A pandemic is plaguing the cryptocurrency industry today, yet most of us don’t yet know we’re infected. These diseases arise from extreme exposure to hundreds of national and local laws, jurisdictions, rules, and unknown legal risks due to engaging in open global systems in a world that is largely still clinging to nation-centric, hyper-local rules and controls. While currently there is no cure for these diseases as a whole, we can acquire immunity to some of the most problematic, by using an existing prophylactic vaccine: arbitration. This article aims to explain what options exist and how they might be used to protect yourself, your clients, and the industry.
Simply put, arbitration is a private dispute-resolution forum and mechanism, authorized by the lawmakers of each country to deal with civil (not criminal) disputes, and made internationally valid through a series of international treaties. From an international perspective, binding arbitration is one of the most popular and commonly used components of ADR, or alternative dispute resolution. Why? Because it allows people freedom of choice; it provides an opportunity to opt out of national legal systems and many of their most cumbersome processes.
Broad, Multi-Strain Protection
Just as a good flu shot protects you against multiple strains of the influenza virus, a detailed arbitration clause can protect you against many of the most cumbersome and costly traditional court processes. Let’s explore some of the standard arbitration clause components and compare them to traditional court processes: (shading represents clauses included in most contracts , not just those including arbitration)
Must Opt-In In Writing
As you can see, arbitration gives parties much more power over the entire process. Most of these options are simply not available in national and local courts: their rules, their forum, their decisions, your money and time. However, there is a catch. You have to get the vaccination in order to be protected, meaningyou must opt-in to binding arbitration in writing. If you do not opt-in, in writing (such as within terms and conditions) you will not be protected.
Some in the industry have tried the quarantine and placebo methods to avoid infection; neither is effective at preventing the disease, and both have disastrous side effects.
The Quarantine Method
This method is most commonly heard as, “we will float above jurisdiction and use smart contracts to enforce only fully-escrowed, digital-currency-based agreements between anonymous parties for virtual goods” is the equivalent of quarantine. It may isolate and protect you from local jurisdiction, but only by significantly reducing your freedom to trade outside of those narrow boundaries. If you want to buy a physical good, interact with pseudo-anonymous or known parties, or touch the traditional world in any meaningful way, you have no immunity.
The Placebo Method
The placebo method commonly involves writing text on a website that says things like: we are not a company, we are not subject to any laws or jurisdictions, the language on this website is meaningless, this agreement is to be interpreted solely based upon the code and its execution. It is the equivalent of a placebo. It’s like a sugar pill. It tastes good and it might even make you feel better but it is entirely ineffective at protecting you from disease. For a real world example, consider legal confusion created by theDAO.
Just as vaccines are not 100% effective, having a properly-signed, robust arbitration clause can’t guarantee you won’t be brought into local court, nor does it guarantee enforcement, but they are largely effective overall. As a practical matter, if a claim is brought against you in a local court you would request that the local court send the matter to arbitration, as provided in your contract. Many local judges will grant the request without further inquiry. Once there is an award (an arbitration decision), the New York Arbitration Convention requires local courts in 150+ signatory jurisdictions to enforce the award. The following map illustrates which countries have adopted the Convention as of 2011.
The vaccine can be free and relatively easy to acquire and implement. You can do it yourself in 10 minutes or less, though you may want to do further research and you should probably speak with a lawyer for complex choices with significant implications on your future rights, like choice of law, processes, and evidence.
Companies should consult with counsel and begin including it in terms & conditions immediately. Founders should consider making it part of their founder agreements (you do have one, right?) Independent contractors should consider including it as a standard part of services agreements. A good rule is to consider an arbitration clause whenever possible, particularly if your agreement crosses national borders. Remember, parties to a dispute can always change the rules if they both agree to do so. You can always opt-in to local court by agreement.
DIY Arbitration Clauses
The American Arbitration Association (“AAA”), and their sister site the International Centre for Dispute Resolution (“ICDR”), have many free online resources to help you understand arbitration and ADR best practices. They provide a free tool to help you create a customized arbitration clause yourself. Importantly, you do not have to sign in or identify yourself in order to use the tool. Simply use the tool and insert the resulting text into your contract. In the interest disclosure, the author recently became a Commercial Arbitrator in AAA for the purposes of providing dispute resolution services to this industry under these rules if parties choose her as an arbitrator. A sample clause resulting from the tool is at the end of this article an example, it should not be considered legal advice and it is not a substitute for competent legal advice from a lawyer in your jurisdiction.
Side Effect of Innovation
One positive side effect of widespread adoption of arbitration is that it provides an avenue for commercial viability of other experimental legal offerings. Today, many arbitration clauses include a stepped resolution plan with arbitration as a last resort. An abridged example of a three step plan might look like this:
“When a dispute arises the parties first agree to negotiate in good faith, then if negotiation fails (within a reasonable time), they will attempt to resolve the dispute through mediation. Only if mediation fails will the parties seek binding arbitration.”
For this example, the three steps are negotiation, mediation, and then arbitration. We can use these steps, or substitute our own. For example, instead of mediation, we might submit the dispute to crowdjury.org. Or we might have agreed that during the negotiation period, we will submit the dispute to a prediction market, like gnosis or augur. We are free to choose the steps, implement them in any way we like. Just as arbitration has strengthened traditional mediation and negotiation, it can strengthen new private dispute resolution mechanisms.
Side Effect of Uncoupling Identity and Justice
A few months ago, I wrote about the idea of uncoupling identity and justice. To summarize, traditional courts require national identity because of a concept called personal jurisdiction which is closely tied to sovereign power. But in private dispute resolution, we are free to design systems that do not require national identity to deliver justice. Systems of justice that require national ID often don’t adequately deliver justice to large segments of the population, whether due to access issues (someone doesn’t have ID) or because of their identity (skin color, city, age, postal code). By moving to private dispute resolution systems, we can also experiment with Alternative “No-ID Required” systems that might profoundly affect our ability to deliver truly blind justice.
Side-effect of Being an Attorney
Writing a general purpose article like this requires me to clearly explain that nothing in this article should be considered legal advice. It is intended to be a starting point for your own personal research and for discussion with a qualified attorney in your jurisdiction, who understands your specific needs and goals.
Beyond trying the clause builder tool, there are many ways to learn more about arbitration and ADR systems in general. There are other arbitration resources such as ICC and JAMS international that can help you draft clauses and navigate the entire arbitration process. The American Bar Association has compiled an online dispute resolution best practices guide. The OECD has also made recommendations. Regarding industry specific solutions, we continue to work on the Decentralized Arbitration & Mediation Network (DAMN) project. Regardless, we (as an industry) should learn more about arbitration and how it can help protect us from the jurisdictional pandemic.
Sample Clause Created Using the Clause Builder:
"The International Expedited Procedures of the International Centre for Dispute Resolution shall apply regardless of the amount in dispute. All disputes shall be heard by a single arbitrator, unless the claim amount exceeds $1,000,000.00, in which case the dispute shall be heard by a panel of three arbitrators. The place of arbitration shall be Illinois, U.S.A. The language of the arbitration shall be English. Within 20 days after the commencement of arbitration, each party shall select a person to serve as an arbitrator. The parties shall then select the presiding arbitrator within 30 days after completion of the appointment of the party selections. If any arbitrators are not selected within these time periods, the International Centre for Dispute Resolution shall, at the written request of any party, complete the appointments that have not been made. The arbitrator(s) shall be an expert in digital currencies, bitcoin, or the ethereum protocol. Consistent with the expedited nature of arbitration, pre-hearing information exchange shall be limited to the reasonable production of relevant non-privileged documents explicitly referred to by a party for the purpose of supporting relevant facts presented in its’ case, carried out expeditiously. Regardless of the amount in dispute, evidence will be taken by the submission of documents only. The award shall be rendered within six months of the commencement of the arbitration, unless such time limit is extended by the arbitrator. Failure to adhere to this time limit shall not constitute a basis for challenging the award. Except as may be required by law, neither a party nor its representatives may disclose the existence, content, or results of any arbitration hereunder without the prior written consent of (all/both) parties. Notwithstanding any language to the contrary in the contract documents, the parties hereby agree that a Final Award issued may be appealed pursuant to the American Arbitration Association’s Optional Appellate Arbitration Rules (“Appellate Rules”). Appeals must be initiated within thirty (30) days of receipt of a Final Award, as defined by Rule A-3 of the Appellate Rules, by filing a Notice of Appeal with the International Centre for Dispute Resolution. Following the appeal process the decision rendered by the appeal tribunal may be entered in any court having jurisdiction thereof."
Pamela Morganis an attorney, educator, and entrepreneur who has been working exclusively in the bitcoin and blockchain industry since early 2014. In addition to her law practice, Pamela is the CEO of Third Key Solutions LLC.