THE AUTHORS: Jason Rose is an Associate at Velitor and Paul-Raphael Shehadeh is a Paralegal at Velitor
Introduction and Background to the UKJT Rules
Following recent rapid developments in the law relating to digital assets across the globe, the UK Jurisdiction Taskforce released its Digital Dispute Resolution Rules on 22 April 2021 (“UKJT Rules”). The publication of the UKJT Rules follows the launch of the Taskforce’s Legal Statement on cryptoassets and smart contracts (a computer code which reflects the terms of a contract, that is executed automatically when all conditions are met). The UKJT Rules build on the conclusion of the Jurisdiction Taskforce’s Legal Statement that a smart contract can be binding under English law and aim to deliver streamlined dispute resolution to blockchain users.
Unless the parties otherwise agree, the UKJT Rules provide for arbitration when disputes arise in relation to cryptoassets, cryptocurrency, smart contracts, distributed ledger technology and fintech products. In general, the UKJT Rules seek to simplify procedures, leaving the arbitrators and parties with a broad discretion to tailor proceedings as they see fit. An even simpler, alternative expert determination process is also available to dispose of certain issues, such as an oracle (an artificial intelligence agent) determining a valuation under Rules 3a and 5. An automatic dispute resolution process, which allows parties to resolve a dispute by the automatic selection of a person, panel, or artificial intelligence agent, is also available under the rules, and where the parties have selected this process, Rules 4 and 5 support those arrangements by providing that the outcome of any automatic dispute resolution is binding on the parties.
Discussion of the UKJT Rules
At first glance, the UKJT Rules display many of the characteristics of a standard arbitration: parties make written submissions setting out their case, the dispute is resolved by an arbitrator (or arbitrators), and the procedure culminates in a final and binding award. However, on closer inspection, many other ‘usual provisions’ have been modified to suit blockchain users. A number of these are discussed below.
Incorporation
The UKJT Rules can be incorporated in the usual way, through the arbitration clause. Indeed, Rule 3 provides for a standard clause that the parties can use whenever they wish to have their potential dispute resolved in accordance with the UKJT Rules. The novel twist – a reminder that these Rules target a tech-savvy market – is that the agreement to arbitrate may be encoded in a transaction. How such text is included depends on the digital asset in question. For instance, in relation to Bitcoin, this may be done using platforms such as Counterparty, which has described this process as “writing in the margins of regular bitcoin transactions”.
Given that the code is often hidden to end users, the incorporation of the UKJT Rules by “encoding” raises concerns surrounding what cryptocurrency pioneer Nick Szabo termed “smart fine print” in a 1994 essay, whereby parties might unknowingly incorporate contractual terms. Szabo’s essay calls for smart contract platforms to remedy the smart fine print problem by paying attention to improving the communication of “transaction semantics”. In other words, the essay asks for parties to smart contracts to be given proper notice of exactly what they are agreeing to.
In principle, the UKJT Rules can be incorporated individually into smart contracts just as easily as into the terms of use of digital platforms of all descriptions. The UKJT appears to foresee both scenarios in the Further Explanation section when it states: “…it is anticipated that the Rules will be expressly adopted into rules and contracts governing participation in and use of cryptoassets.”
Rapid and cost-effective dispute resolution?
A focus on speed is a recurring theme in the UKJT Rules, which resemble in their substance the “emergency” or “expedited” procedures found in institutional rules of procedure (for example, the ICC, LCIA, SCC, and UNCITRAL rules). Notably, though, speed is the default position in the UKJT Rules.
One example of this objective is the time periods in which the parties must exchange initial notices. Commencement of proceedings (Rule 6) is achieved by giving a notice of claim to all other parties to the dispute and to the appointment body (the Society for Computers and Law, the default body, although according to Lawtech’s further guidance section, the parties may agree that another body should manage the appointment of arbitrators or experts). Following that, Rule 7 requires the respondent to send its initial response to the claimant in only three days, although the necessary information requirements are minimal. Only electronic details are needed and there is no doubt that claims may be started by email.
A further example is Rule 10, which gives the tribunal “absolute discretion” to determine the nature and volume of evidence and argument, although this must be read in conjunction with Rule 9, which relates to procedural fairness and which mirrors section 33(1)(a) of the Arbitration Act 1996 (“the Act”). Rule 10 also expressly states that “no party shall have the right to an oral hearing.” This follows the pattern of emergency provisions such as those of the LCIA Rules, where Article 9.7 states “the Emergency Arbitrator is not required to hold any hearing with the parties.” In giving tribunals such wide discretion in matters of procedure and evidence-gathering, the UKJT Rules go some way towards avoiding the tilt towards the ‘legalization’ of arbitration(since as this recent CIArb Report points out, arbitration is supposed to be cheaper, quicker, and less adversarial than litigation, and there is concern that this is becoming less the case), while working within the limits set by section 34 of the Act (which states that choices concerning procedure and evidentiary matters are within the Tribunal’s discretion to determine “subject to the right of the parties to agree any matter”).
Empowered by Rule 10, arbitrators acting under the UKJT Rules have an opportunity to deliver genuinely rapid dispute resolution, although it remains to be seen how realistic is the 30-day timeline between the appointment of the tribunal to the rendering of the award foreseen by Rule 12.
Seat, governing law, and jurisdiction
Importantly, Rule 16 states that English law applies to the UKJT Rules, and that the seat of the arbitration shall be in England and Wales, although it appears by virtue of Rule 3(d) and Rule 16 itself that both the seat and governing law may be otherwise agreed by the parties. It is suggested that expressly providing for the governing law and seat is particularly important given the de-centralised nature of these assets, which naturally complicates any such determination. This clarity will help avoid discussions of the type seen in the English courts where it has to be established that England is the appropriate forum for the dispute, and a jurisdictional gateway under the Civil Procedure Rules may have to be established for serving the claim form out of the jurisdiction. For example, in the English case Ion Science Ltd v Persons Unknown (unreported, 21 December 2020), the English High Court was asked to determine the lex situs of Bitcoin. The Court ultimately considered the decisive factor to be the location of defrauded funds that were then converted to cryptoassets.
Direct intervention by the tribunal
Pursuant to Rule 11, the tribunal has a wide-ranging power “at any time to operate, modify, sign or cancel any digital asset relevant to the dispute using any digital signature, cryptographic key, password or other digital access or control mechanism available to it”. In certain circumstances, this power would, in essence, allow arbitrators to enforce their own awards, for instance, where the tribunal rules that the parties did not conclude a binding agreement for the sale of a cryptoasset.
There is nothing in the Act to prevent the exercise of this power, and section 38(1) confirms the parties’ freedom “to agree on the powers exercisable by the arbitral tribunal for the purposes of and in relation to the proceedings.” However, it remains to be seen how a challenge to an award under sections 67 and 68 the Act would unfold if the arbitrator had already provided a remedy directly on the blockchain. Were an award to be challenged under the Act, a situation may arise whereby the assets that have been dealt with by the tribunal pursuant to its powers under Rule 11 may then not be traceable, let alone capable of being returned to their original pre-intervention state. One may interpret Rule 11 as applying only to the arbitral tribunal’s power to grant provisional measures, but its wording appears to provide for final measures, especially given the power to “cancel”. Further, the rules appear to be silent on whether the parties have to all be in agreement to provide the relevant data to the Tribunal before it may exercise the powers contained in Rule 11. Should one party make a “digital signature, cryptographic key, password or other digital access or control mechanism” available to the Tribunal in circumstances where the other party objects, it is not yet known whether the Tribunal would be prepared to exercise these powers or whether such an exercise of powers would withstand a challenge in the English courts.
Confidentiality and Anonymity
Rule 13 provides for a procedure whereby the parties to the arbitration remain anonymous to one another, if they so agree. This may seem peculiar to those accustomed to traditional commercial disputes, but one of the unique aspects of peer-to-peer technologies is that they allow parties to transact in relative anonymity. The UKJT’s inclusion of a rule allowing for optional anonymity caters to industry needs and will be a key attribute for parties considering incorporating the UKJT Rules into their agreements.
Relatedly, Rule 15 raises the prospect of the publication of anonymised awards with the consent of the parties in cases where “an award or decision is considered to be of general interest” (as of the date of this post, the authors are not aware of the publication of any such anonymised awards), as is the case with the ICC, which is now as standard practice publishing awards rendered under the applicable ICC Arbitration Rules on an opt-out basis. Adoption of a pro-publication stance (for which a persuasive case is made by Sir Bernard Rix) by the UKJT Rules is welcomed and may be key to the future success of the UKJT Rules, as it will allow stakeholders to pool experience, and aid in the development of legal solutions to the novel problems posed by digital assets and smart contracts.
Evaluating the Rules in their Wider Context
The objective of the UKJT is to demonstrate that English law and the jurisdiction of England and Wales offers “a state-of-the-art foundation for the development of DLT [Distributed Ledger Technology], smart contracts and associated technologies.” By providing a means of “rapid and cost-effective resolution of commercial disputes, particularly those involving novel digital technology […],” (Rule 1) the UKJT Rules seek to play a key part in realising the UKJT’s objective.
As the UKJT Rules were launched only a few months ago, it is too early to judge their success. It therefore remains to be seen whether England and Wales will emulate the successes it has had in, for example, maritime arbitration (see, for example, a publication by the Baltic Exchange which reports that 75% or 80% of the world’s maritime arbitrations now takes place in London). It is also possible, given the popularity of digital assets, that other jurisdictions will respond more successfully to the needs of blockchain users in the resolution of their disputes.
It is clear that the UKJT Rules are a work in progress and it is expected that Version 1.0 will be upgraded and improved. In fact, in his Foreword, Sir Geoffrey Vos MR signals a readiness to consider revising the Digital Dispute Resolution Rules before the end of the year. This approach is consistent with the world of cryptoassets and smart contracts, which itself is in a continuous state of flux, as computer engineers engage in a process of continuous improvement. For these reasons, it is encouraging that the UKJT Rules appear to embrace the ethos of the futurist sector, which these rules aim to serve.
Jason Rose is an Associate at Velitor, qualified in Australia. He works in international arbitration and commercial litigation, and advises clients on cryptocurrency dispute resolution issues.
Paul-Raphael Shehadeh is a Paralegal at Velitor. He has experience working on commercial and investment arbitrations in a wide variety of sectors. A graduate of the University of Oxford and the Ludwig-Maximilian University of Munich, Paul-Raphael is in the process of qualifying as a Solicitor of England and Wales.
