Rakshit and Rushil on Online Dispute Resolution: Arbitration going Virtual along with Blockchain and Smart Contracts

 ONLINE DISPUTE RESOLUTION: ARBITRATION GOING VIRTUAL ALONG WITH BLOCKCHAIN AND SMART CONTRACTS

INTRODUCTION 

Digital revolution in areas of financial transactions are fast paced as of now. There is a clear trajectory visible for all the establishments, along with their subsequent integration in the “traditional” financial institutions. This shows that these for-profit companies are here to stay. All these facilities like Paytm or net banking, have drawbacks, which harm their efficiency. One of them being third-party intervention in transactions, which is due to the multistep process of transferring money. Although it is used for security, it creates a sense of unnecessary and avoidable delay, especially in bigger industrial level transactions which especially require the payments to be quick. Along with this, concerns related to extra charges and data privacy are also deprecating the value of this medium.  What appears to be a legible antidote to this dead end is blockchain. Despite being a new method of conducting transactions, it comes across as if it had been tailor made for the problems which the industry faces right now, whether time based, or of middlemen.

This digital boom including that of blockchain is useful for quick, efficient, and safe transactions which work on the basic idea of an online self-updating ledger[i] that notes down the accounting changes in an autonomous manner. It is also useful for other processes like that of smart contracts and dispute resolution practices like that of Arbitration, Mediation, Conciliation or Negotiation. Just to briefly define these terms, smart contracts are agreements which are drafted with the help of a coder who puts in certain conditions in a format wherein when those conditions are met, the requisite transfer of the consideration takes place from one party to another. Similarly, the proceeds of the final arbitration result are also transferred electronically from one party to another, thus reducing human involvement and any scope of error which would have followed. It is needless to say that the arbitration process itself would require humans because of the qualitative nature of the same but reduced human intervention is nevertheless desirable.

RECOGNITION OF ARBITRATION

There is also sufficient amount of statutory conformity followed in these concepts. Whether it is Article 21of the Constitution of India[ii] which prescribes Right to Life which has been judicially interpreted to include the right to a speedy and fair trial, and in Section 89 of the Civil Procedure Code Amendment Act[iii], which talks about alternate mechanisms to resolve disputes along with Order 10[iv] which allows the parties to have an option to opt for ADR methods after their first hearing. The Arbitration and Conciliation Act[v], which stemmed from the UNCITRAL Model Law on International Commercial Arbitration,[vi] by the UN, allows the settlement agreement reached by parties the status of a court judgement under section 73 of the act[vii]. The 2015 amendment[viii] to this act gives legal recognition to electronic arbitration settlement agreements, which symbolises a movement to inculcate online methods into the ambit of dispute resolution. Sections 4, 5, 10-A, and 11 to 15, of the Information and Technology Act[ix],  gave legal recognition to electronic pathway transactions, agreements, digital signatures etc.

TWO FACETS OF DIGITAL ARBITRATION

Dispute resolution – irrespective of the medium – is a very nuanced space with both good and bad sides. For example, the transfer of assets to be made in compliance with an arbitration agreement can be done via a blockchain processor, in a lot of cases, digital signatures can be used instead of physical signatures. This can also be done using other modes of communication of acceptance involved in the making of contracts or smart contracts, as seen in the decision of Shakti Bhog Food Ltd. v. Kola Shipping Ltd[x] judgement. This decision allowed many valid modes of communication like telegram, fax etc., which were different from traditional ways. These means of acceptance should be considered since the era of COVID-19 demands the same.

 During arbitral proceedings, virtual methods like video conferencing can be used to further save up time, since that is the ultimate motive of technologies such as blockchain that we are trying to rope in, as per the Supreme Court judgement of State of Maharashtra v. Dr. Praful B. Desai[xi].

The Supreme court also nullified the RBI circular recently which dealt with cryptocurrency, in Internet and Mobile Association of India v. RBI[xii]. In this case banks were prohibited from conducting any sort of business with the entities who engage in any business with cryptocurrency. The Supreme Court side-lined it by claiming it to be against the doctrine of proportionality and allowed the banks to conduct business as usual since no case of avoidable losses or extreme threat of a loss has arisen yet. This judgment also serves as a flagbearer of the fact that blockchain processes contain in themselves the potential and the capability to change the way payment mechanisms work in India.

But if we look at the contrary there are some perils attached to this process as well which can be removed via the process of continuous refinement. A violation of privacy, under the K.S. Puttuswamy[xiii] judgement and Article 21[xiv] of the Constitution is a reasonable possibility, as there is confidential information involved in these proceedings which might be uploaded temporarily on the server for the arbitrator or the other parties to view. This gives rise to concern of leaking out of important or secret information digitally and unlike court proceedings, there are no permanent records of arbitration proceedings, and neither are the parties supposed to keep records, which makes this all the more illegal. This can be patched up by strengthening protective measures relating to cyber security like firewalls, which restrict unauthorised entrants into the server, or encryption, which turns information into symbols which are decoded on password basis, known only to owner of the information etc.

Another de-merit of this multifarious entity is the clash of endeavours and efforts which, we are making as a community, as we envisage to make arbitration, and other modes of alternate dispute resolution –  whether commercial or not – to be at the ground level of our country. With the existence of panchayats and Lok Adalats, we seldom give any attention to the lack of internet access to a huge chunk of population to our country. Thus, with the outreach of ADR methods, the facilitators of those methods also need to entrench in the roots of the country.

The arbitration process which is to be invoked by the parties, if carried out digitally has to be pre-determined by them, only via the means of a written agreement as per the conditions stated in Article 2 of New York Convention[xv] and Article 7(2) of UNCITRAL Model Law[xvi]. This, in essence, goes against the virtue of blockchain and virtual arbitration processes and practically defeats the purpose of it. This takes both the parties a step backward where the physical signing of agreement has to take place and parties have to actually meet. If physical presence was to be one of the prerequisites, why would anyone pick blockchain or digital arbitration over its traditional counterpart?  

THE JURISIDICTIONAL ENIGMA

The jurisdictional riddle, is something which has its own benefits and loses in the realm of arbitration, where the travel costs, time and effort are saved when one turns to smart contracts and virtual arbitration proceedings. What remains is a complex puzzle, of whether the laws of the land of the appellant shall apply or the defendants’, or in cases of international arbitration, what shall be the enforceability of the award, and in which jurisdiction. These issues also apply to the case of challenging an arbitral award and are not very well addressed and may cause problems when ADR itself, as a concept reaches bigger lengths and spaces. For example, Article 8 of UNCITRAL Model Law[xvii] prescribes the need to present data in its original form and this can be met by electronic or virtual means. Article 31(1) of UNCITRAL Model Law[xviii], preaches that the arbitral award shall be given in physical format and shall be signed by arbitrator. This is just one of these examples which signify the lack of concrete rules in cases of virtual or online arbitration, and these problems will hence, obviously, carry themselves forward to blockchain payment mechanisms which follow from the arbitration process.

CONCLUSION

The purpose of this piece was to check the viability of the arbitration process, which can take place at a virtual space along with the processing of the arbitral award and other transactions if possible can take place via blockchain methods[xix]. On one hand, where advantages like those of a faster, smarter, and more efficient process stand, there are also threats of privacy, accessibility, and facilitation with respect to jurisdictional and legal concerns[xx]. As long as the discourse on this keeps going and the idea gets more and more polished, a day with digital and blockchain arbitration practices being commonplace can be imagined as a reasonable possibility.


[i] Jhawar A, “Online Arbitration Practices in India” (mondaq2020) https://www.mondaq.com/india/arbitration-dispute-resolution/978492/online-arbitration-practices-in-india&gt. Accessed 2020.

[ii] The Constitution of India, 1950

[iii] Code of Civil Procedure (Amendment) Act, 1999.

[iv] Id.

[v] THE ARBITRATION AND CONCILIATION ACT, 1996

[vi] UNCITRAL Model Law on International Commercial Arbitration, 1985

[vii] Id.

[viii] The Arbitration and Conciliation (Amendment) Act, 2015.

[ix] Information Technology Act, 2000

[x] Shakti Bhog Food Ltd. v. kola Shipping Ltd 2012 Indlaw DEL 1528.

[xi] State of Maharashtra v. Dr. Praful B. Desai 2003 Indlaw SC 320.

[xii] Internet and Mobile Association of India v Reserve Bank of India 2020 Indlaw SC 234.

[xiii] Justice K. S. Puttuswamy (Retd.) and Anr. vs Union of India and Ors. (2017) 10 SCC 1.

[xiv] supra note 2.

[xv] Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958).

[xvi] UNCITRAL Model Law on International Commercial Arbitration 1985.

[xvii] Id.

[xviii] supra note 16.

[xix] Moghe, “Online Dispute Resolution Mechanism: Prospects and Challenges in India” (Legal Service India) http://www.legalserviceindia.com/legal/article-839-online-dispute-resolution-mechanism-prospects-and-challenges-in-india.html&gt. Accessed 2020

[xx] Sawhney K, “Alternative Dispute Resolution to Online Dispute Resolution” (The Indian Council of Arbitration2017) http://www.icaindia.co.in/icanet/quterli/jan-march2002/ICA2.htm&gt. Accessed 2020

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