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Blockchain Arbitration: The Future?

[This article is authored by Athul Aravind, a law graduate from JGLS, Sonipat.]

Keywords: Blockchain, Smart Contracts, Arbitration.


The rise of the e-commerce sector in India can largely be attributed to the increasing popularity of online shopping through various platforms such as Amazon, Flipkart, and so forth. It’s growing popularity stems down to its convenience, speed and accessibility to a wide range of products at the click of a button. Seeing that companies like Flipkart have made as much as 1.4 crores in day [i], one cannot doubt it is increasing in popularity.

Although a large chunk of this revenue is legitimate, a sizeable chunk of this revenue is made through small sums of money (Rs.50-4000) that were unclaimed by the consumer through mishaps of the company (failure of delivery, or bad condition of product), this is becoming more common, as products such as clothes require specific measurement requirements, which can easily be fumbled.

Often, due to the sum being small, the consumers do not want to go through the grueling and lengthy task of bearing costs and suing in court. The International Consumer Rights Protection Council (“ICRPC”) is only a mediator in these situations, as they can only notify the court about its growing number of complaints.

The crux of the problems is that traditional shoppers do not face this problem as they are near their seller or know the location of the seller and can easily convey any problem with the product and retrieve their money. However, online shoppers do not have easy access to the seller. This results in the overburdening of the customer helpdesks of these companies by the growing number of complaints, and they have been unable to appease every consumer.

New Era of Arbitration

Advancements in technology has found an efficient solution to the above-mentioned dilemma. The introduction of crypto-currencies has introduced a new form of contracts called "smart contracts" which serves as the bedrock for explaining the concept of blockchain arbitration.

Blockchain is a digital ledger of transactions. The blockchain is a "trust-less" form of securing transactions due to the lack of a regulatory and centralized authority and is less susceptible to human manipulation or errors as it acts as a digital timestamp and can be verified by the decentralized computer network. Until recently, law did not cover these sorts of transactions. However, due to its increasing popularity in the U.S.A, in 2016, certain legislations have recognized it. As per the Arizona Electric Transactions Act ("AETA"), under Article 5, blockchain is defined as: "Blockchain technology means distributed ledger technology that uses a distributed, decentralized, shared, and replicated ledger, which may be public or private, permissioned or permission less, or driven by tokenized crypto economics or token less." The data on the ledger is protected with cryptography, is immutable and auditable and provides an uncensored truth [ii].

What are Smart Contracts?

Since smart contracts have only recently come to forth, it lacks policy recommendations, limited sources of legal literature on smart contracts and case-law is non-existent. The Arizona Electric Transactions Act defines a “smart contract” as an "event-driven program, with state, that runs on a distributed, decentralized, shared and replicated ledger and that can take custody over and instruct transfer of assets on that ledger. [iii]”

One of the most striking difference between smart contracts and a traditional contract is its ability to self-enforce contracts, and a majority of disputes occur due to non-enforcement of contracts, so a self-enforcing contract can only limit the scope of potential disputes. The contract self-executes its content according to the embedded contract terms e.g. the digital assets placed within the contract are allocated by the software.

These types of contracts can drastically change the method of dispute resolution. The lack of a fiduciary relationship between the parties in a contract plays a crucial role in preventing conflict. Therefore, this form of arbitration is more efficient for an impersonal platform like online shopping.

Blockchain Arbitration in Practice: How the Software Works

This form of arbitration was properly formulated and executed into a software by a company called "Code Legit." The design was such that the Arbitration Library and Blockchain arbitration rules are embedded within the smart contract, which ensures convenience when concluding an agreement or resolving a dispute. It is imperative to note that the software can hold this money till contract specifications are met and will only transfer money on completing these contracts.

Blockchain replaces this traditional form negotiation and arbitration with computation. It pre-programs interactions that are limited to pre-identified participants, computationally executing and monitoring the interactions. This structure eliminates corruption and equalizes power across all users [iv].

However, there must a statement that the agreement is bound by these rules, for application of them through the software. The following is the statement – "any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination, or invalidity thereof, shall be settled by arbitration in accordance with the Blockchain Arbitration Rules."

The most important feature of blockchain is its ability to hold information about the party, such as date of delivery, quality of goods, product specifications and value. This makes it easier for the software to identify discrepancies and will self-enforce measures to resolve any discrepancy. This will be particularly helpful for consumers, who will automatically be refunded on non-compliance with a clause.

However, the most efficient form of formulating a smart contract is when it has the option of triggering the Arbitration Library, as it must co-exist with these arbitration rules for these rules to efficiently resolve disputes. These can be done by calling the function “Pause and Send to Arbitrator”. The advantage of this library is that it provides the parties with a form of emergency brake, which can be applied in case the parties wish to bring a case to a court.

The Arbitration Library feature is more helpful to these corporates and serves as a method of appeal in case the subject matter of dispute is beyond the computing power of the software or if there has been any error that has occurred in the software. It can also be useful to the consumers when they do not receive their money.

Once the Arbitration Library is triggered, the smart contract is sent to a mediator, who will adjudicate the matter and will send the result through the software, after which the amount of money in dispute is reallocated by the smart contract itself. However, on bigger sums of money, a video conference is usually held.

One of the biggest merits of the procedure is that it can prove, undeniably what the clauses and details of the agreement were, for the purpose of this procedure. The only possibility of it being altered is through a computer that the governments use in modern warfare. Importantly, a time-stamp is added to each transaction, meaning that a chronological order can be ensured for all relevant documentation of the process, which is very relevant in platforms like online shopping. This can ensure a safer and more secure experience for the consumer on online shopping platforms. It also gives more power to the consumers to negotiate their contracts.

Blockchain Arbitration: The Way Ahead?

There are many reasons why blockchain arbitration seems to be the next logical step in boosting the power of consumers on e-commerce platforms.

These "Arbitration Rules" are deliberately designed to enable flexibility within the procedure so that it can be adapted to suit the needs of the parties and the nature of the dispute. Strict grounds are required to challenge awards enforceable under the New York Convention, 1958. While court judgments from many jurisdictions have reciprocal enforcement regimes, they can be more difficult and take longer to process. Whether litigation or arbitration is chosen, the effectiveness of any future considered at the outset and protections such as insurance considered and, if necessary, provided for.

This form of arbitration ensures confidentiality. Hearings are not held in open court and are not reported. The software thrives on anonymity, as the transactions are untraceable and only the relevant information is embedded in the contract. It also allows a "pause feature" during the dispute resolution process. This may be useful when there is a dispute 5 months into a yearlong contract, for easily resuming their contractual liabilities to each other after the dispute.

This is the next logical step towards a more secure online experience for consumers, and can be a huge step strengthening consumer rights, especially when it is a small sum and solves the problem of retrieving money from the seller as easily as a traditional shopper could.

However Online Dispute Resolution ("ODR") has only recently come to the fore in India and the laws have not moved forward with arbitration, as more and more provisions have only recently started recognizing ODR. It will at least be a decade until this form of arbitration is widely used, due to recent developments in the economic sector and the global e-commerce boom. Initiatives such as "Digital India" are evidence of this growing trend.

[i] Economic Times, Oct 05, 2016.

[ii] Article 5, Section 44-7061 (E)(1), AETA.

[iii] Article 5, Section 44-7061 (E)(2), AETA.

[iv]“Governing Ungovernable Blockchain”, (CORNERSTONE), June 2017<>.

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