APPLICATION OF BLOCKCHAIN ARBITRATION FOR RESOLUTION OF DISPUTES ARISING OUT OF SMART CONTRACTS

Source : ICLG.com

This article has been authored by Ayushi Raghuvanshi, a law graduate from Amity University, Rajasthan.

Introduction

Blockchain technology is one of the leading technologies today which is substantially gaining ground. This technology can be seen entering into the traditional dispute resolution too. What has brought the technology into this system is the widespread use of smart contracts these days instead of the traditional contracts. Resolving disputes between the parties to the contract is one of the challenges which the implementation of these contracts pose and this particular challenge can best be resolved by the use of blockchain arbitration.

What is blockchain technology?

Before delving into the concept of blockchain arbitration, it is primarily important to understand what blockchain technology is. It is a distributed ledger technology with a decentralized database system.

Smart Contracts

Smart contracts are a feature of blockchain technology; these are computer programs essentially, which automate the enforcement of terms. Computerized set of rules and mechanisms collectively form a smart contract and these exist across a distributed, decentralized blockchain network.

Smart contracts are in digital form as these incorporate coding, data and operating programs; all the clauses of the contract are embedded in the form of code in the computer’s software. All the actions like payment release are controlled by technology based functions. Smart contracts are irreversible and irrevocable for the simple reason that once the action is triggered and starts processing then there cannot be an interruption on the part of either of the parties.

Arbitration in disputes arising out of smart contracts.

Traditionally, arbitration refers to the alternative dispute resolution system wherein the parties agree to refer their dispute to an arbitrator or an arbitral tribunal instead of taking it to any conventional court. It does away with the problems associated with the conventional method of dispute resolution.

Arbitration indeed offers even a larger number of advantages in dispute resolution when it comes to smart contracts. The required expertise to deal with matters arising out of the novel and rather complex technology can be offered in a better manner through the choice of arbitration over other methods of dispute resolution.

The arbitrators with specialized knowledge in the area are required to comprehend the matters which arise in the dispute and suggest plausible solutions. There may be problems with regard to the determination of the jurisdiction would be competent to determine the dispute relating to smart contracts in the case of litigating in State Courts. This is due to the reason that the smart contracts are executed through nodes across different geographical areas across the globe. It then becomes hard to discern which state court and which law would govern the matter arising out of it. This also can be well addressed by arbitration.

The time involved in the determination of disputes through conventional courts is very long and does not do justice with the parties. Through arbitration one can get speedy redressal of the grievances and thus the purpose of justice be served upon the parties.

At the same time arbitration also offers privacy and confidentiality which is much preferred by the parties. The matter is resolved between the parties through the assistance of the arbitrators who do not disclose the details of the matter to third party by virtue of the confidentiality clause. It remains private and confidential between the actual parties to the dispute and the arbitrators.

Application of arbitration

Arbitration offers commendable advantages in case of dispute resolution but it has certain limitations too which blockchain arbitration overcomes. It effectively overcomes the drawbacks of traditional arbitration in cases of disputes arising out of smart contracts.

The very first requisite to arbitration is that the parties must have agreed to refer the dispute to arbitration in a valid agreement or through a clause in an agreement. The procedural obstacles are taken care of, with the press of a button the entire process begins without involving any complexities which are faced in the traditional system. In a traditional system, the claimant has to first send a notice requesting arbitration to the opponent; it allows the opponent a period of time to respond. The tribunal is then formally constituted as per the provisions of the act, all the submissions are written, then there are hearings and the award is passed.

The parties who deal with each other anonymously can easily benefit from the blockchain arbitration as they only need the wallet address of the other party for the initiation of the proceedings.

The enforcement of the decision is also assured as it is self-executed. The smart contract is able to automatically enforce the decision which makes it more effective. This can be understood well by an example where two parties are engaged in a transaction, party X and Y. As per the smart contract, party X would pay party Y a certain sum on completion of a task. The sum will be deposited by X into the smart contract and not paid until Y satisfactorily completes the task. If there arises any dispute over the completion of the contract, either party may trigger the arbitration proceeding which would freeze the sum and select random jurors to decide the dispute. The sum would be credited to the wallet of either party upon determination of the dispute.

The blockchain dispute resolution method uses the concept of decentralization as it resorts to selecting random jurors from across the world. The jurors are incentivized to make the right decision and are not in contact with the other fellow jurors. This ensures delivery of justice. It becomes impractical to initiate a claim due to unavailability of the information about the other party on account of pseudonymous accounts. This is taken care of by blockchain dispute resolution.

Conclusion

With the advancement and wider use of blockchain technology, the scope of the transactions carried out through this technology would enlarge by covering almost every sort of transaction. Thus, the number of disputes would rise along with the increase in the use of this technology. In such a scenario it would be indispensable to have an effective means of dispute resolution, such as blockchain dispute resolution for resolution of disputes. It will be more effective than litigation for the several procedural shortcomings in litigation as far as disputes arising out of smart contracts is concerned. There is a need for more research and development in the field of arbitration and blockchain dispute resolution to effectively serve as a solution to the variety of disputes that might arise in the future with regard to transacting through the use of smart contracts.