United States:
Blockchain Is A Team Sport: Dispute Resolution Planning Is Key To Scaling Blockchain Solutions
To print this article, all you need is to be registered or login on Mondaq.com.
Some of the biggest challenges in scaling blockchain solutions
revolve around setting up an effective governance framework,
particularly a component to manage the processes by which disputes
among parties are properly settled. A new
paper from the World Economic Forum (WEF) and Latham &
Watkins explores forward-looking practical options for different
dispute resolution mechanisms distilled from case studies, various
existing solutions, and blockchain-based dispute resolution
protocols.
The paper outlines the following five key insights to help
market participants — blockchain professionals,
businesspeople, and lawyers — not only plan for disputes
related to on-chain transactions, but anticipate disputes that may
arise in new and unexpected ways.
- Consensus Still Needed on
Dispute Resolution Protocols
While there are many blockchain networks testing protocols and
resolution systems, there is no consensus on how to facilitate
dispute resolution for on-chain transactions. Certain dispute
resolution protocols may work well for some networks, but not for
others. Networks should seek to provide widely accepted, trusted
dispute resolution methods before disputes arise to avoid risking
costly litigation. The existence of an available dispute resolution
mechanism can actually provide parties with the incentive to create
a negotiated settlement rather than incur the costs associated with
the dispute process. Parties are more likely to choose a dispute
resolution mechanism if the process is known to produce reliable
outcomes.
- Is On-chain Enforcement
Necessary?
Many blockchain-based dispute resolution protocols focus on
specific enforcement of transactions—that is, ensuring that
the exact assets that are subject to the dispute are transferred to
the correct party—and the goal of the protocols is to enforce
transactions through means that are as automated as possible.
However, such specific enforcement is only necessary if parties
operate anonymously and their assets (other than those subject to
the dispute) cannot be identified. The vast majority of awards in
business disputes are not specific performance but are monetary
damages. For a network of enterprise users, who most likely all
know each other, the ability to name a counterparty in a dispute
proceeding and access assets to enforce the results of that
proceeding will not be an issue. Of course, parties should choose a
dispute resolution mechanism that a court will respect, should a
party need to access off-chain assets to satisfy a judgment.
- Off-chain Governance Is Still
Paramount
Dispute resolution is distinct from the governance processes
that are required for most blockchain-based enterprise projects.
Governance procedures involve a larger set of stakeholders than the
number of participants in a single transaction, and a governing
body is responsible for updating and modifying dispute resolution
mechanisms. The governing body of a network must decide whether to
provide dispute resolution in-network, whether to stipulate a
jurisdiction for on-chain transactions, and whether users are able
to opt out of either of these provisions. Each of these decisions
will have an impact on the outcomes that users can expect from
conducting transactions using the network.
- Different Mechanisms for
Different Disputes
Participants in a blockchain network may determine that the best
way to resolve disputes is by the network participants deciding for
themselves, potentially guided by the network operator. Network
operators would be incentivized to formulate a dispute resolution
process that appears streamlined, unbiased, and low-risk. And
network participants would be incentivized to adjudicate disputes
fairly based on the desire for the network to continue to function
and because they may be subject to judgment themselves. However,
while the participants in a network may determine that some
disputes are best resolved internally, other disputes may be
significant beyond one network. And participants may desire the
legitimacy conferred by an industry standards body. In these
situations, network operators may look to semi-private industry for
a resolution. Despite these other dispute resolution mechanisms,
parties to an on-chain transaction dispute may still decide to
pursue arbitration or litigation.
- Dispute Resolution Mechanisms
Are Key to Network Adoption
Well-functioning dispute resolution is crucial for achieving the
best outcomes on the blockchain network. Without dispute resolution
mechanisms, some parties may experience suboptimal outcomes For
example, parties may incur large litigation costs in the process of
resolving their dispute. They could also choose to forego the
efficiencies provided by network adoption or investment in custom
agreements because there is no way to recoup their costs should
transactions break down. This reduces the value to those potential
participants and also to the network as a whole. A blockchain
network with clear dispute resolution protocols will find it easier
to onboard enterprise participants who seek certainty with respect
to their operations, and a network can more easily grow when that
certainty is embedded in the platform’s governing and
operational documents.
Originally Published by Latham & Watkins, December
2020
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances
POPULAR ARTICLES ON: Litigation, Mediation & Arbitration from United States