Managing disputes in a digital trade transaction environment

Guy Pendell, Partner & Solicitor Advocate, CMS Cameron McKenna Nabarro Olswang LLP

A barrier to early adoption of any new technology is uncertainty. Yet businesses will take measured risks where change is driven by customer expectations. That can be seen by the widespread adoption of digital trade for B2C services. For B2B transactions, however, the transactions are typically larger, more complicated and the drivers to change are arguably weaker. Therefore, concerns around risk and uncertainty prevail. The legal standing of digital trade transactions and how disputes will be managed, is one potential area of concern.

The digital sector, according to the UK Board of Trade’s November 2021 report, contributed £151 billion to the British economy. The same report talks of digital trade representing an opportunity for the UK to play a leading role in the digital revolution, just as it did the first industrial revolution. The ambition is admirable, but is it realistic and what obstacles are there?

English law plays an important role here. It is probably the most popular choice of governing law for international contracts globally.¹  The reasons for that popularity are varied. The English language is an important factor, as well as the independence and quality of our judges and arbitrators. This article isn’t here to examine those reasons, but it is linked to the British government’s ambitions around digital trade. Given parties’ preferences for English law to facilitate international trade, those same parties may well look to English law to govern future digital trade transactions. Is it up to the task? Broadly, yes. There is very little change of law needed to facilitate digital trade, but let’s start with one exception.

Electronic Trade Documents

The Electronic Trade Documents Bill (the “Bill”), currently working its way through Parliament, is set to modernise certain legal practices that go back hundreds of years. They relate to how international trade has been facilitated for years. Put simply, in international trade, parties have been tied to pieces of paper²  – and in some cases a great deal of them. Whilst they are still very much in use, the UK, as with many other jurisdictions, is moving to permit electronic trade documents to have the same status as paper trade documents. This is not entirely straightforward when an entire global system has developed based on a concept of physical possession of unique documents. Therefore, changes to the law are needed to establish standards by which electronic documents are capable of operating in a similar manner. The key being the technology to allow an electronic document to be unique. The Bill, therefore, establishes requirements for electronic documents to meet in order to be capable of qualifying as an ‘electronic trade document’.

Once the Bill becomes law, probably in the second half of 2023, it will clear a path to greater adoption of digital trade documents across thousands of supply chains around the world.

Smart Legal Contracts

There is, however, a separate digital development that has the potential to be just as transformational and may develop in parallel with the adoption of digital trade documents. That is smart legal contracts. It was the subject of a session at the ICC Centre for Digital Trade & Innovation Conference in early April 2023 which highlighted interest and scepticism in almost equal measure.

The term smart contract was apparently coined in the early 1990s by an American computer scientist, Nick Szabo. In December 2021, the Law Commission of England and Wales published the paper “Smart Legal Contracts, Advice to Government”. The focus of the paper was on smart legal contracts that are “legally binding contracts in which some or all of the legal obligations are defined in and/or performed automatically by a computer program”. This distinction matters because it emphasises the need for a smart contract to be a legally binding. There may be examples of computer programs operating between two parties (like a contract) but that may not be legally binding (because they lack elements essential to the formation of a contract). Understanding this distinction is an important piece in establishing confidence in the adoption of smart legal contracts.  Whilst it may never be needed, parties should be confident that they can enter into smart legal contracts, knowing that they will be recognised and enforceable at law. The good news is that the Law Commission reached the following view:

Our findings conclude that the current legal framework is clearly able to facilitate and support the use of smart legal contracts. Current legal principles can apply to smart legal contracts in much the same way as they do to traditional contracts, albeit with an incremental and principled development of common law in specific contexts. In general, difficulties associated with applying existing law to smart contracts are not unique to them, and could equally arise in the context of traditional contracts. In addition, even though some types of smart legal contract may give rise to novel legal issues and factual scenarios, existing legal principles can accommodate them.

Thus, English law is equipped to give effect to smart legal contracts and even to deal with novel issues that may arise. There may indeed be some novel issues, for example how a Court might deal with conflicts between natural language and code, or how a Court might deal with question of interpretation of the code itself.

Focussing on whether English law is equipped to deal with smart legal contracts, overlooks a crucial point. Will there be the same need for oversight of smart legal contracts from courts or tribunals, as there is for traditional contracts? The answer may well be no, due to a particular, beneficial, feature: self-execution. Where a smart legal contract covers all the necessary steps to facilitate trade (whether digital or otherwise), the legal process can be very simple. The smart contract can be programmed, for example, to identify the relevant goods, how and when they might be transported, the conditions of transport, the arrival at the destination port, its arrival at the delivery destination and, if necessary, acceptance by the buyer. If all of that is capable of operating digitally, the smart contract can also then self-execute payment of the consideration, or even adjustments in price based on pre-agreed criteria. That should mean that there will be fewer disputes about performance, and where there are disputes, it is likely that there will be a comprehensive evidential (digital) record of that performance.

There is not yet the wholesale adoption of smart legal contracts in most B2B environments, but this will change, and it is high on the agenda for many businesses, who expect to see greater adoption in the next few years. Smart legal contracts are, however, ubiquitous in many types of consumer transactions – for example, tap-in, tap-out public transportation, ordering and delivery of take away food, e-shopping and an array of streaming services – facilitated through the countless apps now available. Billions of transactions occur each year, the vast majority operating smoothly with consumers barely noticing they have just entered into a smart legal contract. Once that behaviour crosses into B2B contracts, parties are unlikely to look back.

The future of dispute resolution – a great leap forward?

Many lawyers are looking at these and other digital developments with great interest (and perhaps a little concern). Whilst legal systems are presently able to handle smart legal contracts, will parties using digital trade accept moving back into an analogue world for the resolution of disputes? Probably not Yet, even digitised disputes processes require a high degree of human input. However, more recent developments create further opportunities (or challenges, depending on your perspective). The digitisation of contracting moves a traditional analogue process into the digital world, whilst the onset of generative AI, brings the potential for legal analysis to be digitised too. A matter recognised by the Master of the Rolls, Sir Geoffrey Vos. At the McNair Lecture in Lincolns in on 19 April 2023, Sir Geoffrey said:³

The central element of any dispute resolution process is to identify the issue or issues that divide the parties. That issue, even in a complex case, can often, once identified, be simple. The difficulty is getting to it quickly and early enough to avoid massive cost. It is here that generative AI may be able to help. It may be that the power of AI could identify, from a mass of complex facts and transactions, the real issues that divide the parties and that require resolution. If that could be done, the actual resolution process itself could become shorter and less costly, particularly if on-chain recording meant that the scope for factual disputes was much reduced.

The mainstream legal systems are not there yet and there will be a necessary catching up as transacting behaviour, and clients expectations, evolve. However, there are initiatives underway where existing legal frameworks are being used to develop almost fully digital online processes, other than the final decision itself. These are at an early stage but are coming. In the meantime, parties embracing digital trade transactions can do so in the knowledge that legal systems are already capable of dealing with disputes arising, with the potential for great efficiencies to be achieved as the legal landscape evolves to meet client demands. 

Footnotes 

¹ See for example the ICC Dispute Resolution 2020 Statistics.  English law is commonly the most chosen law of parties’ contracts in ICC arbitrations.

² Bills of exchange, promissory notes, bills of lading to name a few.  See Section 1(2) of the Bill.

³ “The future of London as a pre-eminent dispute resolution centre: opportunities and challenges’