Arbitration and Smart Contracts: Essential Clauses to Consider
Kolapo Femi-Oyekola
The last decade saw the internet’s capabilities spread from being just the Internet of Communication to the Internet of Values. Through this development, value has been exchanged and transferred over the internet by invoking self-executing contracts known as Smart Contracts.
However, disputes are bound to, and will arise from these Smart Contracts; Errors and bugs will alter performance and code will malfunction. In the event, parties will most likely resort to arbitration as a more suitable alternative to litigation. Arbitration on a disputes arising from a Smart Contract needs to be brought to life by an elegantly drafted arbitration clause. This clause should consider the following 5 elements:
1. SUBSTANTIVE LAW
A provision stating the substantive law should be included in the agreement as this is fundamental because this governs inter alia, the validity, interpretation, performance and termination of the contract as well as the rights and obligations of the parties in the contract. According to Article 35 of the UNCITRAL (United Nations Commission on International Trade Law) Rules (as revised in 2010) (hereinafter referred to as “the UNCITRAL Rules”)[1], parties are free to choose which rule of law governs the substantive dispute and the tribunal shall decide the dispute in accordance with such rule of law.
In deciding the substantive law, parties may wish to consider an arbitral body that is versed in technology and allied matters disputes such as the World Intellectual Property Organization (WIPO) or the Singapore International Arbitration Centre (SIAC).[2] Parties should note the laws of the chosen seat and its position on Smart Contracts; whether or not it renders them unenforceable, and whether the courts in the Seat of the Arbitration will enforce the award and the arbitration agreement. Noteworthy in this regard is Article 2 of the New York Convention, 1958[3] which provides that parties undertaking to submit to arbitration shall do so by an agreement in writing. This means that an arbitration agreement in code or subsumed in code runs afoul of the Convention and will be unenforceable.
A clause such as “…the substantive dispute shall be governed by …” for example, is suitable.
If the parties fail to choose the substantive law, the arbitral tribunal will apply the law determined by the conflict of law rules that it considers applicable by virtue of Article 35 of the UNCITRAL Rules. It is thus in the interest of the parties to choose the applicable law and failing which, may lead to uncertainty which will arise from invoking Conflict of Laws rules.
2. APPOINTMENT OF ARBITRATORS
In addition to appointing regular contract lawyers, parties should prioritise the appointment of technologically-versed arbitrators who can easily interpret contract terms and apply the relevant principles of contract. Disputes resulting from smart contracts, in most cases, arise from various technicalities which may only be understood by an arbitrator familiar with the underlying technology. Furthermore, concepts between technology and contract are bound to overlap, hence the need for these specialists.
3. PROCEDURAL LAW
The parties may agree on the law of the arbitration and this should be included in the arbitration agreement because it governs matters affecting the jurisdiction of the arbitration, the power of the tribunal, and the form and finality of the award. Where the parties choose the law of the arbitration, the tribunal will honour their wishes accordingly.
In cases where parties fail to determine the law of arbitration, the arbitral tribunal shall decide, as it was held in American Diagnostic Inc. v. Gradiopre Ltd. N.S.W. Lexis (1998) 1051, 28, that in the absence of parties’ choice, it would prima facie be the law of the country where the arbitration is held because it is the law most closely connected with the proceedings. Procedural Law is a fundamental requirement in the proceedings because if the proceedings were not in accordance with the parties agreement, it will constitute a ground for setting aside the arbitral award.
4. LANGUAGE OF THE ARBITRATION
Because of the cross-border nature of technology, parties in a smart contract may come from different countries, and by extension, speak various languages. The language element is integral to Arbitration on disputes arising from Smart Contracts as there may be language barriers between both Parties. Article 19 of the UNCITRAL Rules empowers Parties to determine the language in arbitration proceedings, and whether any documentary evidence, exhibits, should be accompanied by a translation into the selected language. A tribunal could decide differently in the event that parties fail to decide upon a language.
The words “the language of the arbitration shall be [English Language [or any preferred language]]” should suffice for this provision.
5. NUMBER OF ARBITRATORS
Parties are in the better position to choose the number of arbitrators which will be suitable to them rather than the institutional rules and national laws. If the parties do not agree upon a method of choosing the number of arbitrators, the arbitrator shall be selected in accordance with the rules of the administering institution. The clause providing for the number of arbitrators will typically refer to a particular legislation to be adopted, or refer the matter to a court or a specified authority which shall then appoint an Arbitrator.
Where there is a substantial amount of money or value involved, parties would feel more inclined to have three arbitrators; Two appointed by each party, and the third jointly appointed by each parties’ arbitrators.
CONCLUSION
The interrelation of contract law and code (through smart contracts) has brought about novel areas of dispute and will even create more complex potential disputes in the future. When these disputes arise, parties are best suited to adopt arbitration as a resolution mechanism, whilst considering the clauses discussed above.
DISCLAIMER:
*** The above content is for general informational purposes only, and is not legal advice or a substitute for legal counsel.***
[1] The UNCITRAL (United Nations Commission on International Trade Law) Rules (as revised in 2010) (in force since 15 August 2010) provide an extensive set of procedural rules which govern the conduct of arbitral proceedings arising from commercial disputes between parties subject to their agreement. The Rules are widely used in international arbitrations, and for this reason will be relied on throughout this work.
[2] Both centers are versed in in settlement over international Intellectual Property and Technology related disputes.
[3] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958, (widely referred to as the New York Convention, 1958) was enforced to provide common legislative standards for the recognition and enforcement of arbitration agreements, and foreign and non-domestic arbitral awards.
