[This article is authored by Rakshit Sharma and Rushil Kumar, first-year law students at RGNUL, Patiala.]
Keywords: Digital Revolution, Financial Transactions, Data Privacy, Blockchain Processor, Electronic Arbitration.
The digital revolution in the areas of financial transactions is fast-paced as of now. There is a clear trajectory visible for all the establishments, along with their subsequent integration into 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 is 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 the blockchain. Despite being a new method of conducting transactions, it comes across as if it had been tailored for the problems which the industry faces right now, whether time-based or of intermediaries.
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 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. Because of the qualitative nature of the arbitration process, human intervention is required, but less human intervention is still preferable.
Recognition Of Arbitration
There is also enough statutory conformity followed in these concepts. Whether it is Article 21 of the Constitution of India, which prescribes the 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, which talks about alternate mechanisms to resolve disputes along with Order 10 which allows the parties to have an option to opt for dispute resolution methods after their first hearing. The Arbitration and Conciliation Act, which stemmed from the UNCITRAL Model Law on International Commercial Arbitration by the UN, allows the settlement agreement reached by parties the status of a court judgement under Section 73 of the act. The 2015 amendment to this act gives legal recognition to electronic arbitration settlement agreements, which symbolizes 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 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 Shakti Bhog Food Ltd. v. Kola Shipping Ltd [i] 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 save up further 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 [ii].
The Supreme court also nullified the Reserve Bank of India circular recently, which dealt with cryptocurrency, in Internet and Mobile Association of India v. RBI [iii]. In this case, banks were prohibited from conducting any sort of business with 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 [iv] judgement and Article 21 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 raises the possibility of important or secret information being leaked digitally, and, unlike court proceedings, there are no permanent records of arbitration proceedings, nor are the parties required to keep records, making this even more illegal. This can be patched up by strengthening protective measures relating to cybersecurity like firewalls, which restrict unauthorized entrants into the server, or encryption, which turns information into symbols, which are decoded on a password basis, known only to the 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 arbitration, and other modes of Alternate Dispute Resolution ("ADR"), 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 the population in our country. As a result of the spread of ADR methods, the facilitators of those methods must also become entrenched in the country’s roots.
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 the New York Convention, 1958 and Article 7 (2) of UNCITRAL Model Law. This, in essence, goes against the virtue of blockchain and virtual arbitration processes and practically defeats its purpose. This takes both the parties a step backwards where the physical signing of an agreement must take place and parties must meet. If physical presence were to be one of the prerequisites, why would anyone pick blockchain or digital arbitration over its traditional counterpart?
The Jurisdictional Enigma
The jurisdictional riddle is something that has its own benefits and losses 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 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 preaches that the arbitral award shall be given in physical format and shall be signed by an 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.
The purpose of this piece was to check the viability of the arbitration process, which can take place in a virtual space along with the processing of the arbitral award and other transactions, if possible, can take place via blockchain methods. Where advantages like those of a faster, smarter, and more efficient process stand, there are also threats to privacy, accessibility and facilitation with respect to jurisdictional and legal concerns. If 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] Shakti Bhog Food Ltd. v. kola Shipping Ltd, (2012) Indlaw DEL 1528.
[ii] State of Maharashtra v. Dr. Praful B. Desai, (2003) Indlaw SC 320.
[iii] Internet and Mobile Association of India v. Reserve Bank of India, (2020) Indlaw SC 234.
[iv] Justice K. S. Puttuswamy (Retd.) and Anr. v. Union of India and Ors., (2017) 10 SCC 1.