Arbitration Remains Attractive for Digital Disputes in 2024

The rapidly evolving fields of technology lend themselves to arbitration as a forum for dispute resolution. Technology companies and entrepreneurs generally prefer privacy in their commercial dealings, which are often international and complicated, and to have control and flexibility over their businesses. Arbitration offers these benefits and more — but not without its problems.

As the industry looks ahead to the new year, there are several emerging arbitration trends in technology, such as digital assets and smart contract arbitration, arbitration in the metaverse, and artificial intelligence.

Digital assets are inherently intangible and often cross-border, as counterparties to transactions may be unidentifiable or untraceable in certain jurisdictions. Public markets for their trade, like cryptocurrency or non-fungible exchanges, have few or no terms and conditions of use. In all, it can be difficult to ascertain what forums have jurisdiction to entertain a digital asset dispute, and what conflicts of law and substantive legal rules apply.

Of increasing discussion and interest in the legal world is arbitration relating to digital assets, including cryptocurrencies such as bitcoin, non-fungible tokens, artificial intelligence, technology and innovation, and how they attempt to mitigate the risks that come with the adoption of new technology.

This article identifies some of the paths that AI and arbitration will take in 2024, particularly in light of the Court of Appeal of England and Wales decision in Soleymani v. Nifty Gateway LLC^[1] on Oct. 6, 2022, and the High Court of Justice of England and Wales decisions in Chechetkin v. Payward Ltd.^[2] on Oct. 25, 2022, and July 14, 2023.^[3]

These rulings examined the interplay between arbitration consensually agreed between the parties on the one hand, and the jurisdiction of the English courts over disputes involving domestic legislation outside the scope of the underlying contract, notably gambling and consumer protection law, on the other.

Digital Assets and Smart Contract Arbitration

There have been numerous developments in arbitration in digital assets and so-called smart or self-executing contracts. In 2021, the U.K. Ministry of Justice's jurisdiction task force produced the digital dispute resolution, or DDR, rules, which was a major step in the development of arbitration rules for digital disputes.

To date, no major arbitration institution has issued specific rules for arbitrations involving digital assets. The DDR rules are intended to be built directly into contractual arrangements involving digital property, thereby binding the parties to a flexible process for the speedy resolution of any material dispute by either arbitration or expert determination.

The rules have a number of notable characteristics:

• The near-complete anonymity of the parties, obliging the parties to provide details and evidence of their identity to the reasonable satisfaction of the tribunal, while allowing the parties to agree to provide that evidence to the tribunal alone and not include it in the notice of claim or initial response;
• A broad application to digital asset disputes relating to "a contract, digital asset or digital asset system";
• An acceptance of automatic dispute resolution processes involving the "automatic selection of a person or panel or artificial intelligence agent whose vote or decision is implemented directly within the digital asset system (including by operating, modifying, cancelling, creating or transferring digital assets)" of which the outcome shall be legally binding on interested parties; and
• The appointment of arbitrators by a specialist, expert body — the Society for Computers and Law, if not chosen by the parties — and granting permission for the tribunal to provide the award in an anonymized format to the SCL for publication, if the tribunal "considers that an award or decision is of general interest" and the parties do not object.

Arbitration in the Metaverse

In its consultation paper on digital assets published in July 2022, the Law Commission of England and Wales described the DDR rules as "particularly well-suited" to digital asset disputes. Yet, at the time of writing, there appears to be no published awards or judgments under the DDR rules.

Specialist, online blockchain forums for resolution of arbitral disputes continue to be created, particularly in the metaverse. These new arbitral institutions have been invented using distributed ledger technology, i.e., the blockchain, not located in a single place, but spread over the internet in a large number of networked computers that store mirror copies of public information to which users have private access keys.

One example is Kleros, a decentralized arbitration service in which users sit as fact-finding jurors, randomly selected to decide cases. The jury is restricted in its access to information, which is limited to that solely on the blockchain and related to the transaction.

This raises the question of whether enforceable awards will be rendered at the end of the process if the parties are so constrained, as Article V(1)(b) of the 1958 New York Convention permits refusal of recognition and enforcement if a party did not have sufficient opportunity to present its case.

Secondly, CodeLegit also retains human arbitrators under its blockchain arbitration rules, which are modeled on the well-known U.N. Commission on International Trade Law Model Rules and are also intended to be built into the coding or wording of smart contracts. CodeLegit itself appoints the arbitrator, who issues his or her award under its authority, but the company retains the capacity to modify the contract.

Another example of these institutions is U.S.-based JAMS, which produced in 2018 its draft rules governing disputes arising out of smart contracts. Under Rule 1(d), a smart contract is broadly defined as "a computer protocol intended to digitally facilitate, verify or enforce the negotiation or performance of a self-executing contract, when the terms of the agreement between the parties are directly written into lines of computer code that exist across a distributed, decentralized blockchain network."

Arbitration and Artificial Intelligence

Most AI development is currently focused on generative software that uses large language modeling: It surveys and analyzes vast quantities of information to build a model that attempts to answer questions posed, such as in the ChatGPT software.

At present, nongenerative AI has found its use in arbitration in support of e-discovery and document review, and legal research. Generative AI is now being used to generate first drafts of pleadings, awards, legal research memos, and transcription or translation services. All of these functions require the absorption and sifting of data, with outputs subject to human control. AI can assist in other less repetitive ways, such as selecting arbitrators and assessing the potential outcomes of a dispute.

Arbitration institutions have generally been slow to respond to AI technology, leaving its deployment to parties themselves. However, in August 2023, the Silicon Valley Arbitration and Mediation Center published draft guidelines on the use of AI in arbitration, including draft rules on the uses, limitations and risks of AI.

Arbitrating or Litigating Digital Disputes

It is fair to observe that most developments in substantive and procedural law relating to digital disputes occur in litigation, rather than arbitration. There have been instances, however, where the two dispute resolution processes have conflicted, most notably when consumer protection legislation has been invoked in a bid to oust contractual agreements to arbitrate.

There are interlocking provisions in English law, for instance, which affect the enforceability of agreements to arbitrate. On Oct. 6, 2022, in Soleymani v. Nifty Gateway, the Court of Appeal ordered a trial into the validity of a New York JAMS arbitration clause under English law in the terms of service of the Nifty Gateway non-fungible token platform.

The claimant participated in a non-fungible token auction held on the defendant's platform in which he bid to purchase a non-fungible token. A dispute arose and the claimant refused to make payment, causing the defendant to bring New York JAMS arbitration under the terms of service. The claimant issued concurrent proceedings in the English courts, seeking declarations that the New York governing law clause and the JAMS arbitration clause in the terms were unfair and so not binding, and that Nifty was in breach of the English Gambling Act 2005.

At the first instance, the judge stayed the court proceedings in favor of the arbitration. The Court of Appeal upheld the decision as it was for the arbitrator to decide if the arbitration agreement was unfair and not binding on the claimant, following the so-called kompetenz-kompetenz

doctrine. However, the court held that questions regarding the governing law and the Gambling Act and their effects on the arbitration agreement could be resolved by the courts. The domestic courts were better placed to adjudge questions of fairness in consumer protection law than foreign arbitrators, it said.

On Oct. 22, 2022, in Chechetkin v. Payward, the High Court found that it retained jurisdiction over a dispute relating to the claimant's trading losses on the cryptocurrency trading platform Kraken even though (1) the relevant terms of service contained a San Francisco arbitration agreement and (2) a tribunal had been formed and issued a final award.

The court later held in Chechetkin v. Payward on July 14, 2023, that the final award should not be enforced because it was, among other things, contrary to public policy considerations underlying domestic consumer rights legislation.

Conclusion 

The DDR rules and blockchain and distributed ledger technology arbitration forums show that arbitration is using its flexibility to quickly adapt to a number of new digital technologies and platforms, adjusting its rules in innovative ways to meet the demands of the often unique disputes that can arise.

However, there remain challenges, as shown by local court judgments refusing to uphold arbitral awards due to essentially cross-border issues, i.e., lack of compliance with local public policy concerns. These challenges should subside with familiarity, as terms and conditions are redrafted to avoid such problems.

It remains the case that arbitration will remain the most attractive forum for resolving disputes in this area due to its flexibility, confidentiality and the comparative ease with which arbitral awards can be enforced across borders.

Reproduced with permission from Law360. This article was first published in Law360 on 10 January 2024.  For further infomation, please visit: Arbitration Remains Attractive For Digital Disputes In 2024 - Law360

[1]  Soleymani v. Nifty Gateway LLC [2023] 1 WLR 436.

[2]  Chechetkin v. Payward Ltd & Ors [2022] EWHC 3057 (Ch).

[3]  Chechetkin v. Payward Ltd & Ors [2023] EWHC 1780 (Comm).