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Blockchain Arbitration: The Future of Dispute Resolution

The current buzzword- Blockchain has advanced from being a theoretical concept to reaching the sphere of technology where it is shaping today’s society and the legal profession. The field of legal technology has not only streamlined knowledge management requirements and operational aspects of a legal office, but also transformed the way lawyers practice law!

Smart contracts and blockchains have the potential to alter the way documentation and dispute resolution are approached. Hence the concepts need integration, implementation and recognition with arbitration for a more efficient, cost-effective and automated structure.

Smart Contracts, Blockchain and Arbitration

 

These self-executing, new generation contracts are geared towards the realization of predetermined conditions. With the help of smart contracts, Blockchain Arbitration can facilitate storing and verification of rules and automated execution (upon a particular event constituting a breach of the agreement) by invoking the arbitration clause incorporated in the smart contract.

In case of a dispute, the smart contract will notify the Arbitrator via a blockchain-based dispute resolution interface. A party can digitize the terms of an agreement, lock the funds into a smart contract, and condition the intelligent contract so that the task at hand is fulfilled and the funds will pass through. Upon completion of the process, the self-executable nature of the smart contract will automatically enforce the award and transfer the prescribed fee to the Arbitrator.

However, it is yet to be seen how smart contracts shall interact with data protection and privacy laws, intricacies of dispute resolution, and obligations and rights of the parties involved.

Blockchain Technology: An aid to Arbitration?

 

Arbitration aims to be a time-bound and specialized decision-making process. In this backdrop, Blockchain Arbitration theoretically promises to be an ideal structure for the trial process in the following ways:

  • Briefs, Transcriptions & Document Management: The tool in the blockchain system can quickly and efficiently provide synopsis and briefs of the record which would be beneficial not only to the Tribunal but to the parties.
  • Elimination of intermediaries and cost-effectiveness: There shall be no mechanism requiring approval and control at every stage, and the intermediary institutions are not included in the process. For instance, Banks, involved as intermediary institutions in legal and financial transactions, incur costs at every stage of the transaction and are time-intensive in nature.
  • Automation: A blockchain-based dispute resolution platform would exclude oral hearings and the Arbitrator’s decision and automate other aspects of filing of pleadings, filing of documentary evidence, correspondence with the Arbitral Tribunal.
  • Ease in making the Arbitral Award:  Blockchain tools can assist the Tribunals in preparing awards. The tools ensure that all necessary ingredients to make the arbitral award reasoned and enforceable have been taken care of.  The blockchain will continue to prepare the award from the beginning as the arbitration progresses.
  • Confidentiality / Security of Data: Blockchain is the safest way of storing information. Each block will be authenticated by the Arbitral Tribunal and the party to the proceedings. There is no provision for changing, altering or deleting the data unilaterally. It can only be done when it is authenticated by the Arbitral Tribunal and the party to the proceedings. Since third parties are entirely absent from the proceedings, the possibility of breach of data and information is negligible. Disputes arising out of smart contracts can be made confidential which will limit the exposure of the nature of dispute between the parties. Blockchain has a decentralized structure and the security of the system is protected by cryptography.
  • Removal of human error: The reliability and validity of a transaction depend upon the accuracy of the algorithm underlying the transaction. Since, each transaction is based on algorithms, which are mathematical models, it is free from human influence and intervention and, consequently, human error. 

Security and privacy of data are primary concerns in the conventional Arbitral process. In fact, as a specific case representing the flaws of the present model of international arbitration, in July 2015, the website of the Permanent Court of Arbitration was hacked during an essential hearing of maritime border arbitration between China and the Philippines, in the international arbitration of the “Republic of Philippines v. People’s Republic of China.”[1]  

As far as the credibility of blockchain technology in resolving such issues is concerned, the World Economic Forum, in its 2015 survey recognized that by 2025-27, about 10% of the global GDP would be stored in blockchains, owing to its efficient attributes of data security management. By 2025, even taxes are strongly probable to be collected by employing blockchain technology. Moreover,  in its research published in 2018, World Trade Organisation described at length the opportunities that lie ahead in the future, owing to the efficacy associated with the safeguard mechanisms of blockchains. 

Legal Recognition of Blockchain Arbitration and procedure to be adopted

The UNCITRAL Electronic Model Law on Electronic Commerce (1996 Convention) and the ‘UNCITRAL Convention on Electronic Communications in International Contracts (2007 Convention)’ are the primary legal instruments facilitating blockchain contracts.[3]

Articles 6 and 18 of the 2007 Convention assert the validity of on-chain arbitration by allowing for electronic data records and electronic transactions in the arbitration process, thereby providing legal recognition to on-chain arbitrations.

  1. Appointment of an Arbitrator

 Once the notice of arbitration has been sent, the appointment of an arbitrator can be done through blockchain. Thus, the exchange of documents, e-mails, and messages, etc. are all recorded automatically and replicated at all stakeholder’s computers without the involvement of any third party. The case management conference can be done online using a video conferencing facility of blockchain which is recorded and filed in the computers of all stakeholders in original and thereby removing manipulation.

  1. Pleadings

The pleadings including a statement of claim, statement of defense, counterclaims, and reply to counterclaims and further submissions can be submitted online and are automatically served to the parties & the Tribunal along with automated acknowledgment. This ensures timely submissions and helps in maintaining uniformity in the pleadings thus circulated. Any delay will also be penalized in terms of the penalty prescribed by the Tribunal or as agreed by the parties. The fear of ex-parte communication will also be mitigated when the procedural orders and communication by the Tribunal will be auto-delivered to both parties. 

  1. Interim Measures

Interim measures that are sought from courts can be executed on the blockchain if the judicial system of a particular jurisdiction allows for a seamless digital interface with the parties’ computers. In the case of an automated interface with the judicial system, the execution of court orders can also happen immediately provided the jurisdiction’s administrative machinery is using blockchain. 

  1. Recording of Evidence & Preparation of Award

 The efficiency of blockchain can be seen in evidence-taking and award preparation. Witness conferencing, cross-examination, and taking of oral evidence can be easily done using video conferencing suites, or even if hearings are done physically, they can still be transferred on blockchain and stacked for procedural integrity. Statements of expert witnesses, oral submission by experts, and expert communications can be recorded on the blockchain. 

  1. Security of Data

Blockchain is a secure way of storing information because each block is replicated and authenticated by all stakeholders. The provision to alter or delete any data does not exist until authenticated by all stakeholders. In the absence of intervention of a third party, there is no network administrator or supervisor making the possibility of data breach negligible. 

Globally, blockchain technology is being readily resorted to as an effective means of data storage, management, distribution, and transfer. Blockchain technology has immense potential to enhance the efficacy of Arbitral proceedings, especially owing to its mechanism of encryption, which helps secure data.

Contemporary issues in Blockchain Arbitration

The functioning of blockchain arbitration highlights various concerns. Firstly, in an on-chain arbitration, there would be no requirement for oral hearings which are integral to the current justice system and stand at a juxtaposition with the principles of natural justice.

Secondly, an essential principle of arbitration is the underlying idea of confidentiality. Despite the strong protection afforded by blockchain, data privacy can pose a significant concern when an independent third party gets involved as an oracle in dispute resolution. The General Data Protection Regulation (GDPR) provisions are not currently empowered enough to regulate the intricacies in the decentralized functioning of blockchain, which makes it difficult to impose liability on data controllers. Furthermore, the traceable feature of blockchain is again in conflict with the GDPR’s requirement of the “right to be forgotten“.

Thirdly, The New York Convention on the Enforcement of Foreign Arbitral Awards of 1958 (hereinafter referred to as “the New York Convention”) is the most prominent code on enforcing international arbitral awards with 166 contracting states to the Convention. According to Article II of the New York Convention, an arbitration agreement must be in “writing” and requires the parties’ signature. However, in a virtually operative blockchain arbitration, there is no scope for written agreements or signatures.[4]

Challenges in the enforceability of the Blockchain arbitration award in India

 

Lack of enforceability of the agreement itself under the New York Convention

One problem identified with the enforceability of blockchain arbitration awards is the lack of enforceability of the agreement itself under the New York Convention which requires such agreements to be in writing or through an exchange of telegrams/telefaxes.

Section 7 of the Arbitration and Conciliation Act, 1996 requires that a valid arbitration agreement should be in “writing”. However, unlike Article II of the New York Convention, Section 7 of the Arbitration and Conciliation Act, 1996 clarifies that an agreement would be considered as having been made in writing if it has been communicated through “electronic means”. The allowance for “electronic means” was introduced through the Arbitration and Conciliation (Amendment) Act, 2015, yet remains undefined.

Theoretically, it can be asserted that an award generated in a blockchain arbitration may fall within the ambit of the definition of an ‘electronic record’ under the Information Technology Act, 2000.

Difficulty in determining Awarding Country in a Blockchain Arbitration

India although is a signatory to the New York Convention, only foreign awards made in only certain Contracting States of the Convention (gazetted by the Central Government) can be enforced in view of India’s reciprocity reservation. India has gazetted less than 1/3rdof all of the Contracting States to the New York Convention.[5] 

In the working of a blockchain arbitration, Arbitrators are appointed by a blockchain-based dispute resolution platform. The award is generated on a blockchain and circulated to the parties before the Arbitrator. The parties may be in different countries and the origin/awarding country may be difficult to trace out. In the absence of details of an awarding country, the enforceability of such an award in India becomes a daunting task.

 

Enforcement of Arbitral Award

As per the Arbitration and Conciliation Act, 1996, an application for enforcement of an arbitral award shall be accompanied by an original arbitral award. In a blockchain arbitration, the award is circulated as an electronic record in the blockchain to the parties directly. The concept of a hard copy/original award is alien in blockchain arbitration.

 

Conclusion and Suggestion

A conspectus of the aforesaid facets of the blockchain system shows that the same needs multi-fold reforms before being set to use by the legal fraternity. Even though the blockchain assures, to a great extent, protection of data, but it cannot be forgotten that the hackers also keep updating their own skills and no technology is flawless. The blockchain system has to be made dynamic enough so as to keep abreast with the challenges of new advents in unethical hacking.

Secondly, it is also required that a proper training module is formulated for lawyers of the participating countries which shall ensure unimpeded use of the technology.

Lastly, the author strongly recommends that the use of blockchain should be limited only to procedural aspects in such cases where the dispute involves issues of interpretation of the clauses and or statutes including common law. This may be achieved by adopting a hybrid model of dispute resolution with embedded human intervention modules.

References: 

[1]Gargi Sahasrabudhe, Blockchain technology and arbitration, VIA Mediation & Arbitration Centre, (Nov. 3, 2021, 5:00pm), https://viamediationcentre.org/readnews/ODE1/Blockchain-technology-and-Arbitration

[2]Athul aravind, Blockchain arbitration: the future?, Law and Dispute resolution blog, (Nov. 3, 2021, 5:00pm), https://www.mappingadr.in/post/blockchain-arbitration-the-future

[3] Dena Givari, How does arbitration intersect with the blockchain technology that underlies cryptocurrencies, Kluwer Arbitration Blog, Wolters Kluwer, (Nov. 6, 2021, 8:00pm), http://arbitrationblog.kluwerarbitration.com/2018/05/05/scheduled-blockchain-arbitration-april-17-2018/

[4] Idil Gncosmanoglu, Blockchain-smart contract and arbitration, Mondaq, (Nov. 5, 2021, 5:00pm), https://www.mondaq.com/turkey/fin-tech/967452/blockchain-smart-contracts-and-arbitration.

[5] Ritika Bansal, Enforceability of awards from blockchain arbitrations in India, Kluwer arbitration Blog, http://arbitrationblog.kluwerarbitration.com/2019/08/21/enforceability-of-awards-from-blockchain-arbitrations-in-india/, (2019)

 

 

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Photo by Launchpresso on Unsplash

The use of blockchain should be limited only to procedural aspects in such cases where the dispute involves issues of interpretation of the clauses and or statutes including common law. This may be achieved by adopting a hybrid model of dispute resolution with embedded human intervention modules.

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Arbitration in Intellectual Property Disputes in India – A fable or reality?

Reconciliation of the rights pertaining to the creation of mind through a creature of contract remains an unsolved conundrum in India.  

In the wake of commercialization, when the Indian legal system is tenaciously shifting its focus from adjudication to alternate dispute resolution, arbitration has become a trend-setter in effectively resolving various kinds of commercial disputes. Arbitration is preferred in commercial disputes because it ensures neutrality, confidentiality, timeliness, and expertise while granting an award. The rise in arbitration proceedings, therefore, necessitates the conclusive determination of a range of issues that continue to be incessant in this field. One of the pressing issues while executing an arbitration clause in a contract is – whether an IPR dispute arising from a commercial agreement arbitrable? Delving deeper into the Indian scenario, it is evident that this issue remains an unsolved conundrum. Different benches in different High Courts have adopted a diversity of observations, contradictory to each other, forming a motion of debate as follows: 

 

Arbitrability of IPR Disputes arising from a commercial contract:

 

Pro-Arbitration 

“I do not think the world of domestic and international commerce is prepared for the apocalyptic legal thermonuclear devastation that will follow an acceptance of the plaintiff’s submission that no action under the Trade Marks Act or the Copyright Act can ever be referred to arbitration.” 

The above was stated recently in ‘Eros International Media vs. Telemax Links’ (2016), where the Bombay High Court while dealing with the issue of arbitrability of a dispute under Section 8 of the Arbitration and Conciliation Act 1996 (henceforth referred to as “the Act”) in a suit for copyright infringement, held that the disputes in contractual nature would always be an exercise of a right in personam owing to the fact that the defied parties would seek particular reliefs against each other and hence, be referred to settlement by arbitration.  

The facts of the Eros Case surrounded the grant of a license by the Petitioner for copyright distribution of its films. The Respondent had violated an express prohibition clause of the license which barred the exercise of distribution rights upon termination of the agreement. Similarly, in ‘Deepak Thorat vs. Vidli Restaurant Limited’ (2017), the Bombay High Court reiterated the holdings of the Eros Case.  

Earlier, the Delhi High Court in ‘Ministry of Sound International vs. M/s Indus Renaissance Partners’ (2009) had observed that IP-related disputes born out of a contract could be referred to arbitration, provided that there was no blanket ban on conducting arbitration of such issues.  

 

Pro-Litigation 

On the other hand, the Bombay High Court in the case of ‘Steel Authority of India Limited (SAIL) vs. SKS Ispat and Power Limited’ (2016) has held a different view while dealing with an application of notice of motion filed by Defendants under Section 8 of the Act against the damages and permanent injunction claimed by the Plaintiff for infringement of their registered trademarks. The application under Section 8 was made relying upon the clauses of the arbitration agreement governing the matter. However, the Bombay High Court dismissed the notice of motion on the ground that the infringement as well as passing off of a trademark as meted out in the suit, were a violation of rights in rem and therefore, not maintainable to be referred for arbitration.  

Further, in ‘Munidipharma AG vs. Wockhardt Ltd.’ (1990), the matter before the Delhi High Court was related to civil remedies for copyright infringement under Chapter XII of the Copyright Act, 1957. The Court had held that every such suit or other proceedings under Chapter XII related to a ground of copyright infringement or other rights in connection with it would only be maintainable and amenable before the district court of competent jurisdiction. 

 

No Definitive Verdict by the Apex Court 

A quick glimpse at Supreme Court verdicts on this subject well establishes the fact that we are still waiting for an authoritative determination by the Apex Court on the arbitrability of IP disputes arising from a contract. The only relevant judgment is the case of ‘Booz Allen Hamilton vs. SBI Home Finance Ltd.’ (2011) where on the one hand the Apex Court ruled out the arbitrable nature of rights in rem; on the other hand, the disputes involving rights in personam borne out of rights in rem were observed as arbitrable. The case addressed the right in rem versus the right in personam debate but did not determine the contractual aspect of the rights. Similarly, in ‘A Ayyasamy v. A Paramasivam’ (2016) while determining the arbitrability of fraud, the Court blatantly listed the IP disputes as arbitrable as a whole, without analyzing its contractual and non-contractual aspects. It should be noted that these cases basically dealt with statutory claims that had statutory remedies granted exclusively by civil courts. Therefore, they cannot be cited as authorities for IPR related contractual disputes.  

 

Way Forward  

A keen observation upon the nature of IPR disputes and their adjudication portrays the divergence of allied rights as rights in rem which are to be adjudicated by the prescribed statutory body and rights in personam which are exercised and executed between private parties in a commercial contract. Hence, once an IP infringement is identified to be sourced from a commercial contract, for an arbitrator to exercise its jurisdiction over such claim of infringement, the existence of a breach of contractual covenants by the parties involved should be proved. This is because commercial contracts are consciously entered into by the private parties to decide their rights and obligations and amicably settle the disputes before a private forum.  

It is pertinent to emphasize that sometimes in a contract involving IP ownership; we may anticipate a wide range of disputes directly or indirectly akin to IP ownership or license. Under such circumstances, it would always be open to the arbitral tribunal to determine the issue of arbitrability based on whether a particular IP dispute is directly arising from the breach of contract. For example, when a contract pertains to the enforcement of IPR, the disputes aiming to the validity of registration of IPR shall not be arbitrable. Therefore, the formula of ‘one field one law’ to ascertain the arbitrability of IPR allied disputes cannot be applicable to each case with varied facts and issues. Unlike India, in the periphery of International Commercial Arbitration, jurisdictions like the USA, Switzerland, Hong Kong, France, and institutions like WIPO have taken a progressive step towards the growth of IPR arbitrations by framing customized rules to administer the arbitration of IPR disputes. Therefore, in order to bury this conundrum in perpetuity and fall in line with the International framework, India needs to formulate a special rule or issue a conclusive verdict on the matter.  

Image Credits: Photo by Edge2Edge Media on Unsplash

A keen observation upon the nature of IPR disputes and their adjudication portrays the divergence of allied rights as rights in rem which are to be adjudicated by the prescribed statutory body and rights in personam which are exercised and executed between private parties in a commercial contract. Hence, once an IP infringement is identified to be sourced from a commercial contract, for an arbitrator to exercise its jurisdiction over such claim of infringement, the existence of breach of contractual covenants by the parties involved should be proved.

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