Blockchain Arbitration: Promises and Perils

Author: Rana Sajjad Ahmad*

In light of the rather serendipitous convergence of relevant technologies that have enabled creation of complete new ecosystems, the future is coming faster than we think. Consequently, the vision of previously unthinkable digital solutions, not just products and services, such as self-driving electric cars are becoming a reality. For techno-optimists, the ambitious vision of blockchain technology with its promises of decentralization and enhanced security and transparency will also disrupt several industries including financial services and real estate. The realm of arbitration will be impacted too and the critical question is if it would be a disruptive innovation, characteristic of “creative destruction”, the term coined by Joseph Schumpeter, whereby a generally accepted product or service is supplanted with a product or service by completely new players and entities. Alternatively, it could be a non-disruptive innovation, the type referred to in the groundbreaking books titled “Blue Ocean Strategy” and “Blue Ocean Shift” involving the creation by existing or new entities of a blue ocean, an altogether new market in which even previous non-consumers, or non-users in the case of arbitration, become converts and new users of arbitration.

And how exactly would this disruption change the manner in which arbitration proceedings are conducted? Would it entail a complete transformation or even displacement of the role and powers of one or more individuals/entities – the disputing parties, counsel, arbitrators and arbitral institutions? Or would it merely constitute a technology platform that aids the more time and cost-efficient administration of arbitration proceedings? And how soon is this disruption going to take place? Are we looking at a few years or decades?

Let us take a step back for a moment and ask the more fundamental question: Why should we even consider adopting blockchain arbitration? Do its advantages give a compelling reason to prefer it over traditional arbitration? Does the term blockchain not raise questions because of its components including cryptocurrency, a form of digital payment that is relatively new, volatile and, perhaps, a bit controversial? What about smart contracts that also constitute an important part of blockchain arbitration? Since, unlike a traditional contract that contains legal language, they are computerized transaction protocols which automate the actions specific to a contract, are all the stakeholders familiar or even comfortable with smart contracts?

One of the primary benefits of blockchain arbitration could well be that it does not just arbitrate a dispute but also facilitates enforcement of the arbitral award. For instance, in the case of small-value e-commerce disputes, as of now, it offers an escrow arrangement whereby once the award is rendered, the buyer’s payment for the goods or the seller’s reciprocal performance are decided/directed by the tribunal/jurors to be paid or performed respectively in direct proportion to each other.  Accordingly, the payment and performance scenarios run across the entire spectrum between no payment on one end and full payment on the other. This feature would be highly valued by disputing parties since enforcement is not the responsibility of arbitral institutions in traditional arbitration proceedings and can be a cumbersome and long-drawn process. The challenge or perhaps the holy grail for blockchain arbitration would then be to effectively adapt it for higher-value disputes and longer-term contracts in the construction and energy industries that, unlike e-commerce, do not just involve a rather straightforward, one-off sale transaction.

Now let’s turn to some of the potential perils. From the standpoint of party autonomy, one issue is how arbitrators are self-selected instead of being chosen by the parties. This takes away one of the advantages of arbitration of appointing, with parties’ mutual consent, an impartial arbitrator having relevant expertise and experience. Blockchain’s self-selection mechanism may ensure impartiality and expertise of the arbitrator but it does not give parties comfort regarding the identity and background of the arbitrator.  Transparency is vital for the disputing parties especially when it comes to knowing who will be deciding their dispute. The counterargument is that having this choice may not be an advantage in the first place as in some cases, it takes a long time to either nominate an arbitrator or mutually agree on one. Then there is the issue of availability of the most sought-after arbitrators that causes scheduling conflicts and the concomitant delays in proceedings. Therefore, this ostensible disadvantage may well be an advantage if it helps parties resolve this paradox of choice by appointing the arbitrators for them.

Another potential loss of party autonomy relates to the self-executing nature of the smart contract. After a dispute arises, this automated process does not give parties the freedom to consider other possibilities such as an amicable resolution. For disputes, especially between parties having a longstanding business relationship, it is always beneficial to have the option of an amicable resolution regardless of the stage of the arbitral proceedings. Choosing blockchain arbitration would then mean having the dispute definitively decided by the tribunal/jurors instead of having the option of settling it amongst themselves on their own terms.

The lack of confidentiality is another potential concern. Blockchain arbitration is conducted as a permissionless system in which all the information including parties’ claims, arguments and even their evidence is on a public, distributed ledger which is viewable/accessible by the public. The question then is if parties would be willing to sign up for such a system that would essentially work like an open court without any confidentiality safeguards.

In view of some of these concerns, the question is if blockchain arbitration should be redesigned to make it work more like traditional arbitral proceedings as we have understood or experienced them to be. For instance, to ensure confidentiality, can it be redesigned to run as a permissioned system? Should parties also be given the choice of appointing the arbitrators and amicably resolving the dispute? If not, the question to consider for users and practitioners of arbitration is whether it would be worthwhile to trade off all these advantages of confidentiality, party autonomy and amicable resolution for the advantages that blockchain arbitration offers in return such as the automatic and seamless enforcement of the arbitral award. “Time will tell” would be a convenient and rather cliched response to this question. However, in this age of lightning and almost terrifyingly fast pace of technological advancement and deployment, the decision to adopt blockchain arbitration in its current or redesigned form would have to be made faster than we think.

*Rana Sajjad is a dual-qualified lawyer (licensed in New York and Pakistan). He is the Managing Partner of Triage Law and the Founder & President of the Center for International Investment and Commercial Arbitration (CIICA), Pakistan’s first international arbitration center.