The Digital Dispute Resolution Rules

The Digital Dispute Resolution Rules

June 29, 2021, Covington Alert

On 22 April 2021, the UK Jurisdiction Taskforce (“UKJT”) published the Digital Dispute Resolution Rules (the “Rules”). This is a new procedural framework designed to facilitate the rapid resolution of disputes relating to novel digital technologies such as crypto-assets/crypto-currency, smart contracts, distributed ledger technology (“DLT”)/blockchain, and fintech applications.

The Rules are boldly innovative in their approach, designed to promote an informal, cost effective, specialised, and anonymous process, that allows for the use of technology both in the arbitration process and in the enforcement of awards. As such, the Rules have many attractions, but they are also untested (as is the body responsible under the Rules for arbitrator appointments), and (deliberately) very brief; therefore, it will likely take some time to assess (i) how effective they are in practice, and (ii) whether they can establish themselves as the go-to procedure for disputes of this type.

This article considers:

1. Key and novel features of the Rules, how these may impact the dispute resolution process, and potential advantages and disadvantages (compared with rival dispute resolution mechanisms); and

2. The wider context to the Rules, as one part of the broader positioning of the UK Judiciary and Government post-Brexit on technology, crypto-assets/crypto-currency, fintech, and financial services generally.

Very Quick Process Envisaged

Under the Rules an arbitral tribunal must use its best endeavours to determine a dispute within 30 days of appointment (subject to any different time period(s) agreed by the parties). It is rare for arbitral rules to specify a default period in this way and 30 days is substantially quicker than the average period for completion of an arbitration[1]. In fact, a 30 day determination is also substantially quicker than the expedited arbitration procedure offered by many arbitral institutions[2], and applies to all disputes under the Rules (unless varied), without any value threshold requirements, as some other rules have.

The commencement and appointment process is also streamlined: a claimant need only provide limited information in its notice of commencement and each respondent must respond within three days. Then the appointment body (The Society for Computers and Law, (“SCL”)) must appoint a tribunal as soon as practicable. The SCL must have regard to the parties’ specified or agreed preferences as to the number, identity or qualifications of arbitrators, but it is not bound by them. This limits the potential for protracted disputes over the constitution of the tribunal, which can often drag on for months.

The Rules also provide that no party shall have the right to an oral hearing and the tribunal may determine the dispute on the basis of written submissions only. In a similar vein, the Rules provide for no right of appeal of an award on a point of law[3].

Separately, the Rules allow parties to agree that particular issues or types of dispute should be resolved by expert determination instead of arbitration, which has the potential to be an even quicker and more cost-effective process. This is likely to be most appropriate for the quick determination of shorter factual issues forming part of an arbitration. For example, in digital disputes it could be used to decide whether an oracle[4] has determined an automated valuation correctly. 

These provisions may be attractive to parties seeking a quicker, cheaper, more final, and more informal way of resolving commercial disputes.

That said, parties should not expect that it will be possible for all disputes governed by the Rules to be resolved in around 30 days; where disputes are complex or involve a large number of parties, it is likely that a more protracted process will be required (potentially including an oral hearing) and may well be preferable in such cases, to avoid a risk of ‘rough justice’.  

Short and Flexible Rules Compatible with New Technologies

The Rules are deliberately very short, running to 16 clauses over fewer than five pages. This is to provide the parties with maximum autonomy as to how disputes are resolved, which may be attractive to parties involved in novel (or as yet undeveloped) technologies, requiring an approach to dispute resolution that is not easily reconcilable with more traditional (and formal) processes.

Brevity necessarily leaves more scope for potential disputes as to the operation of the Rules, however, the Rules are not without substance: they provide for England and Wales as the juridical seat, with the law of England and Wales applying to the Rules. As such, the much more detailed provisions of the Arbitration Act 1996[5] also apply (unless varied by the Rules), providing a comprehensive set of defaults for circumstances not expressly dealt with in the Rules.

Further, the Rules actively encourage the use of technology in a way that other arbitral rules do not. For instance, they have been specifically designed to be compatible with an “automatic dispute resolution process” meaning a process associated with a digital asset that is intended to resolve a dispute between interested parties by the automatic selection of a person or panel or artificial intelligence agent whose vote or decision is implemented directly within the digital asset system (including by operating, modifying, cancelling, creating or transferring digital assets)[6]. The Rules provide that where parties have agreed to such process and incorporated the Rules, its outcome shall be legally binding on interested parties. It is also possible parties may adopt the Rules to resolve disputes relating to whether an automatic dispute resolution process has been properly complied with or worked as intended.

This is significant in relation to jurisdiction and enforcement (on which see further below) because in some jurisdictions it may not be possible to oust by agreement a party’s right to refer a dispute to court, unless the alternative dispute resolution mechanism in question (in this case an automatic process under the Rules) constitutes an arbitration process under the New York Convention[7]. The Rules therefore provide a means to bolster the standing of automatic dispute resolution. 

Electronic Incorporation

Parties can include a term in their written contracts providing that disputes are to be resolved with reference to the Rules, or agree to the same after a dispute has arisen. The Rules provide a model incorporation clause.[8]

Uniquely, UKJT also envisages the Rules being incorporated into on-chain digital relationships and smart contracts and provides that the Rules may be incorporated into “digital assets or digital asset systems”, including by adding incorporation language in “electronic or encoded form”.

Specialised Arbitrators

The appointment process under the Rules allows parties to express their preferences as to the necessary experience and technical expertise of the arbitrator(s) and/or expert(s), depending on the dispute, and it is anticipated that over time the SCL will develop a panel, with arbitrators and experts being selected according to their expertise in relevant technologies. If the parties would rather select a body other than the SCL to manage appointments, they may agree to this.

This is likely to be attractive to parties involved in new and/or highly specialised technologies who might fear the capacity of more traditional arbitrator candidates to understand such technologies. That said, parties should consider that even when contractual relationships involve such technologies, disputes that may arise may not always directly relate to the technology, and may instead concern discrete legal (or other) issues, e.g. limitation or contractual interpretation.

Further, even where a dispute does involve technological issues, arbitrators still need to be able to apply the relevant law to those issues, for example in considering reasonableness, proportionality, mitigation etc., and an arbitrator will need to write the arbitration award, setting out in a logical way the reason(s) for their decision (unless the parties have agreed to dispense with reasons[9]). Therefore, more traditional arbitral candidates may often still be more appropriate, and parties should think very carefully before including in their contracts provisions that would rule out such candidates (e.g. by requiring that any arbitrators(s) must have certain prescribed technological expertise).

In the short term, the uptake and success of the Rules may well depend on the extent to which the SCL, which is a charity and not an arbitral institution, rises to the challenge of choosing appropriate arbitrators, in an efficient manner. Whilst the capacity of the SCL to do this remains uncertain, parties may wish to de-risk the process by agreeing that an established arbitral association handles the appointment process. This may impact the cost of the process. 

Optional Anonymity

The Rules provide for parties to include in their incorporation language, or agree after-the-fact, that there is to be “anonymous dispute resolution”, meaning that each party must identify themselves to the tribunal, but not to each other. In that case the tribunal may only disclose the identity of the anonymous parties in limited prescribed circumstances (e.g. if required for enforcement).

This may be attractive to parties entering into smart contracts or other digital relationships such as decentralised finance (‘Defi’) protocols anonymously who want access to a means of dispute resolution without having to sacrifice their anonymity. Further, as with most arbitrations, proceedings under the Rules are confidential, and although there is provision for awards to be published, this is only in anonymised form and where no party has objected[10]. Confidentiality will also be attractive to parties involved in nascent technologies, potentially without the protection of IP rights, eager to avoid proprietary information being made public.

Interestingly, the Rules may create a situation where a losing party unhappy with the outcome of an arbitration may face a choice between resisting enforcement of the award (thereby likely sacrificing their anonymity) or complying with enforcement of the award (so as to preserve their anonymity).

Enhanced Enforcement Mechanisms

An arbitration award or expert determination produced under the Rules can be enforced in England and Wales easily, in the same way as a court judgment. Similarly, an arbitration award under the Rules should be relatively easily enforceable in those countries (currently more than 165) signed up to the New York Convention.

That said, given several aspects of the Rules are unique, parties anticipating a need to enforce any award in a jurisdiction outside of the UK may wish to obtain local law advice as to whether any aspects of an arbitration under the Rules may make enforcement more difficult. Parties should also note that expert determinations are not covered by the New York Convention, so enforcement of such determinations outside of the UK will be more difficult. 

Uniquely, the Rules also allow for arbitrators to implement decisions directly “on-chain” using a private key (subject to the relevant network enabling such functionality and the parties having agreed to this in advance and provided the necessary access). This may be effective in allowing parties to bypass traditional enforcement mechanisms, which may be particularly attractive to those involved in decentralised technologies, disputes in relation to which often present complicated problems of establishing jurisdiction, and conflict of laws issues. 

Enhanced Powers for Tribunal Relating to Digital Assets

The Rules expressly allow the tribunal to have the 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, and to direct any interested party to do the same.

This is important, given interim remedies are often needed in disputes involving new digital technologies. For example, stopping transactions from being executed on a blockchain may be of critical importance, given such transactions are irreversible and can be implemented very quickly (e.g. so as to try to defeat the effect of an arbitration award) or often self-execute based on input data without any human oversight.

However, the immediate efficacy of these powers is somewhat dependent on the relevant parties providing the tribunal with the necessary access (e.g. the necessary private keys) to be able to exercise these powers in practice, and/or on the relevant parties complying with the tribunal’s directions. Where a party is unwilling to assist the tribunal in this way an application to the English High Court (under s.44 Arbitration Act 1996 and in compliance with the procedure under CPR Part 62) may still be necessary to compel compliance with a tribunal’s order, under threat of the court’s contempt orders and/or penal notices. This would take some time (and may only be available to a party with the approval of the tribunal). However, the English court is well used to granting tribunals assistance very quickly in emergency situations, and obtaining such urgent assistance with the support of a tribunal should be achievable.

The UKJT is one of six taskforces of the LawTech Delivery Panel, a team of industry experts and leading figures from the UK Government and Judiciary, formed with the aim of helping the UK legal sector to grow, with a focus on how technology can facilitate this.

The specific objective of the UKJT is to demonstrate that English law and the jurisdiction of England and Wales together provide a state-of-the-art foundation for the development of DLT, smart contracts and associated technologies. This was also the intention behind the UKJT’s legal statement of November 2019[11] which expressed the view that crypto-assets were property and smart contracts were contracts under English law. This view has since been adopted by the English High Court[12]. By taking such steps, the aim is that the UK becomes the go-to jurisdiction for this type of innovative technology.

More generally, the UK Judiciary has been pushing a pro-technology agenda. This can be seen in the increasing use of online hearings in the Commercial Court in London (which was escalated by the COVID-19 pandemic) and judicial encouragement to embrace the “move to digital working”, with the Master of the Rolls, Sir Geoffrey Vos advocating for a system to allow all civil claims to begin online before entering a digital court process, with only the most complex cases requiring physical hearings[13].   

A complimentary broader focus can be seen in UK Government policy on fostering a more technologically advanced, innovative and open financial services sector. The Chancellor of the Exchequer, the Bank of England (“BoE”), and HM Treasury have all made a number of announcements[14] in this area in recent months, including:

• New visa schemes allowing individuals with relevant technological expertise to qualify for easier/quicker access to the UK[15].
• The Kalifa Fintech Review (published in February 2021), commissioned by the UK Government to identify priorities to focus on extending “the UK’s competitive edge over other leading fintech hubs”.
• The ‘Future Fund: Breakthrough’ (announced in March 2021), designed to steer £375 million of UK Government investment into highly innovative businesses focusing, among other things, on quantum computing and ‘clean-tech’.
• The Central Bank Digital Currency Taskforce (announced in April 2021), to explore the potential for a new digital currency issued by the BoE to “ensure the UK remains at the forefront of global innovation”.[16]
• A new industry-led Centre for Finance, Innovation and Technology (announced in April 2021), designed to incubate growth in the UK’s fintech sector, at regional and national level.
• A new ‘Scale box’ from the FCA (announced in April 2021): a package of measures to enhance its pioneering regulatory sandbox, invaluable for allowing start-ups to test new propositions, and to provide a one-stop regulatory shop for growth stage firms. This has worked with a range of crypto-asset propositions.
• A second phase of the FCA’s ‘Digital Sandbox’ (announced in April 2021), designed to help young finance companies test concepts to tackle sustainability and climate-change-related finance challenges.
• A new FCA sandbox delivered in collaboration with the BoE and HM Treasury (announced in April 2021), to assist companies exploring the use of finance-related technologies such as DLT to improve market infrastructure.
• A new ‘omnibus’ account from the BoE (announced in April 2021), to allow access to innovative financial market infrastructure providers that can support the delivery of faster, cheaper, 24-hour wholesale payment and settlement using central bank money.
• A consultation in Summer 2021 on proposals surrounding immediate and longer term reforms to the UK’s capital markets and listing regimes, designed to encourage more of the growth companies of the future to list in the UK, including the greater role technology can play, for example in streamlining the process of rights issues.
• An FCA review into its Regulatory Decisions Committee cautions to see whether decisions on authorisations and supervisory interventions could and ought to be made in a more streamlined way to ensure quick and decisive action that prevents entry to – or allows quick removal from – UK markets, of those companies unable or unwilling to meet the FCA’s standards.

These changes and others point towards the UK considering that it can set itself apart from old and new competitors, including EU jurisdictions, not by financial deregulation, but by ensuring the UK maintains the highest regulatory standards, and has a sustained focus on fostering technology and innovation.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Dispute Resolution practice.

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