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  • By Mauricio Duarte

High Technology Arbitration


For most “millennials” the online environment is a basic need. In a period of transition, innovation, and growth, this should not be surprising. The online world overcomes the physical limitations of space and enables us to learn, socialize, create, solve, buy, and sell in new and efficient ways. Technology’s reach is broad and our attraction to it is endless. As the online environment continues to grow rapidly, it is time to acknowledge its potential as a powerful tool that can help solve more disputes and new kinds of disputes. Blockchain, smart contracts, artificial intelligence (A.I.), machine learning, and text-mining applications are just a few of the new technologies that are being used in many industries.

However, the legal industry, especially the arbitration world, has been timid to welcome these new technologies. Legal professionals are known for their conservative position regarding the exercise of the profession. Furthermore, resistance to technology persists, in part, on deep concerns that such technologies will seize the role of the traditional lawyer role and change the usual way of doing things. Nevertheless, clients are increasingly seeking more simplicity, transparency, and accessibility to dispute resolutions at a lesser cost. Arbitration and new technologies can have a constructive and beneficial relationship. On one hand, new technologies can improve efficiency, improve transparency, and reduce overall costs to arbitration proceedings. On the other hand, arbitration could present itself as a trusted mechanism to solve new disputes, especially those related to the hi-tech world.

The opportunities to use technology to resolve, and even prevent, disputes are within our reach. Even though it could be argued that technology is the source of many problems, at the same time, technology has the potential to provide many solutions. As long as we are ready to understand the shortcomings of the human mind, we can acknowledge the potential of new technologies and move forward.

Blockchain

Unless you are a software developer, it is possible you never have heard of blockchain. Blockchain was first described by Satoshi Nakamoto in his paper introducing Bitcoin. In a strictly legal definition, blockchain is a transaction validation mechanism, not requiring intermediary assistance. [1] In a distinctive definition, blockchain is a decentralized technology, maintained by a distributed system of computers (known as “nodes”), that enables a purely peer-to-peer network to transfer assets, exchange values, and enter into contracts without the assistance of intermediaries.

Blockchain is based purely on a decentralized chain of transactions, each one being added as a block and linked together by chaining the hash of the previous block. [2] As such, this technology has some very appropriate attributes such as security, permanence, immutability, and accessibility due to the cryptographic link in which is based upon.

Thus, a person that wishes to change the information in the blockchain must control a significantly proportion of the computation power (typically 51%) [3] to produce one false block and faking transactions back into the

past is exponentially hard.

Blockchain can check and verify the authenticity of facts, data, processes, evidence, reputation, with the same simplicity as googling for information today. Imagine how blockchain could be used in arbitration in a myriad of ways. Some of the possible uses of this technology could be the following:

  1. Arbitrators could verify the existence of evidence and facts in the blockchain: Timestamping is a basic function of blockchain that permanently registers on the blockchain the time that a particular action took place. For example, this could be recording the transfer of an asset, or the fact that an action occurred, such as the delivery of merchandise at a given harbor. This feature of the blockchain could be used by arbitrators to verify that an event, argued by one of the parties, actually took place at a particular moment in time. Even from an evidentiary perspective, this could save time, money, and unnecessary discovery proceedings.

  2. Arbitrators could have a reputational system in the blockchain that reduce conflicts of interest: A general blockchain based reputation system could aim to solve several major challenges such as lack of impartiality and independence from arbitrators. The blockchain could be used to store reputation from the arbitrators that have completed previous arbitrations. With this information, the parties could verify if there have been previous claims for lack of independence or impartiality from a given arbitrator they wish to appoint. Furthermore, unlike most previous generation reputation systems where the reputation is controlled by a centralized authority, a new proposed reputation system could be controlled by the parties. The party that has appointed an arbitrator can calculate the reputation score based on certain parameters. Therefore, depending on the reputational average, another party could decide which arbitrator hast the best reputation to be appointed. Talk about a competitive industry dictated by a reputational system in the market. Forget the short-list of arbitrators.

  3. Blockchain could help the recognition of international awards: It is possible to store a duly rendered award in an arbitration proceeding. By having this information in the blockchain, the jurisdictional authority could verify the existence of the award and avoid additional costs, judicial proceedings, and the traditional “exequatur” according to the New York Convention of 1958. [4] Forget about having the “burden of proof” to prove the existence of an award duly certified. Blockchain can do the task in its own. [5]

Smart Contracts

Smart contracts, term first introduced by Nick Szabo [6], is a key underpinning of blockchain. Smart contracts are agreements that are implemented in software code and can be automatically enforced after a set of conditions have been met. With smart contracts, performance obligations are not written in standard legal prose. Rather, the contractual obligations are set up in a strict and formal programming language, like Solidity in the Etherum

Blockchain. Smart contracts present an extraordinary feature of automatic enforcement. That means that once the conditions of the contract are put into motion, the terms embodied in the code will be executed, and nobody, including the parties, can stop it. Right now, smart contracts are being designed to transfer digital currencies, as well as to control access to data. However, imagine a world in which an arbitral award could be embodied in the form of a smart contract.

Arbitrators could help the efficiency in the enforcement of the award by expressing the award in code. The award could be drafted in a way in which, after a set of conditions have been met, the award could be automatically enforced by the prevailing party. The benefits could extend to the following:

  • avoid the malice [7] that exists, in some instances, for the enforcement of the award;

  • promote, even more, trust and reliance in the efficiency of arbitration;

  • save costs for the parties; and

  • avoid unnecessary judicial scrutiny or intervention.

I do not intend to diminish the importance of the New York Convention. On the contrary, I believe is one of the most successful international conventions in history. However, the reality is that technology can disrupt the legal world, making some legal tools obsolete to make way for efficiency. If this sounds like a crazy idea, maybe it is. But technology gives us the platform to think big.

As people related to the arbitral world become more familiar with smart contracts, their use could be extended to other areas. For example, smart contracts could be used to process automatic payments to the institutions that administer arbitrations. Other example could be the use of smart contracts for security for costs. Security for costs are interim measures, usually requested by the claimant, if there is reasonable cause to believe that the defendant is insolvent and will not pay the legal fees and expenses. By setting up a smart contract, there could be and automatic performance of the measure if the losing party does not voluntarily comply. Finally, smart contracts could also be used by financial institutions to enhance third-party funding. As you can see, the uses could be extended to other areas, as long as the technology is mature enough and the players of the game are willing to use these tools.

Artificial Intelligence

The general goal of artificial intelligence ("A.I.") research is to enable computers to interact with the world as ordinary humans do. However, AI is characterized by the ability to perform actions without direct human presence or intervention. The uses of AI, depending on its complexity and advanced technology, can perform one or more of the following functions:

  • gather information;

  • personalize information;

  • monitor information;

  • analyze information; and

  • undertake actions, through a cognitive knowledge base and a self-sustainable experience.

Despite the lack of legal barriers, especial resistance to artificial intelligence persists, thriving on concerns this technology will usurp arbitrators’. In other words, A.I. has sparked a debate on a computer’s ability to solve a legal dispute in arbitration and on the consequences such technology would have on the legal world.

At this point in time, is improbable that technology could completely replace arbitrators. Almost all existing national and international laws and rules envisage that arbitrators must be human. [8] Furthermore, the use of A.I. to act as an arbitrator would lack the key human characteristics of feelings, morality, decency, the ability to explain logical deductions of the decisions, and the ability to decide ex aequo et bono.

However, it could be argued that in some years, A.I. could replace arbitrators. As long as the A.I. has the ability to fact-find, assess independently, analyze critically, and act impartially, there should not be objective restrictions. It is an uphill climb, but there could be a future in which is accepted that arbitration can be automated by artificial intelligence.

On the other hand, fueled by the progress made by artificial intelligence, arbitrators can optimize their role and use A.I. In a near future, arbitrators could no longer need to spend countless hours shifting through contracts, evidence, and international case law. A.I. could maximize the efficiency of each case, forcing arbitrators to cut down on the time spent in arbitrations. For example, machine learning powered by A.I. could have the capacity to

review thousands of cases and decisions in merely seconds. Furthermore, with legal grunt work becoming automated, arbitrators could engage in more substantive work. Consequently, A.I. is a tool that will increase access to cheaper and more efficient services in arbitration.

Final Thought

“Code is law” has become a well-known phrase that asserts that code can structure human behavior more effectively than law due to its objective parameters without undue influence of external factors. I think we’re going to see the adoption of technology in the legal market, and hopefully in the arbitral world. Lawyers are sort of naturally reluctant, for cultural reasons, to disrupt the way they work and go about their profession. Technology tends to generate that aversion. However, some major international law firms are already making use of technology, such as blockchain, in order to embrace this new trend.

We require a reorientation of perspectives along with the development of new processes that use technology. We need new ways to handle the increasing variety of disputes that are surfacing and new ways to think about how to do this. New technologies can ease some of arbitration’s inconveniences, such as high costs and, sometimes, lack of efficiency. This might be the only way in which we can promote real efficient justice.

Right now, technology is no longer a luxury; it is increasingly becoming a necessity. The pace of technological change is accelerating, the innovations cycles are getting shorter, and new technologies are adopted at lightning speed. Hopefully, lawyers can forget a technophobic mindset and embrace the notion that innovation requires the ability to see change as an opportunity rather than a threat. For the sake of arbitration, a tradition of innovation has to be embraced.

Notes

[1] William, M., The Business Blockchain.,P. 5

[2] The collection of blocks (and their transactions) is called the ledger in Bitcoin and is publicly inspectable by any peer.

[3] Known as the 51% attack

[4] Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958.

[5] For more, see Could Blockchain Help the Recognition of International Arbitration Awards?, Kluwer Arbitration Blog, April 20, 2018.

[6] Nick Szabo, Smart Contracts: Building Blocks for Digital Markets

[7] Sometimes using the defenses laid out in Article V of the New York Convention.

[8] For example, Art. 1450 of the French Code of Civil Procedure mentions that only physical persons could be entrusted to act as arbitrators. Similarly, the English Arbitration Act 1996 irrefutably presupposes that an arbitrator is inherently and by default a human, as Art. 26 deals with the event of the arbitrator's death.

About the author

Mauricio Duarte is an Attorney from Guatemala City, graduated from Universidad Francisco Marroquín. Recently, he was granted his LL.M. Degree in U.S. Law. As a young associate of QIL +4 Abogados, Mr. Duarte has worked in cases involving international investment for energy infrastructure, international arbitrations, and other complex internationalmatters.

Furthermore, he has served as an active coach in International Moot Court Competitions and guest arbitrator. Recently, he has been an active proponent of the use of technology, especially Blockchain, in the legal industry.

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