Thanks to Mate Aleric for collaborating on this article
The metaverse is not just another virtual environment. A whole array of features—enabled, among others, by the blockchain and augmented reality technologies—distinguish it from other online universes. These features have the potential to turn the metaverse into the world’s main market for digital assets, but they also raise quite a few legal issues. From trademark infringement to data breach, encouraging suicide, and even sexual assault,[1] the virtual world already seems as viable a venue for disputes as the physical world. And while some of the disputes arising from the use of virtual environments are not at all novel, the metaverse raises numerous original questions of both fact and law. Here, we shall deal with three issues concerning the relationship between the metaverse and arbitration, namely (i) arbitrating real-world disputes in the metaverse; (ii) arbitrating disputes arising in the metaverse; and (iii) arbitrating on chain.
Arbitrating real-world disputes in the metaverse
The COVID-19 pandemic triggered a technological leap in international arbitration.[2] While some pre-COVID institutional rules also allowed for basic remote case management, none of those provisions are comparable to the framework brought about by the pandemic. Considering the importance of procedural fairness and confidentiality in arbitration, the only way to embrace the innovation that was inexorably disrupting ongoing proceedings was to codify it as quickly as possible. The result is a host of protocols and guidelines on the use of technology in international arbitration,[3] as well as the odd provision on the power of arbitral tribunals to employ technology to enhance the efficiency and expeditious conduct of the proceedings (e.g., art. 14.6.(iii) of the 2020 LCIA Rules).[4]
On February 18, 2022, the International Chamber of Commerce (the “ICC”) released the “ICC Commission Report on Leveraging Technology for Fair, Effective and Efficient International Arbitration Proceedings.”[5] Notably, the ICC report does not advocate the adoption of any specific tool or technology-related practice and leaves the choice of the most appropriate means to conduct the proceedings to parties and arbitral tribunals.
Arbitral proceedings have traditionally been defined as private affairs, conducted in conference rooms instead of courthouses. Now that practitioners have the post-COVID-19 legal framework at their disposal, there is no reason for that conference room not to be set up in virtual reality (“VR”). The decision to do so, however, can only be made by parties and arbitral tribunals on a case-by-case basis, balancing the quest for efficiency and expeditious conduct of the proceedings with concerns about confidentiality and procedural fairness. In this regard, the arbitration community is already questioning whether the parties should be allowed to use their digital identities in arbitration proceedings to be held in the metaverse—and the question raises even more doubts in relation to arbitrators.[6]
More complex procedural issues may arise with reference to arbitration proceedings seated in the metaverse. Indeed, absent any choice made by the parties, tribunals have widely applied the law of the place of arbitration to interpret the validity and scope of the arbitration agreement. But what law should the arbitrators choose if the seat of arbitration chosen by the parties is the metaverse? It will be interesting to follow how arbitrators react to such problems. Indeed, the rise of the metaverse could represent an opportunity to revive the “third way” adopted by French courts,[7] according to which the existence and scope of the arbitration agreement is determined exclusively by the parties’ discernible common intention—thus leaving aside national law.
At this stage of development, it is not even certain that convening in the metaverse would necessarily boost efficiency. But in the long run, a shift to the metaverse is highly possible. Experiments are already underway.[8]
Arbitrating disputes arising in the metaverse
Most metaverse platforms provide arbitration clauses in their terms of service.[9] By way of example, section 18 of Decentraland’s terms of use contains a multi-tiered arbitration clause that establishes good faith negotiations as a condition precedent to arbitration under the ICC rules.[10] Similarly, the arbitration clause contained in Binance’s terms of use[11] states that user-to-platform arbitration shall be administered by the Hong Kong International Arbitration Centre under the HKIAC Rules. Other platforms (e.g., Roblox,[12] Oculus,[13] and MetaMask[14]) opt for the AAA’s Commercial Arbitration Rules and Supplementary Procedures for Consumer Related Disputes (AAA).
We can therefore safely say that international arbitration has already entered the new virtual marketplace, and it seems poised to become the dispute resolution method of choice for user-to-platform metaverse disputes. But while user-to-platform disputes are governed by these clear provisions, there is no universal solution for disputes between metaverse users. Some traditional disputes arising between users will indubitably be settled in the physical world under the applicable law, in accordance with the principles formulated for the Internet on issues such as space and time.
On the other hand, disputes arising from user-to-user transactions of digital assets are up for grabs. Intellectual property disputes—already on the rise regarding NFTs distributed on online marketplaces[15]—could prove particularly complex. Indeed, national rules of international private law (and international treaties) usually provide that IP disputes related to non-contractual obligations (e.g., trademark infringements) shall be regulated under the law of the country in which protection is claimed or where infringement was committed. Thus, a question arises: What would the applicable law be in the case of IP infringement that occurs entirely in the metaverse?
User-to-user transactions are completed through smart contracts, i.e., through “a set of promises, specified in digital form, including protocols within which the parties perform on these promises.”[16] Therefore, a smart contract is a blockchain algorithm that automatically executes the terms of a contract after certain stipulations are met.
It is commonly said that arbitration is a creature of contract, but can that contract be smart? In other words, is it legally and technically possible to program a smart contract to submit any dispute arising from the overall transaction to on-chain arbitration?[17] And would such a clause meet the formal requirements of Art. II of the New York Convention?[18]
Arbitrating on chain
The concept of blockchain arbitration may sound futuristic, but several decentralized dispute resolution platforms already provide such services (e.g., Kleros,[19] Jur,[20] Aragon[21]). Once a dispute is submitted, these platforms conduct entirely virtual automated proceedings, leading to an award issued as a smart contract. As such, the award is automatically executed on the blockchain. Some of these platforms link their awards to escrow accounts into which the parties are required to transfer a certain amount of cryptocurrency. Hence, the system is still limited to awards for monetary compensation, but further development in blockchain technology will lead to increasingly complex transactions.
By way of example, Kleros defines itself as “an open source online dispute resolution protocol which uses blockchain and crowdsourcing to fairly adjudicate disputes.”[22] Smart contracts have to designate Kleros as arbitrator and may even choose a specialized section of Kleros’s quasi-judicial system.[23] When a dispute is submitted, the platform draws jurors through a self-selection system based on Kleros’s own token, the pinakion (“PNK”). Once the jurors have assessed the evidence, the decision is put to a vote, and the platform even has an appeal system in place.
It is unsurprising that decentralized dispute resolution appeals to those who subscribe to the theory of autonomous arbitration.[24] Indeed, self-executing awards have no need for enforcement proceedings. But can they be classified as real arbitral awards? And does such a classification even matter? One of the main reasons international arbitration is the preferred dispute resolution method for cross-border commercial disputes is the near universal enforceability of arbitral awards, for which parties to on-chain arbitration proceedings have no need.
Parties to on-chain arbitration proceedings are interested in a quick, neutral, and enforceable determination of their rights and obligations, and that is exactly what decentralized dispute resolution platforms provide. The mechanism resembles adjudication or Italian informal arbitration, in which the final award produces the legal effects of a contract. Pursuing this analogy, smart arbitration awards can be considered as legally binding as any smart contract and would therefore have to meet the same legal requirements. Accordingly, they should be governed by contract law rather than by arbitration law.
Conclusion
Recent digital innovation has brought about new tools and uncharted markets. As such, it will inevitably influence and perhaps even disrupt international commercial arbitration as we know it today. Arbitration already seems to be the preferred means for resolving user-to-platform metaverse disputes, and global pioneers of institutional arbitration can expect a substantial VR caseload in the near future. The importance of studying the metaverse business and its legal implications thus cannot be overstated.
Finally, while on-chain arbitration does not directly concern traditional arbitration practitioners, it is not a topic for idle chatter either. As you are reading this article, awards for monetary compensation are being executed on the blockchain as smart contracts. And the parties to such proceedings are not the least bit concerned about the legal classification of their transactions in national jurisdictions.
[1] https://www.technologyreview.com/2021/12/16/1042516/the-metaverse-has-a-groping-problem/.
[2] We dealt with the issue in our article on COVID-19: The prompt reaction of the arbitration world – Portolano Cavallo.
[3] Ex multis, ICC COVID-19 Guidance Note, SIAC COVID-19 FAQ, SCC COVID-19 Guidance, CIArb Guidance Note, Seoul Protocol, and the recent CIArb Guideline on Technology in Arbitration (https://www.ciarb.org/news/the-future-is-now-the-new-ciarb-guideline-on-technology-in-arbitration/).
[4] https://www.lcia.org/Dispute_Resolution_Services/lcia-arbitration-rules-2020.aspx.
[5] Arbitration in the Metaverse_ ICC Issues New Report on How Technology is Changing Arbitration – Lexology.pdf.
[6] https://www.jurist.org/features/2022/02/06/the-rise-of-digital-identities-and-their-implications-for-international-arbitration/.
[7] Above all, Cour de Cassation, first civil chamber, December 20, 1993, Municipalité de Khoms el Mergeb v. Société Dalico.
[8] http://arbitrationblog.kluwerarbitration.com/2022/02/06/arbitration-tech-toolbox-lessons-from-the-first-ever-international-arbitration-gathering-in-virtual-reality/.
[9] The Metaverse and International Arbitration – How to Anticipate and Resolve Web 3.0 Disputes – Lexology.pdf.
[10] Decentraland’s Terms of Use are available at https://decentraland.org/terms/.
[11] Available at https://www.binance.com/en/terms.
[12] https://en.help.roblox.com/hc/en-us/articles/115004647846-Roblox-Terms-of-Use#user-dispute.
[13] https://www.oculus.com/legal/terms-of-service/.
[14] https://community.metamask.io/tos#heading–disputes.
[15] For example, the lawsuit launched by Nike against StockX . Please see: https://www.thefashionlaw.com/nike-names-stockx-in-lawsuit-over-sale-of-unauthorized-sneaker-centric-nfts/.
[16] Nick Szabo, Smart Contracts: Building Blocks for Digital Markets (1996).
[17] The Metaverse and International Arbitration – How to Anticipate and Resolve Web 3.0 Disputes – Lexology.pdf; http://arbitrationblog.kluwerarbitration.com/2018/03/29/online-dispute-resolution-future-alternative-dispute-resolution/.
[18] http://arbitrationblog.kluwerarbitration.com/2018/10/09/blockchain-adr-bringing-international-arbitration-new-age/.
[21] https://aragon.org/aragon-court.
[23] https://kleros.io/whitepaper.pdf.
[24] http://arbitrationblog.kluwerarbitration.com/2022/03/11/autonomous-arbitration-in-the-era-of-the-metaverse/.
