Smart Contracts give rise to a number of dispute resolution challenges that make including a robust dispute resolution system key.
Difficulty identifying someone to sue
Smart Contracts can be executed pseudonymously. In those cases, it may be difficult to identify someone to bring a claim against. There may also be evidential difficulties in pinpointing who is responsible for loss that is caused by bugs in the operating system, corrupted messages or defective code.
Uncertainty over jurisdiction and governing law
As Smart Contracts operate via distributed nodes (computers) which may be based all over the world, it may be difficult to determine the applicable governing law and jurisdiction; it also increases the risk of satellite disputes over such issues.
Novel enforcement issues
One of the key characteristics of a Smart Contract, and what many see as an advantage, is that they are irrevocable and the transaction is indelibly recorded on the blockchain. However, this creates problems when a party is entitled to terminate or unwind a transaction and the record no long reflects the legal position.
Arbitration is likely to emerge as the preferred means of resolving Smart Contract disputes for a number of reasons, and Smart Contract disputes will, in turn, drive innovation within arbitration, as arbitral bodies and arbitration law and procedure adapt to meet the needs of new types of dispute.
Protecting proprietary information
Some Smart Contract disputes are likely to involve evidence about proprietary software and/or hardware. Where that is a risk and the source code and other proprietary information becoming public may have material commercial ramifications for one or both of the parties, it is preferable to agree that disputes will be resolved by confidential arbitration and to limit disclosure.
Tribunal with specialist technical knowledge
Some Smart Contract disputes will be fairly vanilla contract law disputes, but others will be of a highly technical nature, for example, where the code does not operate as expected. The courts in many jurisdictions are adept at getting up to speed with technical issues quickly, but the parties to a Smart Contract can agree an arbitration clause which enables them to appoint someone with, for example, an understanding of coding. The arbitral institutions are likely to develop specialist pools of arbitrators with relevant experience or published blockchain-tailored procedures over time.
Bespoke procedures and automated enforcement
Arbitration offers parties the potential to agree bespoke procedures that may help overcome the challenges presented by pseudonymity and the irrevocable nature of Smart Contracts. For example, the parties may agree to refer disputes below a certain threshold to a central blockchain administrator with the power to determine disputes and insert remedial transactions into the blockchain as necessary. Technologists are going a step further and looking at the idea of decentralised arbitration, whereby disputes in relation to Smart Contracts are referred to arbitrators selected at random, and their decision is then recorded on the blockchain.
A variation on this is where parties to a Smart Contract incorporate into the Smart Contract an agreement to refer disputes to arbitration and a mechanism to allow the arbitrator automatically to enforce any award without the intervention of a third party. For example, the “multisig” mechanism enables the parties collectively to nominate an arbitrator, which then triggers the power of that arbitrator to transfer assets or money on the blockchain.