Over the years, smart contracts have played a significant role in transforming blockchain technology, enabling a decentralized system. The World Economic Forum, in its 2015 survey recognised that by 2025-2027, about 10% of the global GDP would be stored in blockchains, owing to its efficient attributes of data security management.
By the means of smart contracts, fully automated legal obligations can be enforced without the involvement of third parties. Much like conventional contracts, smart contracts on the blockchain are susceptible to a variety of problems, including non-transactional disputes, off-chain governance issues, and on-chain disputes.
An on-chain dispute resolution system is still in its infancy. It is said that an on-chain smart contract is contained in a self-executing code that automatically executes the terms of the parties’ agreements without the intervention of a third party, leaving little space for human mistakes or disagreement.
Smart contracts, on the other hand, do not eliminate the possibility of a disagreement. Thus, it becomes imperative to implement a dispute resolution mechanism governing digital relationships set out in such smart contracts.
Out of the available alternative dispute resolution mechanisms available, arbitration is the most accurate and optimal dispute resolution mechanism. The blockchain arbitration can be bifurcated into “on-chain” and “off-chain”.
● On-chain arbitration involves the use of a smart contract in a classic dispute resolution mechanism.
● Off-chain arbitration involves automatic recognition of awards but with automation of certain elements of the procedure before the Arbitral Tribunal.
The efficiency of Arbitration as a dispute settlement mechanism in Smart Contracts.
● Even though the chances of disputes arising out of a smart contract are minimal none the less disputes might arise between parties due to various conditions.
The dispute might arise between parties with regard to the sale of defective goods or because of technical difficulties, or due to the performance of oracles or in case improper or wrong information has been fed into the code of the contract, etc.
Another major problem that may arise in determining the jurisdiction where the dispute must be resolved.
This is where Arbitration, as a dispute settlement mechanism, comes into play. Arbitration provides a speedier redressal of disputes and it is confidential. Smart contracts are based on blockchain technology and in order to resolve a dispute related to a contract based on blockchain, it is imperative that the person resolving the dispute has knowledge of the technology which might not be possible in traditional courts, but in case of arbitration, a special tribunal can be set up in order to resolve disputes arising out of smart contracts.
The inclusion of an arbitration clause in the smart contract will reduce the number of issues arising out of the contract and help in the settlement of disputes in an effortless manner.
Since smart contracts are distributed through various computer networks which may be based in different parts of the world, if a clause regarding the jurisdiction and the governing law is added to the smart contract it will wipe out any uncertainty regarding the jurisdiction and the applicable law.
In cases where a smart contract is entered into by parties with regard to certain highly sensitive matters, moving traditional courts in case of a dispute might not be their best bet since court proceedings are not confidential. Certainly, in such cases having an arbitration clause in their contract would be of benefit since arbitration proceedings are confidential in nature.
The Digital DR Rules define a smart contract as a digital asset. To incorporate these rules into a smart contract on a blockchain, the text `any dispute shall be resolved in accordance with UKJT Digital Dispute Resolution Rules” has to be included in an on-chain contract.
The Digital DR Rules allow these words to be incorporated into codes.
Since a blockchain is programmed into codes, these words can be incorporated into the encoded form. Under the remit of the Digital DR Rules, disputes relating to smart contracts can be resolved without the interference of the courts.
Disputes under the Digital DR Rules can be solved via an automatic dispute resolution process. Alternatively, such disputes can also be submitted to an arbitrator or expert determination.
● Automatic dispute resolution process: The rules provide an idiosyncratic automated dispute resolution mechanism that allows the parties to choose a person, panel, or artificial intelligence agent to decide disputes automatically. The decision is then immediately applied to the digital asset system i.e. the platform where the digital asset exists. Rule 8 makes the outcome of the automatic dispute resolution process legally binding on the parties.
● Submission to an arbitrator: Alternatively, any dispute between parties arising out of the relevant contract/digital asset that was not subject to an automatic dispute resolution process can be presented to an arbitrator. The procedure for commencement, appointment, and submission is quite similar to the regular arbitration procedure. The rules allow arbitrators to use a private key to implement their decision directly on the blockchain.
One of the most significant advantages of blockchain arbitration is that it removes human intervention, allowing for quicker and more cost-effective dispute settlement. On the blockchain, the proper examination of evidence may be done online, leaving less room for facts to be tampered with or evidence to be manipulated. However, smart contracts and blockchain arbitration, while gaining traction among governments and experts throughout the world, are still in their early stages of development and would require additional legislation to become a viable option for dispute settlement. Privacy concerns and the enforceability of smart awards continue to be a source of concern. Because blockchain arbitration is a component of technical evolution that allows artificial intelligence to generate self-enforcing decisions, it is still solar systems apart from being used in countries going through development.