This article has been authored by Advait Sharma and Bhadra Anil are 4th-year B.A. LL.B. (Hons.) students at the National University of Advanced Legal Studies, Kochi.
Introduction
In today’s tech-dominated era, many companies increasingly incorporate blockchain technology to stay competitive. Reports show over 44% of the top 100 public companies use blockchain. A significant application of this technology is in smart contracts. Smart contracts are self-executing agreements with terms directly written into code, running on blockchain to ensure automatic, transparent, and tamper-proof execution without intermediaries.
Smart contracts gained momentum with their nature of swift execution and the inbuilt character of avoidance of dispute attributed to it, unlike traditional written contracts. Since it is self-executive in nature, it ought to have zero human intervention and offer a just mechanism for both parties involved, making the business operations faster and more efficient. While all of this made it better and much more equipped to tackle the problems compared to the traditional one, what remained primitive was the dispute resolution mechanism. While the machines have now done everything that took time, cost, and effort, the resolution of conflict associated with smart contracts still involves resorting to traditional methods that invalidate the basic premise of adopting smart contracts. So, what could be a potential solution for this? The answer lies in Blockchain Arbitration.
Blockchain arbitration revolutionizes dispute resolution by seamlessly integrating smart contract technology with traditional arbitration processes. When a dispute arises, it is automatically logged onto the blockchain, triggering a sophisticated automated process. However, the legal landscape for smart in India remains uncertain. In this article, the authors evaluate the need for Blockchain Arbitration and the enforcement of its Awards through a landmark Mexican case involving Kleros. It explores legal challenges, including those under the Arbitration and Conciliation Act (A&C Act) and the New York Convention. Moreover, it delves into the jurisdictional dilemmas and the potential for blockchain arbitration to standardize and enforce awards with the future potential of blockchain arbitration as a transformative and efficient dispute resolution mechanism.
The Klero Case
On May 28, 2021, a pivotal moment was reached in the realm of blockchain arbitration when an arbitral award that incorporated blockchain technology was enforced by a Mexican court. This decision transformed the theoretical concept of enforceability of blockchain arbitral awards into a practical reality, aligning such awards more closely with state-controlled legal frameworks.
The case involved Kleros, a decentralized application designed for swift, automated online dispute resolution. The dispute arose from a rental estate leasing agreement that featured a hybrid arbitration clause. This clause mandated that the Arbitrator draft a Procedural Order that would summarize the dispute and evidence to be submitted to Kleros. Based on objective legal criteria, Kleros would then issue a decision, which the Arbitrator would later incorporate into the final Arbitral Award. This Award would determine the substance of the ruling and be issued in writing. The clause specified that the Award would be final, with both parties relinquishing their rights to modify or revoke it.
Notably, the Award itself did not provide comprehensive details about the blockchain arbitration process or Kleros’ role in reaching the conclusion of the dispute. It was issued solely under the Arbitrator’s name, without any reference to Kleros’ automated involvement. Moreover, this dispute originated from a rental agreement dominated by Mexican currency and was entirely off-chain. Despite this, the blockchain arbitral award generated by Kleros was enforced within Mexico’s traditional arbitration framework, thanks to the arbitration clause’s incorporation of the blockchain protocol.
Indian Jurisdiction & Blockchain Arbitration
However, the Indian scenario is different. While the human mind at its cusp of technology has given rise to the arena of blockchain arbitration, it remains uncertain whether the current legal framework is equipped enough to accommodate this new player in the realm of alternate dispute resolution mechanisms in India. With the legal mandates of the A&C Act 1996 ranging from the terms of arbitration in the contract to the enforcement and registration of awards, can blockchain arbitration successfully navigate itself through the legal requirement and achieve effective dispute resolution?
The Question Of Enforceability
Blockchain arbitration faces its first hurdle in the form of a lack of enforceability. Both Section 7 of the A&C Act and the New York Convention require such agreements to be in writing. The recent amendment through Sec 3 of the Amendment Act 2015 has clarified that an agreement would be considered in writing if it is communicated through electronic means.
Even when the phrase “electronic means” is not defined within the act itself, Section 10 (A) of the IT Act would suffice in proving the legal validity of the arbitration in blockchain. Further, the UNCITRAL model law on E-commerce states that an offer and acceptance may be expressed through data messages, which shall not be denied legal validity and enforceability and include any computer-generated records that are not intended for communication.
With the nature of smart contracts being self-executing, Article 2.1.1 of the UNIDROIT Principles of International Commercial Contracts, 2016 covers contracts involving automated performance arrangements, where parties agree on self-executing electronic platforms without the involvement of a natural person to ensure performance.
The Jurisdictional Dilemma
Through Art 1 of the New York Convention, India has made certain reciprocity reservations, making only a few foreign arbitral awards enforceable in the country. While there have been certain exceptions, like the case of Transocean Shipping Agency v. Black Sea, where India accepted an award from Ukraine despite not being on the list, India still remains strict.
In blockchain arbitration, the preset dispute resolution mechanisms select the arbitrators once a request has been sent to the interface. With this mechanism, it becomes hard to decide on the seat of arbitration. At the same time, the potential solution to this would be an institutional arbitration framework that recognizes the arbitrators and the establishments that offer arbitration within a territory. This step would also be antithetical to the arbitration-friendly approach.
Way Forward
The smart contracts market was valued at USD 2.14 billion in 2024 and is projected to grow to USD 3.21 billion in 2025 and reach USD 12.55 billion by 2032. The future of alternative dispute resolution gleams with promise through ‘Blockchain Arbitration’, with its objective of mainstreaming arbitration. Distinguished by its transparency, security, and efficiency, it addresses the shortcomings of the traditional method and emerges as a highly efficient substitute for conventional arbitration.
By 2025, Gartner estimates that over 50% of global mid-to-large enterprises, such as Amazon, Alibaba, and Google, will adopt smart contracts. India is also participating in this growth, with the government partnering with 5ire and raising USD 100 million in July 2023 to enhance blockchain capabilities.
As global confidence in blockchain technology grows, its adoption in legal frameworks is expected to become more prevalent. The integration of artificial intelligence with blockchain further enhances the potential for automated, unbiased decision-making.
Blockchain arbitration, exemplified by Kleros, faces challenges in enforceability and integration within existing legal frameworks like the A&C Act 1996 and the New York Convention. While electronic communication amendments and smart contract principles provide some legal backing, issues like jurisdiction and seat of arbitration remain problematic. Blockchain arbitration must navigate these legal complexities and gain broader acceptance within traditional arbitration paradigms to achieve effective dispute resolution. With technological advancements and legal validity, blockchain arbitration is poised to ascend the zenith of alternate dispute resolution mechanisms, embodying the ultimate aim of justice and fairness.