Digital Dispute Resolution Rules – a new way of resolving tech disputes?

Published 27 May 2021

On 22 April 2021 the UK Jurisdiction Taskforce, chaired by Sir Geoffrey Vos, Master of the Rolls, published new arbitration rules, the Digital Dispute Resolution Rules (the “Rules”).

The Rules aim to enable the prompt and cost-effective resolution of disputes arising out of digital technology such as cryptoassets, cryptocurrency, smart contracts, distributed ledger technology (“DLT”) and fintech applications.

The seat of the arbitration is England and Wales and so the English Arbitration Act 1996 will apply in circumstances not dealt with by the Rules.

The Rules are available here.

The need for bespoke dispute resolution rules

There has been a significant growth in the use of blockchain and other DLT, cryptoassets, and digital contracts. It is suggested that some of these technologies eliminate disputes altogether, given that they are based on self-executing code which automatically implements the terms of an agreement between parties reducing the risk of human error or manipulation, and / or can include “on-chain” / automatic dispute resolution within the code whereby solutions are automatically executed by a smart contract. However, they do not remove the risk of disputes altogether – see further “Application” below. The Rules address some unique aspects of disputes arising out of these technologies that do not lend themselves to ordinary dispute resolution procedures.

Of particular importance is the need to deal with jurisdictional issues which often arise with digital / crypto disputes, which are often borderless – assets, their records, and blockchain nodes are often located across different jurisdictions. This means they are vulnerable to different assertions of governing law and can make dealing with the dispute through the usual court process particularly difficult. It also causes issues for the enforcement of any decision.

Key Features

1. Automatic decisions: The Rules allow for any automatic dispute resolution already associated with the digital asset or contract in question, to be legally binding. Only disputes which are not subject to an automatic dispute resolution procedure shall be submitted to arbitration in accordance with the Rules.
   
   
2. Expert determination: Parties can chose whether a particular issue or type of dispute should be resolved by expert determination instead of arbitration.
   
   
3. Efficiency: The procedure is designed to be short, with the outcome determined within 30 days (unless otherwise specified). The Respondent must provide an initial response within three days of receipt of a notice of claim.
   
   
4. Incorporation: The Rules can be incorporated into a written contract, electronic text or code with the following wording “Any dispute shall be resolved in accordance with the UKJT Digital Dispute Resolution Rules”.
   
   
5. Arbitrators: Specialist arbitrators will be appointed by the Society for Computers and Law, a technology and law charity.
   
   
6. Anonymity: Parties can remain anonymous, not only to third parties to the dispute, as is typical with arbitration, but also to the other parties to the dispute (although they will need to disclose their identity to the Tribunal). This recognises the desire for anonymity in some areas, such as cryptoasset ownership.
   
   
7. Remedies: As well as traditional remedies, such as compensation or rectification of a document, the Tribunal also has the power to operate, modify, sign or cancel digital assets using any signature, crypto key, password or other control mechanism available to it. Arbitrators can implement such decisions directly on-chain using a private key.
   
   
8. Governing law: Parties can agree the Rules shall apply to any dispute, as well as the law governing the dispute (the default being English law).
   
   
9. Enforcement: Any arbitration determined pursuant to the Rules will benefit from the New York Convention. This will ensure that any award should be recognised and upheld in over 165 countries, subject to only limited exceptions.

Application

As we said above, while these new technologies aim to reduce disputes, they do not eliminate them altogether. Digital technology contracts and ventures often have real world elements which can lead to disputes and / or instances when the relevant code does not perform as intended.

We set out some examples below of when the Rules may be used and how their unique features could assist:

1. Smart contracts can be used for the purchase of physical property. Although the contract will be self-enforcing, i.e. self-executing code automatically implements the terms of the agreement, the performance will happen in the real world. Disputes may arise regarding breach of covenants and clauses, specification of a build, condition, damage and quality, amongst other things. Due to the self-enforcing nature of smart contracts, a quick dispute resolution procedure should be beneficial.
   
   
2. Where physical assets are recorded in DLT, circumstances might arise where the ownership, location or other state / characteristic of the asset will not accurately be reflected in the digital record. For example, if the transfer of the asset had been fraudulent, or an error was made when recording the physical asset into the blockchain. Every transfer once recorded on blockchain is permanent, and while it can be cancelled by an opposite transfer, the record of the original transfer will always remain on the chain.
   
   
3. Errors in the code or AI, causing it to operate in an unexpected or unintended way, or events external to the code, such as system failure, can lead to disputes. Such disputes would benefit from the Rules, particularly the agreed jurisdiction, the quick resolution (given the speed at which assets can be moved and the volatility of cryptoasset markets) and the Tribunal’s powers to operate, modify, sign or cancel digital assets.
   
   
4. Utility tokens may have a utility which takes place in the physical world or the digital world. For example, a utility token may give access to an app which would have performance and quality expectations which, if they were not met, may lead to disputes. These disputes would benefit from the knowledge of an expert arbitrator and the Tribunal’s powers to operate, modify, sign or cancel digital assets, as well as the parties’ ability to stay anonymous to one another.

Comment

The Rules are another innovative step to develop the UK’s place in the digital technology market. These developments should build confidence in the UK as a home for digital technology companies and encourage the resolution of disputes in the UK.

It will be interesting to see the uptake of the Rules. Hopefully the ease at which parties can incorporate the Rules into their agreements will assist adoption.

The effectiveness of the Rules will depend on how quick the procedure is in practice, how well the Society for Computers and Law works to appoint the Tribunal, and, perhaps most importantly, the quality of the specialist arbitrators.

Our lawyers are heavily involved in the DLT space and are used to advising on the legal implications of this novel technology. Please see here for our Technology team’s recent article regarding non-fungible tokens.