Arbitration refers to an adjudicatory form of alternative dispute resolution (ADR) method where the parties agree to have their case heard by an arbitral tribunal composed of one or more arbitrators (usually three) who make a binding decision. The parties are free to choose the arbitration rules that govern the procedure, the law that governs the procedure, the law applicable to the merits, and how the arbitration procedure will be conducted. The parties can also choose arbitrators. The arbitral tribunal has almost the same powers as a state court. Generally, the arbitration proceedings and the arbitration award are confidential. At the end of the procedure, the arbitral tribunal renders an arbitral award. In an international framework such as the cryptosphere, the incomparable advantage of arbitration is that the arbitral award can be enforced in all signatory countries of the New York Convention of June 10, 1958, for the recognition and enforcement of arbitral awards, i.e., 172 States. A national court can refuse to recognize or enforce an arbitral award on specific grounds.
Many blockchain service providers include arbitration clauses in their terms of service, including marketplaces specializing in NFTs such as OpenSea, Rarible, Zora, and Nifty Gateway include arbitration clauses. Similarly, the legal terms of the decentralized domain name provider Unstoppable Domains also include an arbitration clause. Thus, if a dispute arises between a platform and a user, this dispute must, in principle, be settled by arbitration.
However, there are many criticisms regarding the consent to such clauses since these are included in contracts of adhesion, which means under the aegis of consumer law. The parties must bear in mind that, in certain States, disputes relating to consumer law cannot be submitted to arbitration.
In its attempt to develop a lex cryptographia, the cryptosphere is redefining the notion of arbitration.
Off-chain arbitration
This expression refers to arbitration, as it was known before the advent of distributed ledger technologies. An « off-chain arbitration » clause most often directs to the arbitration rules of an institution whose role is to organize the arbitration. The clauses found in terms of service of the providers mentioned above fall under off-chain arbitration.
On-chain arbitration
Arbitration clauses can be integrated into smart contracts. The arbitration procedure is then predetermined with a certain degree of anticipation, including the request for arbitration, the appointment of arbitrators, and the automatic enforcement of the arbitral award. Given the rapid development of the metaverse, this type of on-chain arbitration could be successful, provided that it takes place under conditions conducive to gaining users’ trust. Moreover, for arbitration to be fully compelling, smart contract creators must also ensure that arbitral awards are valid under the New York Convention.
Crowdsourced « arbitration »
Based on smart contracts, crowdsourced « arbitration » is fully decentralized and automated. This form of dispute resolution has several particularities, such as the following ones:
- The decision rests with a panel of jurors.
- This panel of jurors can be made up of several dozen people.
- Jurors are anonymous.
- A juror is paid only if he/she has voted in the same direction as the majority of the other jurors.
To date, this crowdsourced arbitration is mainly used for disputes concerning cryptocurrencies. It is not sure that the decisions resulting from this dispute resolution mechanism can be qualified as arbitral awards. Therefore, their recognition or enforcement may be challenged.
Uniform Domain Name Dispute Resolution Policy (UDRP)
With rare exceptions, out-of-court domain name proceedings do not qualify as arbitration, in particular, because they are not exclusive, which means that the parties can initiate parallel proceedings before a state court. The question arises whether these procedures can serve as a model for resolving disputes relating to non-fungible tokens and cryptodomains that may infringe on third parties intellectual property rights.
This article was first published in News From There, our Web3 Brand Protection Newsletter, Issue, February 2023.
