International commercial arbitration and the tech sector

OpenAI, makers of ChatGPT, are not alone in preferring arbitration for dispute resolution purposes in their terms and conditions. The US commercial terms of Meta, owners of Facebook, also require most disputes to be resolved by binding arbitration, as do a good number of other big tech companies, including Google, Microsoft and Amazon.

As rapid advances in communications, technology, transport and trade continue to drive the globalisation of human activity, sovereign state boundaries are increasingly crossed when disputes arise, giving them an international dimension. The borderless character of certain technologies, such as blockchain and crypto, only add to this.

Jurisdictional concerns, enforcement problems, conflict of laws issues as well as language and cultural questions often then follow, all of which can create challenges in conventional litigation settings and increased cost and risk for the parties. It is therefore no surprise that with the increasing internationalisation of commercial disputes comes an increased focus on international commercial arbitration as a flexible and effective alternative to litigation.

International commercial arbitration, in brief

International commercial arbitration generally refers to a process whereby two or more parties in different countries agree to submit their dispute to arbitration. Their consent to arbitration is generally found within a dispute resolution clause (or ‘arbitration agreement’) in the contract they entered into. That clause will bear out the parties’ intention to create a legal relationship that will send the parties to arbitration when a dispute covered by the relevant resolution clause arises, although even absent such a clause the parties could still agree to arbitrate after the fact.

The process typically involves the appointment of a neutral arbitrator or panel of arbitrators to hear the evidence and render a binding decision (called an ‘award’) for the dispute. The award sets out the arbitrator’s or panel’s decision, including any damages awarded and any other relief granted. Once made, the award is binding on the parties, meaning they are legally obligated to comply with its terms.

Arbitration is often praised for its ability to provide parties with a clear and final decision and for helping ensure they can move forward with certainty and finality. The general lack of an appellate mechanism in arbitration is one of the reasons for this finality, although it is possible for a party to seek to set aside a fundamentally unfair award or one where the arbitrator or panel has exceeded its mandate or authority. (Appeals is a topic I will save for another day.)

The enforceability of the award is one of the significant advantages of international commercial arbitration, particularly given the international dimension which many web and technology disputes will exhibit.

Enforcement of an arbitration award is typically straightforward. This is because over 160 countries have signed international treaties, such as the New York Convention. These require signatory states to recognise and enforce international arbitration awards in accordance with their national laws. Parties can thereby have greater confidence that their award will be enforceable in most jurisdictions globally.

By way of comparison, a judgment obtained in a domestic court is typically only enforceable within the jurisdiction that it is issued in. That is unless a convention exists for the recognition of the judgment between relevant countries (as, for example, the Recast Brussels Convention allows for the recognition and enforcement of judgments within the European Union), or the party seeking to enforce the judgment initiates further legal proceedings in another country for its enforcement.

Arbitration also takes place in private, and the parties can agree to keep details of the dispute and the award confidential. This can be key in disagreements concerning sensitive information or trade secrets, as are often features of technology disputes.

Arbitration + Technology = ?

So far, so good. Though question marks can arise as to the applicability of arbitration rules, laws and procedures in tech disputes when the issues are not properly thought through. An example of one potential problem can be identified in the context of smart contracts.

Generally speaking, smart contracts can be comprised of two parts. First, the “smart” part, which is the programming logic that ensures its execution. (For example, that if 1 bitcoin is transferred from wallet A to wallet B within a stated period of time then a specified virtual asset held by the owner of wallet B will be transferred to the owner of wallet A.) This part of the contract is generally captured in computer code, which the parties to the contract may be unable to read or decipher.

The second part, often referred to as the “wrapper agreement”, usually takes a more traditional written form and sets out the relevant contract terms in a manner that the human parties to the contract can read. For example, their agreement that the governing law of the contract will be England and Wales.

Based on the simplified descriptions above, the logical place for an arbitration clause or agreement to be included would be within the wrapper agreement, so the intentions of the parties to create a legal relationship mandating arbitration is established in accordance with the ordinary principles of contract formation. This is not to say that the arbitration agreement can only be located in the wrapper (smart contracts come in different shapes and sizes), but if the arbitration clause is not properly incorporated then any arbitration requirement may prove unenforceable. That could make the “smart” part of the smart contract a poor choice for incorporation of the relevant clause, and might create the need for a wrapper for the smart contract if there is not one already.

The metaverse is an example of where another issue could arise.

End user licence agreements are the likely (and so far dominant) place for arbitration clauses to be incorporated by metaverse providers. These are typically click-wrapped, with users agreeing to be bound by the terms (and thereby to arbitration) by ticking a checkbox or clicking a button when downloading software or signing up for a service.

In 2020, Epic Games, maker of the popular multiplayer online videogame Fortnite which is often touted as a proto-metaverse, succeeded in its application to compel individual arbitration of the claims of a putative data breach class action through a well-drafted end user licence agreement. Even if the arbitration agreement is properly incorporated, however, issues can arise if the scope of the agreement does not adequately outline which disputes must be referred to arbitration.

When it comes to the metaverse, the World Wide Web Consortium (W3C) and others are working on proposals to increase interoperability between what are presently largely standalone metaverses, so that users’ avatars, skins, assets, objects and non-fungible tokens (NFTs), et cetera, can seamlessly move between them.

Given these plans, it is not difficult to envisage a situation in which a user can take a virtual asset that is recognised as property in the jurisdiction of Metaverse A with them into a different metaverse, Metaverse B. However, if Metaverse B is located in a different jurisdiction where the same legal recognition of property does not apply, an arbitration clause in the licence agreement of Metaverse B to the effect that “Any dispute, controversy or claim arising out of or relating to the ownership, possession, use, or transfer of property shall be settled exclusively by arbitration” might prove problematic in the event the user (say) loses their right to their property by way of some event subsequent to the jurisdictional change. Metaverse B’s operator could then face far greater uncertainty if the user pursues litigation for any loss through the courts instead, or it may find itself incurring significant legal fees defending the scope and enforceability of its arbitration agreement in addition to the costs of the user’s substantive claim.

Just from these simple examples, the need for well-drafted, clear and binding arbitration agreements in tech contracts should be clear. Yet the contractual provisions made in agreements for arbitration (as well as for other forms of alternative dispute resolution) are often poorly suited boilerplate clauses or late additions inserted as an afterthought, absent any strategic decision-making by the parties.

Conclusion

Properly planned and well thought-through arbitration clauses can ensure arbitration procedures and awards are focused specifically on the needs and the factors of greatest relevance to the parties. This is because arbitrators do not have to account for the impact of their decision beyond the case in front of them, unlike judges in litigation who may have to consider issues of precedent. The process is correspondingly able to accommodate more privacy and greater confidentiality than court litigation, as it does not need to adopt the latter’s focus on the important public interest principle that justice should not only be done but be seen to be done.

The inherent flexibility of international commercial arbitration also makes the process particularly well-suited to cross-border disputes, as the parties can agree such factors as the juridical home of a dispute, the language of the proceedings, the procedural rules that will apply, and even who will hear the matter, which can be very important in disputes involving technology where specific expertise could be beneficial. Crucially, the successful party can have confidence that the award will be highly enforceable, despite where the unsuccessful party is domiciled.

Arbitration is certainly something companies operating internationally (or contemplating doing so) ought to be considering to manage their risk—and they should be contemplating it at the outset of drafting any commercial contracts, licence agreements or terms. If your company is not already doing so and you would like to discuss the matters set out in this article further, please get in touch.