Smart Contracts and Blockchain Dispute Resolution : A Study of India’s Arbitration Regime

Introduction : A blockchain is the name of a digital ledger which safely and immutably records data in blocks which are connected in a chain. Since the data stored in the blockchain are immutable, all we have to do is to trust the data entrant. The blockchain technology is a new way of sharing data securely through computers and this is called “Distributed Ledger Technology”. The first implementation of the block chain was in 2009 in Bitcoin’s Public Blockchain. Blockchain technology has the main application in transactions management and digital currency handling in the financial industry.

In addition, it is increasingly becoming part of supply chain systems since it enhances problem-solving efficiency among other benefits. The other application of Blockchain is in dispute resolution since the characteristics of blockchain technology like immutability, transparency and decentralized consensus make the process of conflict resolution effective. Blockchain technology can be applied in smart contracts, immutable evidence and decentralized decision-making.

Smart Contracts refer to the electronic contracts and they automate the execution of contracts thus reducing the possibility of any misrepresentation of facts. Immutable Evidence makes fact finding easy. Blockchain also helps in decentralized decision making. Instead of one judge or arbitrator making a subjective decision, blockchain systems bring in decentralized justice.

Smart Contract Arbitration: Justice Chandrachud Calls For A Shift From Litigation-Like Arbitration

Justice Chandrachud reiterated how arbitration and technology cannot be separated from each other in seeking justice, especially in light of the COVID-19 crisis. Technology renders arbitration cost-efficient, whereas arbitration is considered the best way of solving technology-law disputes. He further mentioned how technological development and artificial intelligence (AI) is progressing swiftly in different industries (robot driven cars and AI assistance). But at the same time, laws pertaining to these developments are lagging behind. Consequently, there arise disputes in connection with technology which are hard to resolve due to the absence of any legal framework. An example of such a case could be the problem of finding out who was liable for the accident caused by the robot-driven car. 

However, he stressed that such difficulties of determining the law can be overcome through arbitration since the latter is not limited to the confines of any particular nation and has special arbitration judges knowledgeable in technology. Furthermore, evidential flexibility is one of the advantages of arbitration over litigation. The example of the UK Digital Dispute Resolution Rules can be cited in connection with this. Justice Chandrachud concluded that technology and arbitration can be uniquely intertwined to deliver justice if used appropriately, encouraging legal professionals to embrace technological advancements while being mindful of their limitations and potential biases.

The Indian Arbitration Framework

In India, the Arbitration and Conciliation Act, 1996 is used to govern arbitrations conducted in the country. The Arbitration and Conciliation Act, 1996, Chapter II, Section 7 defines an arbitration agreement as a written agreement between the parties to settle their dispute through arbitration and not going to court. With the amendment made in 2015, an arbitration agreement that is created electronically is now valid. Since a smart contract is a digital agreement, it meets these criteria. Thus, an arbitration agreement on the blockchain will be valid in India after the 2015 Amendment. In India, there is a limitation to mutual recognition under Article I of New York Convention. Under this provision, international decisions in just certain nations that are signatory to the convention, as recognized by the federal government, can be implemented in India. Currently, less than a third of all signatory nations of the convention have been recognized by India.

Technical Foundations: Blockchain And Smart Contract

In arbitration, Blockchain technology has the potential for increased speed, efficiency, and cost-effectiveness, thereby making arbitration more effective. With the help of the decentralized platform and automation, blockchain arbitration can have a lot of potential to be streamlined as well as save time and money usually experienced in arbitration through traditional methods. Legal and judicial systems around the world have yet to figure out how to validate blockchain awards due to the fact that they tend to be different from normal practices.

However, there exists one possibility of solving the problem through the Indian legal system, which is studying the Kleros model, which is a decentralized platform introduced in 2017 that works on the basis of ex aequo et bono where arbitrators have to decide a case on the basis of fairness and not strictly by law. 

The involvement of intermediaries in smart contracts could jeopardize immutability and automation of the contract. The very nature of human intervention during dispute resolution renders the purpose of smart contracts which eliminates trusted third parties redundant. Although smart contracts are highly efficient in managing deterministic rules, most legal agreements have non-deterministic aspects like good faith and reasonableness. Such provisions are subjective in nature and cannot be programmed into a computer language such as Solidity unless technological advancement allows machines to interpret human logic through artificial intelligence. Thus, human arbitrators play an important role in dispute resolution in relation to such legal tenets.

The incorporation of arbitration processes into smart contracts systems poses challenges regarding the self-enforceability of the arbitral award. This is because smart contracts have to be executed automatically, and this could mean that the normal process of legal recognition, which is necessary for the validation and enforcement of arbitral awards within state law, could become redundant. The problem has already been witnessed in relation to Bitcoin arbitration since the use of multi-signature addresses will make the resolution of disputes without legal intervention possible. Nevertheless, this does not mean that regulations are needed.  

Moreover, states have the option of adopting off-chain measures like manually returning payments that are executed through smart contracts. Thus, the utilization of smart contracts for arbitration or mediation does not necessarily mean the full technical control by the government. However, the main problem that remains lies in the incompatibility of smart contracts and arbitration.

The aim of blockchain arbitration is to overcome the weaknesses of traditional arbitration, specifically those related to the subjectivity involved in interpreting certain legal clauses. The advantage of blockchain technology is the fact that it allows achieving objectivity and consistency in the process through automated decentralized procedures. One of the benefits that can be achieved with the help of blockchain is effective case document management and quick access to case briefs and transcripts.

Decentralized Dispute Resolution: Understanding The Functioning Of Kleros

Kleros is an innovative arbitration platform which operates based on blockchain smart contract arbitration technology. It works when the two parties involved in a transaction (usually online and across borders) agree that in case any disputes arise, they will be settled via Kleros. The transaction is accompanied by putting the relevant funds in escrow using smart contract technologies. In case there are no problems with the transaction, the funds are automatically released. In case a dispute occurs, either one of the two parties’ initiates arbitration by paying arbitration fees and network fees. Crowdsourcing occurs through randomly selecting jurors who stake the cryptocurrency tokens of Kleros ("Pinakion" [“PNK”]) as a signal of goodwill and dedication. The jurors look at the evidence offered by the two disputants and vote on what should happen. The jurors whose votes correspond with the majority get rewards, while those voting inconsistently lose some part of their staked tokens.

Conclusion

In summary, the combination of blockchain and smart contract technologies within India’s arbitration system presents a considerable possibility to improve dispute resolution through the provision of increased transparency, efficiency, and automation. However, while the immutability of blockchain records and its decentralized nature allow for process facilitation and cost-saving opportunities, certain obstacles related to the legal validity of smart contract transactions should be considered. According to the Indian Arbitration and Conciliation Act of 1996, amendment of which is ongoing at present, electronic contracts are allowed, although certain problems connected with stamp duty, registration, and jurisdiction have yet to be sorted out.

Author: Sanya Bajpai and Maahi Sharma in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney

Endnotes

1. Arbitration and Conciliation Act, 1996, § 7, which recognises an arbitration agreement and permits it to be contained in an electronic communication that provides a record of the agreement. This provision is particularly relevant to arbitration clauses embedded in digital or smart-contract arrangements.

2. Arbitration and Conciliation Act, 1996, §§ 35–36, concerning the finality and enforcement of arbitral awards. Section 35 provides that an arbitral award is final and binding on the parties, while § 36 governs enforcement of an award in accordance with the Code of Civil Procedure, 1908.

3. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (New York Convention), arts. I, II and V, which establishes the international framework for recognition of arbitration agreements and enforcement of foreign arbitral awards, subject to the Convention's requirements and limited grounds for refusal.

4. Kleros, “Kleros: The Decentralized Justice Protocol,” describing the blockchain-based dispute-resolution model in which parties submit disputes to decentralised jurors and the outcome is implemented through smart-contract mechanisms. The Kleros model illustrates the distinction between conventional institutional arbitration and blockchain-based decentralised dispute resolution.

5. Law Commission of England and Wales, Smart Legal Contracts: Advice to Government (2021), which concludes that the existing legal framework of England and Wales is capable of accommodating smart legal contracts and examines issues arising from the interaction between contractual principles and automated code. This provides a useful comparative perspective for assessing the legal treatment of smart contracts in India.

6. Jindal Global University, Mapping ADR, “The Conundrum of Enforceability of Blockchain Arbitration: Learnings from Kleros,” discussing the difficulties involved in reconciling decentralised blockchain arbitration with conventional arbitration requirements, including the identification of arbitrators, procedural fairness, applicable law and the recognition and enforcement of resulting awards.