In an era of accelerating developments in the domain of Web3, smart contracts and blockchain are concepts that are increasingly familiar. Likewise, heralds for the digitalisation of traditional and classic dispute resolution mechanisms have never been louder. To properly decipher and ensure smooth digital adoption, it is of paramount importance for practitioners, to appreciate and understand the local legislative mechanisms in order to ensure the enforceability of awards arising from such digitalised dispute resolution mechanisms. This article highlights, solely, from a Malaysian legal perspective, how decentralised arbitration platforms can potentially be integrated with existing domestic legal frameworks.
A. BLOCKCHAIN ARBITRATION AND DEVELOPMENT OF DECENTRALISED ARBITRAL PLATFORMS
Traditional arbitration is a common option for many in Malaysia, where it is governed by the incorporation of a standard arbitration clause, the Arbitration Act 2005 and the parties’ choice of procedural rules such as the Asian International Arbitration Centre rules. However, with the advent of technology, the notion of “Blockchain Arbitration” has been conceptualised, which is further categorised into “On-chain” and “Off-chain” arbitrations.
A recent development in the domain of digitalised dispute resolution mechanisms has witnessed the introduction of, amongst others, Kleros, Celeste and Aragon Court (collectively referred to as “KCA”), blockchain arbitration platforms that facilitate and govern the arbitral proceedings in the event of a dispute, commonly acting as the online arbitrator and the arbitral hub.
B. CHALLENGES IN ENFORCING A DECENTRALISED DIRECT ARBITRAL AWARD
At the outset, it is trite that any domestic arbitration in Malaysia shall be governed by the Arbitration Act 2005 (“the Act”). In this regard and at present, arguably, the Malaysian legal framework is unable to support blockchain arbitration platforms such as the KCA, where the rendition of a direct arbitral award by anonymous jurors appointed by such platforms may arguably fall short of the current statutory requirements, which would pose significant challenges to its enforceability.
For example, where KCA renders an award directly to the parties, the said award as rendered would arguably fall outside the ambit of the Act which only acknowledges the enforceability of an arbitral award from a foreign state, which is defined as “a State which is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted by the United Nations Conference on International Commercial Arbitration in 1958”. In the circumstance, where the direct award rendered by KCA is entirely in a digital domain, the said direct award cannot be considered to fall within the definition of a foreign award under the Act.
In amplification of the paragraph above, Section 33(4) of the Act also requires that an award state its seat of arbitration. In this regard, against the backdrop of an entirely digital and online environment, arguably, there is no “seat” of arbitration.
Further, Section 33(1) of the Act expressly provides that “An award shall be made in writing and subject to subsection (2) shall be signed by the arbitrator”. However, where an award is rendered by KCA, the award is entirely digital in nature where the procurement of a signature is almost impossible given the nature of KCA’s protocols which strictly uphold the anonymity of its panel of jurors and by extension thereof, the said award will be devoid of any signatures.
C. POTENTIAL SOLUTION: CASE STUDY IN MEXICO
On September 2020, two private parties entered a real estate leasing agreement over a property located in Mexico, thus falling within the jurisdiction of the Mexican courts. In this agreement, there is in existence a standard arbitral clause, drafted according to local provisions, which provide for the appointment of a sole arbitrator and the framework to regulate the proceedings.
However, the one deviation from the standard clause presents an interesting solution to the conundrum discussed, wherein parties had mutually agreed that the sole arbitrator shall utilise the Kleros Protocol to formulate his decision. The relevant part of the translated clause reads as follows:-
“…Once the response is received, or after a period of 5 five days has elapsed without it being presented, the arbitrator will draft the procedural order, a document that will contain the executive summary with the relevant aspects of the controversy, the positions and arguments of the parties, as well as the supporting evidence. This procedural order will be sent to the decentralised justice platform named “Kleros” so that, based on its protocols, it will issue its decision on a strict legal basis. The arbitrator will receive the decision from “Kleros” and incorporate it into his arbitral award to govern the substance of the ruling, issuing it in writing and indicating the date, place, name and signature of the arbitrator…”
A dispute subsequently arose between the parties wherein at the enforcement stage, the Mexican Court had, in 2021, recognised the arbitral proceeding and award, giving notice to the defendant to comply with the award, after which the award would be executed through public force.
In light of this significant development, a potential reconciliation between blockchain arbitration platforms with existing legal frameworks is presented, wherein parties may elect for:-
i. substantive decisions of the blockchain arbitration platforms to be adopted and incorporated into the final arbitral award, by the arbitrator appointed under local jurisdictions and their respective provisions; as opposed to
ii. procuring a direct arbitral award by the blockchain arbitration platform.
The election of the first instance will subjugate the function of such platforms to merely as a means of and/or guideline for deciding the merits of the dispute, which eliminates the notion that the jurors appointed under these platforms would serve as the appointed arbitrator, hence reducing the difficulties in enforcement and recognition of the arbitral award. Therefore, it is possible to overcome the obstacles in respect of enforcement within the current domestic legal framework. However, at this juncture, further research, case development and precedents are required to validate the practicalities of this theoretical model.
*Disclaimer: The contents of this article are for general information purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances. Formal legal advice should be sought in particular matters.