Blockchain Arbitration in India: Adopting the Hybrid Model Envisaged by Mexican ‘Kleros’ Case

[Raghav Saha and Harshit Upadhyay are 3rd year B.A LL.B (Hons.) students at Gujarat National Law University, Gandhinagar]

The recent developments in the domain of blockchain arbitration are redefining the traditional dispute resolution mechanism. Recently, a Mexican court upheld the legal validity of an arbitral award reached using the blockchain arbitration platform, ‘Kleros.’

The idea of blockchain arbitration is based on the underlying foundation of smart contracts, which are written entirely in code. However, the ambit of blockchain arbitration is not only limited to smart contract-related disputes but also extends to disputes arising out of conventional contracts. In its essence, blockchain arbitration is a decentralised system of dispute resolution hosted online, where decisions are reached with the help of crowdsourced jurors. It offers multiple advantages over traditional arbitration in the form of reduced costs, automation, confidentiality, better document management, etc.

With this backdrop, it becomes imperative to analyse the enforceability of awards rendered through blockchain arbitration platforms in India. This article argues that the hybrid model of blockchain arbitration adopted in the Mexican case (“Kleros case”) is a better alternative to direct blockchain arbitration, and the same can be incorporated into the existing Indian legal framework.

Dissecting the Kleros Case

In September 2020, a landlord and a tenant entered into a rental estate tenancy agreement over a Mexican property. The agreement contained a standard arbitration clause, which required the sole arbitrator to draft the procedural order in line with the decided procedural rules and send the same to the blockchain arbitration platform, Kleros, along with the supporting evidence to determine the substance of the dispute. The decision reached by Kleros was to be incorporated into the final arbitral award and in writing, bearing the date, place, signature and name of the arbitrator as decided by the parties.

In November 2020, the landlord initiated arbitral proceedings against the tenant on the grounds of payment failure. After the proceedings commenced, the arbitrator drafted the procedural order and sent it to Kleros to decide on the merits of the dispute. Kleros ran its protocols, and a unanimous reasoned decision was reached by the three crowdsourced Kleros jurors, holding the tenant liable for outstanding rents. The sole arbitrator incorporated this decision in his arbitral award. Later, the landlord sought the enforceability of this arbitral award in Mexican courts, which was granted to him, requiring the tenant to comply with the award reached through Kleros.

In light of this case, it is crucial to differentiate between the substantive decisions of blockchain arbitration platforms that are incorporated into the final arbitral award of arbitrators and an arbitral award directly rendered by the blockchain arbitration platforms. In the first instance, just like the aforementioned case, the blockchain arbitration platforms function as “tools” to decide the merits of the dispute. The decisions of the crowdsourced jurors are incorporated by the arbitrators, who render the final awards. Whereas in the second instance, the blockchain arbitration platforms function as ‘alternatives’ to traditional arbitration systems. Here, the decisions by the crowdsourced jurors are supposed to have the force of arbitral awards. However, there are certain inconsistencies in enforcing awards directly rendered by the blockchain arbitration platforms.

Obstacles in Enforcing Direct Awards of Blockchain Arbitration Platforms

Seat of blockchain arbitration

When blockchain arbitration platforms act as “alternatives” to traditional arbitration, the decisions rendered by them have to be considered as arbitral awards. In the case of international arbitration, the New York Convention only recognises the enforceability of foreign arbitral awards where such awards are made in a territory which is not the territory where the recognition and enforceability of the awards are sought. As the blockchain arbitration platforms are decentralised applications present entirely in a digital environment, they cannot be considered part of any State territory. Thus, it makes their decisions beyond the ambit of the New York Convention and, consequently, the Arbitration and Conciliation Act, 1996 (“the Act”) as well.

 Content requirements of the awards

All arbitral awards have to meet the form and content requirements enshrined in the domestic statutes of the countries where the enforcement is sought. Section 31 of the Act, based on the UNCITRAL Model Law on International Commercial Arbitration, states the requisite form and contents of the arbitral awards for them to be enforced in India. Direct blockchain arbitral decisions fall short of these requirements.

Firstly, the arbitral awards must be in writing and signed by the arbitrators. However, in the case of blockchain arbitral decisions, the awards are entirely digital in nature, and the identities of the jurors remain anonymous throughout the process, making it impossible for the awards to be signed by the jurors.

Secondly, the awards must mention the seat of the arbitration. As blockchain arbitration platforms are decentralised applications present entirely online, there is no “seat” of arbitration.

Lastly, the parties should be served copies of the awards signed by the arbitrators. As the blockchain arbitration jurors cannot sign the award due to their anonymity, the parties cannot be served signed copies of the awards.

Incorporating Hybrid Awards in the Existing Indian Legal Framework

As is evident from above, direct blockchain arbitral awards are inconsistent with the current legal framework. However, these inconsistencies can be overcome by adopting the hybrid model incorporated in the Kleros case while retaining the efficiency of blockchain arbitration. The pre-existing arbitral principles of Party autonomy and Ex Aequo et Bono (“according to the right and good”) can be relied upon to enforce the hybrid arbitral awards.

Party autonomy

The principle of party autonomy forms the basis of every dispute resolution regime. The Supreme Court, on multiple instances, has held that party autonomy is “the brooding and guiding spirit of arbitration.” On the same lines, section 19 of the Act provides that it is for parties to decide what procedure will be followed by the arbitral tribunal. Further, in Bharat Aluminium Co v. Kaiser Aluminium Technical, the Supreme Court held that the parties are also free to decide the law that will govern the substantive part of the dispute. In fact, the parties can even go to the extent of opting to settle their dispute with the help of a chess game or even a coin toss, with the arbitrator acting as referee, so long it does not contravene the national public policy. Thus, there is no reason for the parties to not choose blockchain arbitration platforms to determine the disputes, with an arbitrator then incorporating the result into the arbitral award. 

Ex aequo et bono

The principle of ex aequo et bono provides the arbitrators with the authority to decide a dispute in conformity with their sense of good conscience and fairness instead of rigorous application of legal provisions. The same is explicitly recognised under section 28(2) of the Act. Blockchain arbitration protocols are based on the principles of morality and practical reasoning. Thus, they act in accordance with the principle of ex aequo et bono.

Concluding Remarks

With the advent of technology, there has been a change in the nature of contractual disputes. The number of small value claims has increased drastically, which the traditional dispute resolution forums are unable to handle effectively, owing to the large volume and cross-border nature of the cases. The blockchain arbitration platforms are better suited for resolving these disputes as they offer multiple advantages over the traditional setup.

However, there are legal inconsistencies regarding the validity of direct awards rendered by blockchain arbitration platforms. These inconsistencies can be resolved by adopting a hybrid model of blockchain arbitration. The Kleros case proves to be a remarkable precedent for the same. Drawing parallels, the pre-existing principles of party autonomy and Ex Aequo et Bono can be used to incorporate this model into the legal framework of India.

Raghav Saha and Harshit Upadhyay

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