In 2021, the UK Jurisdiction Taskforce of the Lawtech Delivery Panel (“UKJT”),[1] a body established by the Secretary of State for Justice, and chaired by the Master of the Rolls, published Version 1.0 of the Digital Dispute Resolution Rules (“the Rules”).[2] These arbitration rules, which operate under the law of England and Wales, are intended to be used by parties in commercial disputes, in particular in disputes involving “cryptoassets, cryptocurrency, smart contracts, distributed ledger technology, and fintech applications”.[3]
The Rules are less than a year old and, at the time of writing, there are no published awards or decisions on any challenges under them. However, they recently received the approval of the Law Commission of England and Wales in its advice to Government on smart contracts in November 2021, where they were discussed in detail, and described as “particularly well-suited for disputes involving smart legal contracts”.[4] The increasing use of distributed ledger technologies and smart contracts, coupled with the growing sophistication and size of decentralised finance,[5] make it very likely the Rules will have an increasingly important role going forward.
While the Rules are not the only arbitration rules proposed for smart contracts (the JAMS rules were published in 2018 but remain in draft),[6] they have a number of innovative features which the JAMS rules do not. As such the Rules are innovative even within this new frontier of dispute resolution. These features may give rise to unique implications in eventual challenges under the Arbitration Act 1996, and in particular challenges under s.67 (substantive jurisdiction) and s.68 (serious irregularity) of the Act.[7]
Innovative Features of the Rules and Challenges under s.67 and 68 of the Arbitration Act
This paper picks out three innovative aspects of the Rules which may alter how challenges to decisions operate: (1) the provision for on-chain enforcement of arbitral awards by the tribunal;[8] (2) the provision for anonymity between the parties;[9] (3) the provision that “automatic dispute resolution” is legally binding between the parties.[10]
Feature 1: Enforcement by the tribunal
The provision in Clause 11 of the Rules provides for the tribunal to have the power to “operate, modify, sign or cancel any digital asset relevant to the dispute.” This is particularly interesting when understood in the context of disputes arising out of blockchain or distributed ledger technologies (such as those involving cryptocurrencies or cryptoassets). This is because ownership and control of such assets is confirmed by cryptographic means on a distributed ledger, in most disputes satisfying an award would involve taking appropriate steps to record a transaction on such a ledger. The power of a tribunal to operate, modify, sign or cancel any such asset will therefore in many cases be equivalent to the power of a tribunal to enforce the award.
In one sense, this mirrors the result of “on-chain” automatic dispute resolution (discussed briefly below), where awards are often executed automatically on the distributed ledger by a smart contract. But it also represents a radical departure from the traditional enforcement system for arbitration awards.
This power is likely to be attractive to parties using new decentralised technologies where traditional enforcement mechanisms may be more difficult (not simply because of the continuing uncertainty when considering jurisdiction or conflict of laws in distributed ledger disputes, but also because it remains unclear to what extent signatory states to the New York Convention will consider that at least some distributed ledger disputes fall foul of the public interest exception to enforcement). As such, similar powers are likely to be features of arbitration rules for this industry in the future.[11]
By allowing for tribunal enforcement of the award, the party successful in the arbitration obtains benefits which extend beyond those it could obtain from the Courts when seeking security for costs[12] or security for the award[13] when an award is challenged.[14]
Therefore, where tribunal enforcement occurs, a party seeking to challenge an award will find itself facing unique hurdles. While there is no general rule that enforcement should be stayed pending the determination of a Section 68 challenge,[15] the party against whom an award is to be enforced in the English Courts would normally have recourse to the provisions of CPR 62.18(9) (to apply to set aside an order made to enforce an award under s.66 Arbitration Act) and CPR 83.7 (to stay enforcement of an award when converted to a judgment).[16] These are valuable tools to a party resisting an award,[17] but will not be available to a party where tribunal enforcement has occurred under the Rules.
This necessarily changes the balance of power in any challenge under s.67 or s.68, and does so in a way which has the effect of circumventing the balance struck by the Courts and Parliament under the provisions for staying enforcement and providing for security for costs or the award under Arbitration Act 1996. The party holding the award under the Rules (where tribunal enforcement has been used) holds far more cards than they otherwise would. In effect, they will enter any s.68 or s.67 challenge in astronger tactical position than a successful party under other arbitration rules.[18]
Feature 2: Anonymity
The provision for anonymity during an arbitration under the Rules may well be particularly attractive to parties to transactions on the distributed ledger, where anonymity in the transactions themselves is the norm. The Rules have however recognized that absolute anonymity would not be appropriate, providing for disclosure, providing for disclosure of “identity details” when “necessary for the fair resolution of the dispute, for the enforcement of any decision or award, for the protection of the tribunal’s own interests, or if required by any law or regulation or court order”.[19] This language should be wide enough to enable the disclosure of “identity details” when a party wishes to challenge the award.
The identity details are defined by the Rules as “for an individual… evidence as to his or her identity and residence and for a company… evidence as to its identity, place of incorporation and principal place of business”.[20] It is however not clear if these would be sufficient to enable service of the arbitration claim form, especially given the short time limits under s.70(3) of the Arbitration Act to issue a challenge under s.67 or s.68.[21] (this problem is especially acute if one party is a Decentralised Autonomous Organisation[22]). These practical uncertainties may well be resolved as challenges occur and decision are reported, but will require resolution by the Courts and early users of this procedure.
Feature 3: Automatic Dispute Resolution
The Rules envision that the parties may engage in automatic dispute resolution, and that such resolution will be binding on the parties. Indeed, the effect of such dispute resolution is often binding in matter of fact because the decision of the process is implemented on-chain by a smart contract. Automatic dispute resolution systems come in different varieties and methods, but often involve the application of game theory (including incentivising decision-makers to make the decision they think the majority will make, rather than the decision they consider ‘correct’[23]), crowdsourced self-selecting juror decision-making, Artificial Intelligence, and appeal or de novo re-hearing procedures.[24]
While the Rules describe automatic dispute resolution as “legally binding”, the Further Guidance published alongside the Rules indicate that the Rules “may, for example, be adopted to resolve disputes as to whether the automatic dispute resolution processes have been properly complied with or has worked as intended. Where such automatic processes are present, the parties will need to agree how the Rules are intended to work alongside them”.[25] This raises the prospect of a situation in which the parties agree to use an arbitration under the Rules to confirm or wrap the decision of an automatic dispute resolution process in a form of an arbitral award.[26] This will give rise to some unique questions when bringing challenges to awards based on automatic dispute resolution processes, among them: (i) Does a jurisdictional challenge have to be taken during the automatic dispute resolution process in order to sustain a s.67 challenge? (ii) Does the general duty of fairness extend to the automatic dispute resolution process, and can a challenge to an award under s.68(2)(a) on that basis be sustained on appropriate facts? (iii) Could the conduct of jurors in automatic dispute resolution give rise to a challenge for serious irregularity? (iv) Would an admission of an irregularity (caused perhaps by a coding or software error) by the provider of the automatic dispute resolution process fall within s.68(2)(i)?
Conclusion
While disputes arising out of cryptoassets, cryptocurrency, smart contracts, distributed ledger technology – and procedures for resolving such disputes – are in their infancy, this survey suggests that, if widely adopted, the Rules will present the Courts with new and difficult questions when considering challenges to awards, requiring an approach as innovative as that shown in the design of the Rules themselves.
Jonathan Schaffer-Goddard is a Barrister practicing from 4 Pump Court Chambers in London and an LLM candidate (Starr Foundation Global Law School Scholarship) in the International Business Regulation, Litigation and Arbitration program at the NYU School of Law.
[1] More information at https://technation.io/lawtechukpanel/
[2] UK Jurisdiction Taskforce, Digital Dispute Resolution Rules (2021) (“UKJT Rules”), https://perma.cc/FT6E-CUD3
[3] Clause 1, Digital Dispute Resolution Rules
[4] Smart Legal Contracts: advice to Government, Law Commission of England and Wales, 2021, para 5.156 https://perma.cc/4WFA-2JYP
[5] The total value locked (the sum of all assets deposited in decentralized finance protocols) reached USD 250 billion at the end of 2021 on some metrics (https://perma.cc/B8KB-TYEB).
[6] The JAMS Smart Contract Rules (JAMS Rules Governing Disputes Arising out of Smart Contracts) can be accessed at https://www.jamsadr.com/rules-smart-contracts (https://perma.cc/HW6J-MRVE)
[7] Challenges under s.69 of the Act are excluded by the Rules (Clause 16, Digital Dispute Resolution Rules: “… The decision or award of the tribunal is final and binding. There is no right to appeal any award on a point of law, and there is no other right of appeal or challenge to such award except as permitted under the Arbitration Act 1996.” While this excludes s.69 appeals, it cannot exclude appeals under s.67 or s.68).
[8] Clause 11, Digital Dispute Resolution Rules: “The tribunal shall have the power at any time to operate, modify, sign or cancel any digital asset relevant to the dispute using any digital signature, cryptographic key, password or other digital access or control mechanism available to it. The tribunal shall also have the power to direct any interested party to do any of those things.”
[9] Clause 13, Digital Dispute Resolution Rules: “The claimant and each respondent must provide details and evidence of their identity to the reasonable satisfaction of the tribunal. If the incorporating text allows for anonymous dispute resolution, or the parties agree, then a claimant or respondent may provide identity details confidentially to the tribunal alone and need not include them in a notice of claim or initial response. In that case the tribunal shall not disclose the identity details unless disclosure is necessary for the fair resolution of the dispute, for the enforcement of any decision or award, for the protection of the tribunal’s own interests, or if required by any law or regulation or court order.”
[10] Clause 4, Digital Dispute Resolution Rules: “The outcome of any automatic dispute resolution process shall be legally binding on interested parties.”
[11] In light of the challenges that this procedure raises (are set out below), and the likelihood of this procedure being more widely adopted, the problems caused by the use of this procedure may be worthy of consideration by the Law Commission in its recently announced review of the Arbitration Act 1996 (https://perma.cc/BFD5-PUFV).
[12] Section 70(6), Arbitration Act 1996
[13] Section 70(7), Arbitration Act 1996
[14] The circumstances in which the Court will order security for costs or security for the award are limited by considerations of availability of assets (Azov Shipping Co v Baltic Shipping (No 2) [1999] 2 Lloyd’s Rep 39), the prospects of the challenge (MDIL (UK) Ltd v Mittal Steel Skopje (CRM) AD [2008] EWHC 2243 (Comm)) and prejudice on party seeking to enforce if order not made (see for example: Konkola Copper Mines Plc v U&M Mining Zambia Ltd [2014] EWHC 2146 (Comm)). Applications are often unsuccessful.
[15] BSG Resources Ltd v Vale SA & Ors [2019] EWHC 2456 (Comm), at [55]
[16] It has been held by the High Court that there is an inherent jurisdiction to suspend enforcement while a challenge is ongoing, even if no application has been made to enforce the award. Apis AS v Fantazia Kereskedeli KFT[2001] 1 All ER 348. See also Socadec SA v Pan Afric Impex Co Ltd [2003] EWHC 2086.
[17] A v B [2020] EWHC 952 (Comm) is a recent example of a successful application under CPR 62.18(9) to set aside an order to enforce a judgment entered under Section 66 of the Arbitration Act.
[18] The likelihood of this procedure for tribunal enforcement being more widely adopted in the crypto industry means that the impact of tribunal enforcement of an award may be worthy of consideration by the Law Commission in its recently announced review of the Arbitration Act 1996 (https://perma.cc/BFD5-PUFV).
[19] Digital Dispute Resolution Rules, Clause 13
[20] Digital Dispute Resolution Rules, Clause 2
[21] An extension of time is available under s.80(5) of the Arbitration Act 1996. The relevant caselaw and the principles derived from it are set out in State A v Party B & Anor [2019] EWHC 799 (Comm), [28] – [33]
[22] For an explanation of what a DAO is, see: https://ethereum.org/en/dao/ (https://perma.cc/TL3F-F2JV)
[23] Kleros, Short Paper v1.0.7, page 2 (https://kleros.io/whitepaper.pdf)
[24] See surveys of such systems in Allen, DWE, Lane, AM and Poblet, M. 2019, The Governance of Blockchain Dispute Resolution, Harvard Negotiation Law Review, vol. 25, pp. 75-101 and Yann, Federico and Bruno, 2021, Decentralized Justice: A Comparative Analysis of Blockchain Online Dispute Resolution Projects, Frontiers in Blockchain, vol 4 (https://doi.org/10.3389/fbloc.2021.564551)
[25] Digital Dispute Resolution Rules, page 12
[26] The status of awards rendered by automatic dispute resolution processes is a matter of debate, and it is likely that in many (if not all) cases they are not by themselves enforceable awards under the New York Convention 1958.