Arbitration Ruling and Distributed Ledger Technologies 0.1

On 8th of November EOS Core Arbitration Forum (ECAF) issued an Arbitration Ruling and published the following synopsis:

Above ruling lifted quite some dust and triggered countless debates about legitimacy, legal acceptance, validation, jurisdiction, etc. This ruling is first of a kind and the language is rather poor (or perhaps this is the standard within the EOS community as neither the above ruling nor EOS Constitution remarkably impresses the lawyers).

As the dust will settle and people will soon forget about this ruling, I hope the following introduction to arbitration will help understand the legalise better. This article will address 5 points; we’re starting with the ‘’Why?’’ question and continue with the rules referring to an arbitration and the effects of such ruling. As there was quite some confusion regarding the above-mentioned ruling and whether this now amounts to a new type of jurisdiction, point 4 focuses specifically on this issue. Last but not least, the last point is reserved for future discussions.

1. Why Would Anyone Go For An Arbitration?

Contractual parties can choose to settle their disagreements in various ways, amongst other forms of alternative dispute resolutions, parties can thus initiate the recourse to arbitration.

You may be asking about the reasons for parties to include an arbitration clause in their contracts.

Arbitration is desirable especially when parties do not want the public court proceedings and would prefer to choose their own trustworthy arbitrators who possess the needed expertise and experience. While arbitration offers a quick and definitive solution to the dispute, it is quite often attractive due to the unpredictability of the jurisprudence of foreign courts. Parties to arbitration can also agree on which law will be used in deciding on the content of the dispute and on the basis of which procedural rules of the arbitration procedure.

Advantages to arbitration moreover include preserving confidentiality and lower legal fees. The latter is mentioned quite often, yet it depends on the national rules referring to the effective control of the expenses and the possibility to cap the recoverable costs, expedite the procedure and use sensible procedural mechanisms (e.g. to accept a reasonable offer to settle), etc.

2. Rules Regarding The Arbitration

Unless otherwise agreed by the parties, arbitration rules for international and cross-border disputes may be governed by Arbitration Rules of UNCITRAL. accordance with Arbitration Rules provided by the United Nations Commission on International Trade Law (UNCITRAL). Of course, this is only true if a given jurisdiction and its national arbitration statute so provide. The reality might be much more complex and jurisdictions may not provide the recourse to the UNCITRAL rules, hence it’s up to the arbitrator to decide.

Left aside the lack of universal applicability, UNCITRAL Rules cover all aspects of the arbitral process and provide a model arbitration clause, setting out the procedural rules regarding:

  • the appointment of arbitrators,
  • the conduct of arbitral proceedings,
  • establishing rules in relation to the form, effect and interpretation of the award.

Yet, parties can always decide for themselves and the above rules can be substituted by other types of rules. An example would be the institutional arbitration process governed by the Rules of European Centre for Dispute Resolution (ECDR), or perhaps a bit closer to the crypto community the Rules for Dispute Resolutions provided by above mentioned ECAF.

Choosing the right law is a hard task! Creating your own substantive law of contracts, as in the case of EOS, is impressive, bold and utmost difficult. I’m trying my best to avoid terms such as ‘impossible’, ‘irrational’ and ‘irresponsible’. As Chris pointed out in one of our discussions:

‘’English law or other popular choices of substantive law are popular for a reason’’.

One of the decisive reasons for choosing a popular substantive law is the certainty, established through legal practice and a vast amount of cases which offer reliable interpretational rules.

3. The Effect Of An Arbitration Ruling

3.1 Legally binding for disputing parties alone

Because an arbitration procedure is, as a rule, confidential and the parties usually do not disclose the content of the arbitration award, the legal effects of such a decision only arise for the parties to the dispute. In other words, an arbitration has an inter partes effect only which needs to be distinguished from erga omnes effects, binding third parties.

3.2 What about jurisprudence?

Another effect worth mentioning is clearly connected to the confidentiality of arbitration, which is highly contrary to one of the blockchain related core values, transparency. Lack of disclosure makes it much, much more difficult to form legal practice, case law and after-all, a blockchain related jurisprudence. If we are to follow the latest developments and have a clear understanding or transparent and traceable impact of our rules, we should not aim for confidentiality of dispute resolutions.

Arbitration as an amicable dispute resolution procedure where parties agree to submit an existing or future dispute to an arbitrator or an arbitration panel which issues a final and legally binding arbitration award.

Arbitration decisions are usually final and can not be challenged by an appeal unless the parties exceptionally agree to a two-stage arbitration procedure and only if the applicable law so permits.

3.3 Enforceability of an arbitration award

Arbitration award without a proper type of enforcement mechanism is more or less just another piece of paper. A right has been given and confirmed, yet there’s quite a long way before such a right is thoroughly exercised. If a losing party refuses to abide by the ruling, one needs to pursue and exercise the rights at a national court which needs to issue a writ of enforcement.

The whole process might be additionally postponed due to the challenge of procedural rules. Or maybe the losing party claims arbitrator was biased. Or who knows, maybe the losing party keeps assets and has registered the bank account in a dubious jurisdiction where things move rather slowly and corruption is high.

We’re getting close to a suitable alternative, which will provide much more certainty for the enforcement of not only arbitration awards but many other rulings as well! If parties put assets into the smart property register and then secure their contractual obligations against their registered assets, then an arbitration award can be presented to the registrar instead of the court. The registrar can seize the asset without a court order, liquidate it and use that proceeds to settle the award, giving any surplus back to the original owner. Sounds great right? For more info don’t forget to check out how Mattereum is turning code into the law!

4. Jurisdiction

An arbitration agreement excludes the jurisdiction of the national courts to decide on a dispute and establishes it on the chosen arbitration. In an arbitration agreement, the parties usually determine which procedural rules and (in international disputes) which substantive law will be used by arbitrators.

Moreover, would a party commence litigation at a national court regarding a dispute relating to a concluded arbitration agreement, the court must declare itself incompetent and the action as inadmissible, unless it finds that the arbitration agreement does not exist, is null and void, or cannot be completed.

Thus arbitration precludes the jurisdiction of national courts, yet the preclusion is limited.

5. Food For Thoughts

5.1 Place of Arbitration

Arbitration agreements shall determine the place of arbitration, the arbitration rules to be applied, the number of arbitrators and the manner in which they are appointed, as well as the language in which the procedure is to be conducted.

When it comes to the place of arbitrations, there are basically two important legal consequences one needs to take into account. First and foremost, it establishes the arbitration law that applies and determines the jurisdiction of courts exercising supportive and supervisory powers over arbitration. This should be read together with the limitations of jurisdiction preclusion. Secondly, it determines the place where the arbitral award could be executed in international or cross-border (economic) disputes.

5.2 External Courts

When it comes to arbitrations conducted by ECAF, Article 5.4 of ECAF Rules of Dispute Resolution provides the following areas where the jurisdiction of External Courts may need to be considered carefully:

  • Where a party to the dispute is not a member of the Community and/or is not otherwise bound by agreement;
  • Criminal actions or actions likely to result in criminal proceedings, e.g., fraud;
  • Where a directly relevant law may speak against arbitration;
  • Legal process (subpoenas, etc) delivered by an external court of “competent jurisdiction.”

Article X of EOS Constitution further provides the following on the Choice of the Law: “Choice of law for disputes shall be, in order of precedence, this Constitution and the Maxims of Equity.”

While I support equitable and fair measures are taken into consideration, I’m honestly lacking the knowledge on how one might apply the Maxims of Equity. However, this resembles the so-called ‘Ex Aequo Et Bono’ principle, which is incorporated in Article 38(2) of the Statute of the International Court of Justice and commonly discussed among international lawyers.

5.3 New Types of Old Forms

Are we forming new jurisdictions? May we be talking about an Ethereum jurisdiction already? Threads of thoughts by Cris Carrascosa and Christopher Wray along with numerous replies are worth observing!

Yet, the arbitration made by EOS, Ethereum “jurisdiction” or new forms of dispute resolutions are not at all radical novelties. We’re witnessing parties’ autonomy being exercised in a typical, old form.

With old forms comes old rulings and court practice. What should not be left aside is perhaps the fact that arbitration is a mean of a settlement of disputes, intended for the B2B or C2C disputes.

An arbitration award can be annulled by the national courts on the grounds that the arbitration proceedings were based on arbitration clause as an unfair contract term under the Council Directive 93/13/EEC of 05/03/1993 on unfair terms in consumer contracts (see for example the European Court of Justice decision in the case Claro v. Móvil or Sebestyen, C-342/13). This is, however, one of the major differences between the EU and US practices. As Justinas Jarusevicius (Motieka & Audzevicius) writes: “The EU requires Member States’ courts to presume that the arbitration agreement in consumer contracts is an unfair term if it was not individually negotiated by the parties after the dispute arose.”

The arbitration award shall not be at odds with mandatory provisions of the Directive on unfair terms in consumer contracts, which form part of the European public policy. It’s not strictly prohibited in B2C relations, yet very well limited.

However, the term ‘consumer’ is not interchangeably used with an ‘investor’. How much manoeuvring space are we left with?

A big thank-you to Chris Wray, Mattereum, ECDR and Katarina Kresal who gave me an opportunity to work with them a couple of years ago and make it possible to learn more about these procedures. Also heads-up and KUDOS to many participating in blockchain governance talks, COALA members and Anže Zalar, who has an abundance of knowledge when it comes to the online dispute resolutions!

Sometimes I put things in writing.

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