A new forum for digital disputes: the digital dispute resolution rules

Introduction

The UK Jurisdiction Taskforce (UKJT) has recently published its Digital Dispute Resolution Rules (the “Rules”), a new set of arbitration rules for dispute resolution in on-chain digital relationships and smart contracts. Novel technologies, such as digital assets, smart contracts, blockchain and fintech have grown significantly in recent years. The UKJT’s introduction of a bespoke set of arbitration rules for digital disputes should therefore be welcomed. In this note we look at some of the features of the Rules and how they may apply in practice.

Background and key features

The Rules were published following an extensive consultation and the UKJT’s November 2019 Legal Statement on the Status of Cryptoassets and Smart Contracts (the “Statement”), which expressed the view that cryptoassets were property and smart contracts were contracts under English law. That view was endorsed as “an accurate statement as to the position under English law” in AA v Persons Unknown & Ors, Re Bitcoin (December 2019), and has since been accepted in both Ion Sciences Ltd v Persons Unknown and others (unreported) (December 2020) and Fetch.ai Ltd and another v Persons Unknown Category A and others (July 2021).

The purpose of the Rules is to facilitate the rapid, cost effective and specialised resolution of commercial disputes involving digital technology, including cryptoassets, cryptocurrency, smart contracts, distributed ledger technology, and fintech applications. In order to achieve this, the Rules have a number of ground breaking features, including the following:

• Speed - while the Rules and the procedure they outline are designed to be flexible, with parties able to select their chosen timetable, the default position is that the arbitrators will use their best endeavours to determine the dispute within 30 days of their appointment – significantly faster than the usual timetable for resolution of a dispute through litigation.
• Power over digital assets - under the Rules the tribunal will have the power to operate, modify, sign or cancel any digital asset relevant to the dispute using any cryptographic key or other digital access available to it. The tribunal shall also have the power to direct any interested party to do any of those things on-chain.
• Expert panel - arbitrators and experts will be appointed by the Society for Computers and Law from a panel of digital technology experts. Accordingly, parties using the Rules can expect a high level of technical sophistication from the arbitrators or experts who consider the dispute.
• Automatic decisions - the Rules provide for the possibility of an automatic dispute resolution process, where a legally binding resolution will be automatically selected by an artificial intelligence agent, whose vote or decision will be implemented directly within the digital asset system.
• Confidentiality - given that cryptoasset ownership and the protection of IP rights are contentious issues themselves, the Rules recognise that the parties may desire anonymity. While arbitration practitioners will be familiar with arbitrations being private and confidential, the Rules envisage that the text incorporating the agreement to arbitrate may also provide for “anonymous dispute resolution”, whereby each party’s identity will be concealed from the other and provided only to the tribunal.¹

Incorporation and joinder

Although the Rules are designed to apply to disputes relating to cryptoassets, smart contracts or other novel technologies, they will not apply to those disputes automatically. Parties must instead elect to adopt the Rules by incorporating them into their contract, digital asset or digital asset system or agreeing, after a dispute has arisen, to apply the Rules.

One practical consequence of this is that the Rules will not apply where the dispute relates to a criminal act (such as theft) or a dispute where the parties do not have a contractual relationship. They are therefore unlikely to be widely used in disputes involving crypto related fraud or hacking, where the bad actor may not have a contract with the claimant and, in any event, is unlikely to cooperate (e.g. by disclosing their identity to the tribunal). The Rules are more likely to have utility for commercial parties who are willing to cooperate with the arbitral process, at least to the extent necessary in order to resolve their dispute.

The Rules state that they can be incorporated into a contract, digital asset or digital asset system by including the text “[a]ny dispute shall be resolved in accordance with UKJT Digital Dispute Resolution Rules”. The text can be in electronic or, uniquely, encoded form.

Incorporation in code form may give rise to interesting challenges if there is a dispute about whether the parties shared the necessary common understanding for an agreement to be formed. In order for the text set out above to be properly incorporated into the agreement, it is necessary that both parties shared the intention to incorporate it. Where the text is in code form, one party might argue that it was unaware of its presence, and therefore did not have the requisite intention.

Such an argument would have echoes of the well known Shoe Lane Parking case, in which it was held that if important clauses are not sufficiently brought to the attention of the other party to an agreement, they will not be enforceable. The recent case of Green v Betfred is an illustration of how this kind of issue can arise in the context of digital technology. There, a clause hidden deep in the online Terms & Conditions of a business was held to be unenforceable because it was not sufficiently brought to the attention of the customer (see here for our full analysis). ‘Clickwrap’ or ‘click-through’ agreements present similar issues and it is not hard to envisage agreements in code form also being affected.

There may also be challenges to using the Rules where a dispute involve numerous parties, since there are no rules for joinder of additional parties. This could lead to a multiplicity of disputes relating to the same underlying transaction. It is one of the factors that parties would need to consider when deciding whether to incorporate the Rules into their agreements and may in any event justify tailoring arbitration clauses to allow for joinder in appropriate cases.

Enforcement

The Rules include some attractive features relating to the enforcement of awards – the possibility of an on-chain determination being a particularly novel approach. Such an outcome would mean that awards are received by the successful party instantaneously, without any further action required.

However, it will be interesting to see how this system of on-chain enforcement works in practice. The Rules suggest that arbitrators would be able to implement decisions directly on-chain through use of a private key. In order to do so, the parties would presumably have to be willing to share their private keys with the arbitrators. That may present practical challenges: parties may be unwilling to share private keys entirely or may require assurances as to security of private keys held by the arbitrators. Were there to be a breach of security there is the potential for significant value to be lost. This may be an area in which sophisticated parties could work together with the arbitrators to find a security solution that enables them to proceed with arbitration and enforcement while minimising the risk of a security breach.

If on-chain decision making is not adopted by the parties, one of the commonly cited benefits of arbitration is the relative ease with which awards can be enforced abroad. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”) provides an international regime for the enforcement of arbitration awards, to which over 165 countries have signed up. Given the decentralised nature of many digital transactions, this may be a key benefit of using the Rules instead of national courts.

However, the Convention requires proof of the “original agreement” to submit a dispute to arbitration or “a duly certified copy thereof”. While the Convention recognises that an arbitration agreement may be contained in “an exchange of letters or telegrams”, it was drafted long before anyone envisaged arbitration agreements (or any legal terms) being reduced to code. It remains to be seen how flexible national courts will be towards the interpretation of these provisions in the context of enforcement. We may see a divergence of approaches between different national courts, with some courts showing greater flexibility and openness than others.

Appeals and developing the law of digital business

Once a decision or award is made by the tribunal under the Rules it will be final and binding and there will be no right to appeal any point of law. Parties will need to consider whether they are content to accept the element of risk that comes with such finality, should they find themselves disappointed by the tribunal’s award.

The resolution of disputes using the Rules will also not result in the development of precedent that can form a body of law for the newly emerging digital sector. The Rules seek to address this drawback by providing that, if the tribunal considers that an award or decision to be of general interest, and subject to the parties’ right of veto, it may provide it in an anonymised form to the appointing body (the Society for Computers and Law) for publication.

While this is unlikely to feature prominently in the decision making of parties considering whether to use the Rules, the presumption against publication of decisions and the lack of precedent could have a longer term impact on market participants, for whom there may be less certainty around the application of the law to their businesses. English judges have previously expressed similar fears in other fields, including shipping where arbitration is the default, though that has not deterred parties from continuing to refer their disputes to arbitration.

Conclusion

As technology and markets continue to evolve the law must keep pace. The Rules illustrate the desire of those involved in the UK legal system to move with the times and adapt to new ways of doing business. For parties who are considering incorporating the Rules into their business agreements it will be necessary to reflect on the benefits that using the Rules may bring along with any challenges. This is a fast developing area of the law and one where it will be interesting to see how practice develops.

¹ Unless disclosure is necessary for the fair resolution of the dispute, the enforcement of any decision or award, the protection of the tribunal’s own interests, or if required by any law or regulation or court order.