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With the development of new technologies, a particular category of disputes is gradually emerging: disputes linked to blockchain technology and smart contracts.
The question then arises as to which method is best suited to resolving this type of dispute, which has its own characteristics. Should the dispute be brought before state courts? Or, on the contrary, should alternative dispute resolution methods (ADR), particularly international arbitration, be favored?
Potential disputes - As smart contracts are self-executed, some people tend to believe that there would be no disputes in this area.
However, this is a misconception.
Although smart contracts can offer, depending on their characteristics, a number of advantages, such as the automation of certain tasks, enhanced security and lower costs, disputes are inevitable. Without claiming to draw up an exhaustive list, it is not difficult to predict that potential disputes will arise regarding the validity of the contract (i.e. legal capacity) or its non-performance. In particular, coding errors can lead to unexpected execution problems. What happens if the contract no longer reflects the parties' agreement? There is a risk that the contract will not be executed by the parties if it no longer reflects the original agreement. In this case, who will be liable for the damage, given that the decentralized nature of blockchain can, in some cases, destructure the chain of liability? The technological risks inherent in blockchain, for example in terms of cybersecurity, also raise new questions in terms of liability. Furthermore, as certain legal concepts such as "reasonable efforts" or "good faith" are difficult to encode, the interpretation of smart contracts may also give rise to difficulties.
Using alternative dispute resolution - Given the potential for disputes in the blockchain field, the question arises as to whether traditional courts can adjudicate disputes arising from smart contracts. The characteristics and functioning of blockchain reveal that ADR should be favored as a promising alternative to court proceedings:
Firstly, a smart contract is a code, which can be formulated in several programming languages. Courts may therefore have difficulties interpreting smart contracts, which are written in coded language. In addition, a court would not be able to intervene to neutralize or cancel an automated contract. In fact, this is due to the specific features of each programming language for modifying the code, and the immutable nature of the blockchain.
Secondly, the anonymous nature of certain smart contracts can make it difficult to determine the identity of the parties. As a result, even though their use may differ from one infrastructure to another, the decentralized nature of these contracts can prevent courts from verifying their jurisdiction and determining, in some cases, the applicable law according to traditional rules.
Finally, smart contract disputes often involve testimonies and expert reports containing information about new technologies that the parties wish to keep confidential.
These reasons advocate for the use of ADRs, with arbitration appearing to be the optimal solution for resolving blockchain-related disputes.
Distinguishing "on-chain" from "off-chain" arbitration - Arbitration has played an important role in blockchain-related disputes. There is even a "blockchain arbitration", where blockchain technology is integrated into the ADR itself. We can thus distinguish between two approaches: "on-chain" and "off-chain" arbitration.
Off-chain arbitration is more akin to traditional arbitration proceedings as it does not provide for automatic enforcement of the award. Off-chain arbitration can be facilitated by arbitration rules specifically designed for blockchain and smart contracts. For example, in Poland, the first arbitration court for blockchain has been set up within the Chamber of Commerce for Blockchain and New Technologies.
On-chain arbitration essentially involves the use of technological solutions whereby the equivalent of a traditional arbitral award is automatically enforced by the smart contract. From this point of view, blockchain technology and smart contracts could give rise to a new Lex Cryptographia. Today, there are already a number of platforms offering "on-chain" arbitration services (e.g. Kleros, Juris, Confideal, Mattereum and CodeLegit, etc.).
Obstacles to overcome - Although arbitration has played an important role in the resolution of blockchain-related disputes, many obstacles remain to be overcome. Indeed, the enforcement of awards, the determination of the arbitral seat, potential security flaws in arbitral platforms, and the modality of appointing arbitrators, constitute important challenges for the future of blockchain-related dispute resolution.
Given these difficulties, and at this stage, it seems more prudent to prefer hybrid solutions combining "off-chain" and "on-chain" arbitration. This is the solution that a Mexican court decision of May 28, 2021, seems to be guiding us towards. In fact, for the first time, the Mexican court admitted the enforcement of an arbitral award which was governed not by the arbitrator's judgment alone, but by a technological tool designed for decentralized dispute resolution: the Kleros protocol. What is interesting about this case is the concealment of blockchain arbitration by incorporating the blockchain award into a traditional award. Although this cannot be interpreted as a general rule, it paves the way for hybrid solutions compatible with the traditional arbitration framework.
Consequently, the implementation of an effective blockchain-related dispute resolution mechanism is a fundamental step towards securing crypto transactions and enabling the evolution of the crypto economy. In this respect, ADR, and in particular international arbitration, appears to be the optimal and most compatible solution considering the characteristics of blockchain. However, it should not be forgotten that grey areas remain in relation to several legal points and the use of blockchain also presents very different realities, particularly in terms of the chain of responsibility. Lawyers and clients alike must therefore remain vigilant in the face of this growing technology: we need to stay at the forefront of technological and legal innovation while remaining attentive to new types of emerging risks.
Zoé Koray
