Carolina Mauro and Tilbe Birengel, CyberArb – 26 May 2023
CyberArb is on a mission to inform, educate and train about the topical issue of cybersecurity in the international arbitration environment. This goes for its members too! Accordingly, in 2023 a new internal initiative has begun: CyberArb All Hands, an occasion for our volunteers to e-meet every month and plan, brainstorm, and share their insights and experience.
These sessions are organised by the newly established Team Building team at CyberArb and moderated by the team’s co-chair Tilbe Birengel, Senior Associate at Erdem & Erdem Law Office in Istanbul, Türkiye.
This month’s All Hands featured a very special guest: ArbTech founder and CyberArb mentor Sophie Nappert. We want to thank Sophie for dedicating her time to elaborate on a number of cutting-edge questions posed by Tilbe and other CyberArb participating members about smart contracts, automated dispute resolution systems, and others.
We hope you enjoy the reading as much as we enjoyed the listening!
Question: Does the self-executing nature of the so-called smart contracts make transactions easier, or are we still in a phase where there is room for development?
It is especially important for lawyers to be aware of how to correctly use the terminology when approaching technology-related matters, as it may sometimes be imprecise. Sophie pointed out that the term “smart contract” is a good example of loose terminology in the tech law sector: “smart contracts” are not contracts per se, but rather a piece of code that allows for automatization in the execution of a part of the contract in which they are included, when a pre-determined condition or “milestone” is met.
Having clarified that, smart contracts – as generally understood – are now starting to being adopted more and more frequently. Sophie shared with us that she herself recently entered into a smart contract for the development of a new website for ArbTech. However, the most common context for the use of smart contracts is that of crypto currency, particularly to automate the payment obligation.
The coding language can be very convenient to allow for automation of simple, binary obligations. However, it is not sophisticated and nuanced enough compared to the legal language. Particularly, it cannot automate concepts that are subject to interpretation, such as best or reasonable endeavours, or force majeure – yet. There is no reason why it should not get there in the near future though, and ArbTech is working to facilitate bridging the gap between the tech jargon and the legal jargon.
Martin Beckmann, CyberArb Information Security Committee’s member and personal data protection expert with a mixed background as both an engineer and a lawyer, who was on the meeting, suggested that there is a discrepancy “between the binary world of computers and software, and the interpretative world of law”. Frictions between the two are deemed to be inevitable.
Cemre Kadioglu Kumtepe, CyberArb Executive Board member and co-chair of the Publications Team and Newsletter, posed the questions whether, at this stage of development, lawyers will likely have to learn how to code.
According to Sophie, anyone who wants to put together a workshop for lawyers to learn coding will be very successful (here you have your business idea!). She suggested, however, that what is really required to foster an effective dialogue with coders and developers is to understand the way they think, rather than their language. In order to effectively resolve their disputes, arbitrators and counsels need to understand how the players in the field reason and operate.
This said, learning coding cannot harm – Sophie noted that Harvard University, where she is guest lecturer, has already started exposing its law students to coding.
At this point, Shatrunjay Bose, CyberArb member and co-chair of the Education Team – which brings to you CyberArb e-learning course in collaboration with Arbitrate.com – shared a useful piece of advice: to look at patent applications online, as these are usually written by lawyers with mixed science/engineering backgrounds, to find a good example of how tech and legal languages can dialogue in an efficient way.
Question: Would it be possible to draft and implement a self-executing dispute resolution clause in a smart contract to make it capable of even drafting the award automatically?
Automated dispute resolutions systems already exist, although at this stage they are very simple and mostly used for repetitive, binary disputes which do not pose questions of interpretation, nor complex procedural issues.
According to Sophie, we are at the beginning of a journey and that, in the end, it is a matter of where the line is drawn to keep the human decision-maker as the preferred option to resolve disputes. Ultimately, the ones to make the call will be the users. Thus, the question is: how does international arbitration make itself appetible for the tech industry?
Question: Some dispute resolution providers have drafted Smart Contract Clauses, including the Judicial Arbitration and Mediation Services, Inc (JAMS). Taking the JAMS rules as an example, they have tighter deadlines – for example, they provide that arbitrators must render their awards within 30 days. Is speed the most fundamental need for tech disputes?
When thinking of what made international arbitration attractive as a means of dispute resolution back in the day, classic values such as confidentiality and industry-specific knowledge come to mind. However, these do not seem to be as paramount in the current Web3 Industry, where immediacy has become the predominant factor. International arbitration as it exists today is arguably perceived as too much time-consuming, too much document-heavy, and too much costly.
Current attempts to make international arbitration attractive to start-ups and other players in the tech sector, including the above-mentioned JAMS Rules, mainly focus on “compressing” the procedure and increase the speedy conclusion of the proceedings. However, the real issue is arguably that it is procedural fairness which requires time.
How much procedural fairness should the “tech arbitration” retain?
And who should be the decision maker – how should they be chosen? The traditional system of going through arbitrators lists and curricula does no longer seem to be the preferable one.
Question: Do arbitration practitioners urgently need new arbitration rules specifically tailored for tech disputes?
While the international arbitration environment is trying to adapt to new needs and languages, we are currently witnessing a gradual increase in the available options: at the one end of the spectrum, the already existing automated dispute resolution systems, which are arguably suitable for simple, binary disputes, and the sophisticated human arbitrator, who is preferrable to resolve more complex disputes, at the other end.
Question: International arbitration appears as an effective tool for crypto currency companies. However, there are some concerns about the use of arbitration clauses in the standard terms and conditions of crypto currency exchange platforms. Recently, the English High Court (in Payward v Chechetkin) confirmed its jurisdiction notwithstanding an arbitration clause designating California as the seat of arbitration in a blockchain dispute. One of the reasons behind the High Court’s decision was that the blockchain user, who was party to the dispute, was deemed to be a “consumer” and thusthe exclusive jurisdiction clause was disregarded. Following this decision, a large number of blockchain users could arguably be considered as “consumers” in many other jurisdictions.
Will this protective approach reduce the use of arbitration in crypto currency disputes and put awards are at risk of being set aside/becoming unenforceable?
Sophie suggested that the High Court’s decision should be seen in context, as we are currently at the very creation stage of a consistent jurisprudence in this subject area.
She considered that there seem to be a shared policy among national courts to try and find a way to keep their national laws relevant. Crypto currency is currently a field with no regulation and prone to risks, including that of falling for criminals. Therefore, national courts seem to be consistently relying on consumer protection to provide for justice – Tilbe confirmed that the same rationale is currently being followed in courts in Türkiye too.
UK courts are notoriously arbitration-friendly, however, the High Court seems to have taken in particular consideration that this case concerned a claimant entering a minefield – so to speak –, where people have little or no control over their money. Treating crypto currency users as consumers who were “forced” to accept the platform T&Cs, including the arbitration clause, is the way national courts around the world have currently adopted to provide for protection.
Question: Arguably, there seems to be a lack of transparency in the corporate structure of certain mega crypto currency companies. What kind of procedural obstacles does this create for claimants, for example in terms of legal standing?
It is not always an easy proposition to understand who the user entered in a contract with, when accessing these platforms. Sophie noted that in the recently established arbitration against Binance, for example, the claimant decided to sue all the group entities and even the CEO itself, to increase the chances.
Another problem may be how to serve proceedings to these individuals and entities. The UK courts so far have proved to be very flexible, for example allowing services through NFTs. UK courts seem determined not to be daunted by the fact that crypto currency transactions take place anonymously. The whole online service is becoming a thing.
Question: Do parties to an arbitration currently use blockchain technology to collect, store and submit documents or other evidence?
According to Sophie, there is no reason why blockchain cannot be used for this purpose. However, for that to be effective, the parties involved have to agree on having all their documents on the blockchain from the very initial stage of their doing business together. Putting documents on the blockchain from the outset will allow them to create a paper trail of evidence as things develop, which the blockchain can allow for immutability and transparency. If a dispute arises down the line, the document disclosure will be much easier.
Realistically, at this stage evidence on blockchain can only be reasonably expected by sophisticated players who do business with each other often, for example in the construction field. If these stakeholders could realise how much time and money they could save at the end of the day when they are involved in a dispute – including actually being able to avoid the dispute altogether, by creating the immutable paper trail and being able to check the evidence for themselves –, they may agree to put all documents on the blockchain from the outset.
Question: Even if parties conduct an efficient arbitration, set-aside and enforcement proceedings take considerable amount of time before the local courts, especially in some jurisdictions. Could technology speed up post awards proceedings?
Sophie argued that in so far as the involved parties’ assets are online and there is a smart contract in place, then the moment the award comes into existence, it is immediately and automatically executed.
The offline reality, however, is still unfazed by such technologies and will still require time.
Question: When it comes to ordering interim measures, arbitral tribunals often face obstacles. National courts are arguably still predominate when it comes to seeking an injunction against the counterparty. For tech disputes, is there a tool that could help overcome the reliance on national courts and bypass arbitrators’ limitations to ordering interim measures?
The same as above goes for interim measures: as long as there is a smart contract in place and the “milestone” is met, they will automatically come into place in the online realm.
The current issues are mostly present wherever what is online is to be taken offline to be disputed in real life, in the physical reality of human arbitrators – and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards does not necessarily help.
Question: While the capabilities of AI technology are astounding and may serve for cost and time efficiency (for example, in dealing with basic secretarial work for arbitral tribunals), there are also compelling concerns regarding privacy, cybersecurity, human rights, and ethics. What about the use of chatbots in the current environment?
Certain big law firms in London have already developed their own version of ChatGPT to support newly qualified lawyers with their research tasks, proving that ChatGPT can be a useful tool for lawyers, who should not be afraid to use it.
Sophie herself finds it quite useful to brainstorm legal questions from different perspectives. Naturally, the results of her experiments are sometimes sloppy, but sometimes surprisingly useful The important thing to keep in mind is that ChatGPT is a tool of logic and decision trees, and it should be approached accordingly.
Martin pointed out that the big issue with ChatGPT and other artificial intelligence (AI) tools is the lack of clarity in the way they are trained.
Sophie agreed, as she acknowledged that as long as humans train AI, bias-free AI will be a utopia. A certain degree of bias will always be there, and we can only hope that it is harmless.
Question: What piece of advice can be given to young lawyers who want to explore the technology field and become legal tech practitioners?
“Curiosity” is the first word to come up. Sophie reassured us that the legal skills that we keep developing as young lawyers have a lot to offer to the tech world.
On the other hand though, she suggested that we should also not be scared to go back to first principles, disregard what we have learnt, and rebuild it from a new perspective.
We are currently at the crossroad where we were trained in a traditional way but can work towards a non-traditional career and practice law in a completely new way. Exciting times are ahead of us!