Over time, arbitral institutions are likely to develop specialist pools of arbitrators with relevant experience or published blockchain-tailored procedures.

Bespoke procedures and automated enforcement
Arbitration offers parties the potential to agree on bespoke procedures that may help to overcome the challenges presented by the irrevocable nature of smart contracts. For example, the parties may agree to refer disputes below a certain threshold to a central blockchain administrator with the power to determine disputes and insert remedial transactions into the blockchain as necessary. Technologists are going a step further and looking at the idea of decentralised arbitration, whereby disputes relating to smart contracts are referred to randomly selected arbitrators and their decision is then recorded on the blockchain.

A variation on this is where parties incorporate into the smart contract an agreement to refer disputes to arbitration and a mechanism to allow the arbitrator automatically to enforce any award without the intervention of a third party. For example, the ‘multisig’ mechanism enables the parties collectively to nominate an arbitrator, which then triggers the power of that arbitrator to transfer assets or money on the blockchain.

Drafting arbitration clauses

Smart contracts raise some interesting drafting considerations in respect of arbitration clauses.

Consent to arbitrate
Parties should ensure that they can establish consent to the arbitration agreement. This may be an issue in circumstances where the smart contract is entered into by a computer, is in code or and does not create legally binding contractual obligations under the applicable law.

Given the distributed nature of blockchain and the operation of smart contracts, it is important to agree a seat for the arbitration to avoid satellite disputes about the applicable seat or procedural law. Parties should check that:

the law of the chosen seat does not render a smart contract illegal or unenforceable;
the disputes likely to arise are arbitrable (in some jurisdictions, for example, IP disputes are not arbitrable); and
the codified arbitration agreement in question will be upheld and enforced by the supervisory courts.

Appointment of arbitrators
Parties should weigh the importance of having a tribunal familiar with the technology against the importance of having the dispute decided by experienced contract lawyers. There is likely to be relatively little overlap between the two, so requiring both skill sets risks restricting the pool of potential arbitrators to such an extent that the arbitration agreement becomes unworkable in practice.

Formality requirements
Parties should ensure that the arbitration agreement meets any formality requirements under the governing law of the arbitration agreement and smart contract, the law of the seat and wherever the award is likely to be enforced. For example, an arbitration agreement in code, or incorporated by code, may not meet the requirements for writing under the New York Convention 1958.

Parties often make the mistake of assuming that arbitration is confidential by default, which is not the case in all jurisdictions. If a desire for confidentiality is important, parties should agree expressly in the arbitration agreement that they will keep the arbitration – together with all materials created and all documents produced in the proceedings – confidential, except to the extent required for enforcement.

Авторы: James Rogers, Harriet Jones-Fenleigh, Adam Sanitt


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