Status And Advantages Of Ad Hoc Arbitration

Although there are some drawbacks, ad hoc arbitration is more flexible than institutional arbitration and provides a vehicle for sophisticated parties to resolve their disputes with minimal intervention by third parties. Other benefits include the fact that it is potentially more confidential than institutional arbitration (Cayman also has an advantage here and sets itself apart from many other jurisdictions by making confidentiality and privacy an obligation under the arbitration law[i]), parties can write their own rules, set their own timetables, and control more of the process themselves.

As the international arbitration community grows in size, expertise, and sophistication and the international legal regimes become more efficient and arbitration friendly, the advantages of institutional arbitration over ad hoc arbitration are arguably reduced for experienced practitioners in certain industries whose disputes benefit from a bespoke process and need not rely on an institution to administer the proceedings.

As there is not yet a dedicated arbitration centre in the Cayman Islands[ii], most domestic arbitrations in Cayman are ad hoc. Although it is harder to track ad hoc arbitration statistics compared to institutional arbitration, based on the data available from organisations like The London Maritime Arbitrators Association (LMAA) and from reflecting on experiences with fellow practitioners and clients, ad hoc arbitration is still observed to be a favoured means of dispute resolution across many sectors including shipping, commodities and construction. In addition to the existing industries that favor ad hoc arbitration, some new areas have emerged, particularly in the FinTech space, that are finding ad hoc arbitration an attractive and efficient option for their dispute resolution.

New Users And New Disputes

Several emerging industries have shown that they are well-suited to, and have a healthy appetite for, ad hoc arbitration and among them are disputes involving cryptocurrency, Non-Fungible Tokens (NFTs), and smart contracts.

Alongside cryptocurrency, NFT, an emerging asset class, has seen a meteoric rise since 2020 and is one of the most popular applications in the FinTech field. According to Bloomberg, the cryptocurrency market is worth £2.2 trillion and the NFT market is worth £29 billion. NFTs are units of data linked to unique digital files. The files can be anything, but common examples are artwork, tickets, and recordings of live performances.  The rise of this new, decentralised world of blockchain, smart contracts, and cryptocurrency brings significant benefits to the world of FinTech but also creates unique challenges for litigators, lawmakers, and other practitioners. However, ad hoc arbitration offers some solutions to some of the dispute resolution related challenges.

Speed And Summary Dispositions

Speed is a key advantage of ad hoc arbitration and in a fast-paced, technological world, speed is paramount. Parties can set their own timetable for the arbitration, including the time within which the award might be expected to be published. For example, ad hoc arbitrations with the LMAA typically produce an award within six weeks.[iii] In contrast, the time limit to render a final award under the 2021 WIPO Rules is 12 months (Article 65a) and 6 months under the ICC rules for 2021 (Article 31).

Summary dispositions have become an increasingly prominent procedural tool in international arbitration and ad hoc arbitration gives parties even more freedom to use these tools to empower tribunals to render swift decisions on certain issues, claims, or defences, resulting in time and cost savings. By setting their own rules, parties can deal with summary matters in the manner they choose. For example, they could use automatic dispute resolution methods, such as Kleros, or another platform, to deal with less important or complex issues automatically. They could also choose to use blockchain based arbitration to allow parties access to all documents, with a blockchain serving as a verification tool[iv]. Utilising summary disposition methods can expedite the process and save on costs and ad hoc arbitration gives parties more flexibility to harness the advantages offered by emerging technologies in this space without being limited by institutional rules.

Interim Measures

A January 2022 report by Chainanalysis found that illicit addresses hold about US$10 billion worth of cryptocurrencies, much of which is determined to be the proceeds of theft[v]. The UK courts have employed the expansive powers of interim orders to address the difficulties in uncovering and acting against anonymous, or at least pseudonymous, defrauders. In Fetch.AI Limited v Persons Unknown[vi], a worldwide freezing order was granted against those determined to be directly involved in the fraud or to have knowingly received its proceeds and a propriety injunction was applied to those who were characterised by the Court as being innocent receivers who knew or reasonably should have known that the bitcoin was fraudulently acquired. In addition, a Bankers Trust order was granted against the cryptocurrency exchange Binance’s Cayman holding company, requiring it to disclose confidential information to aid in the tracing of the fraudulently obtained bitcoin, and was satisfied that the order could be carried out in the jurisdiction.

Under the Cayman arbitration law, parties to an arbitration would also have the benefit of interim measures. Interim relief is available during an arbitration, such as for the preservation of assets or evidence, to prevent harm or prejudice to the arbitral process, or to maintain or restore a party’s original position, pending determination[vii]. Interim relief is a crucial tool for preventing a difficult party from thwarting the arbitration procedure by dissipating assets or using other tactics to frustrate the process. A lack of enforceability of interim measures strikes at the heart of an effective system of justice and is a large oversight in some other jurisdictions. The ability to apply for interim relief is crucial, particularly relating to cryptocurrency, where there can be challenges relating to tracing and recovery.

In Cayman, the court also has powers to assist arbitration proceedings and may compel disclosure from third parties, order a person to attend before the court to produce certain documents, and other general powers in support of arbitral proceedings[viii]. This arbitration friendly system ensures efficiency and enforceability.

Smart Contracts And Experts

Smart contracts are “self-executing transactions” that use blockchain technology to automate contract obligations without manual work required. Some common use cases for smart contracts are supply chain management, transactions on cryptocurrency exchanges, and decentralised finance (DeFi). The Law Commission in the United Kingdom published a report, “Smart Legal Contracts: A Summary” on 25 November 2021, which assessed how the law applied to smart legal contracts, their formation, interpretation, mistake, and breach. Contractual interpretation was highlighted as an area that requires future development and it was considered that smart contracts may require courts not just to consider the natural language of a contract but also the meaning of the code underlying the smart contract. It suggested that a “reasonable coder” test should be adopted and utilising an expert to translate coded language to the court and provide the court with expert testimony about what the code appeared to instruct the computer to do. This is another area where arbitration has a distinct advantage as the parties choose the arbitrator or arbitrators that will hear their dispute and can appoint experts to the tribunal, providing a real boost to the proceeding’s efficiency.

Conclusion

Successfully resolving disputes via ad hoc arbitration requires both industry-specific know-how and specialised legal knowledge, but for sophisticated parties in certain industries, particularly in the rapidly developing and innovating world of FinTech, ad hoc arbitration can give parties the flexibility and autonomy they need to resolve their disputes more efficiently, with significant time and cost savings.

Whether or not ad hoc or institutional arbitration is the best choice for parties, or if maybe a different method of dispute resolution entirely is most appropriate, will depend on the individuals and the dispute in question, however, it is clear that a substantial volume of ad hoc arbitration is being undertaken and parties trust ad hoc arbitration as a well-established dispute resolution mechanism. In the future, ad hoc arbitration will likely continue to be utilised by emerging, specialist industries who may find the increasingly homogenised nature of institutional arbitration and traditional litigation not as well suited to their needs and may instead find ad hoc arbitration to be an effective way to reduce delay and diminish costs, while ensuring that the procedures are best tailored to their own needs.

The on-island expertise makes the Cayman Islands an attractive location for arbitration, with access to accomplished and experienced arbitrators, lawyers, service providers, financial institutions, and industry participants with a wealth of collective knowledge and experience, drawing from diverse backgrounds, nationalities, genders, expertise, linguistic skill, and qualifications. This, combined with the fact that some of the world’s leading blockchain and FinTech companies now call Cayman home, means there is no doubt that Cayman will continue to see developments in arbitration and FinTech related disputes and practitioners and clients alike will benefit from blossoming innovation and increased efficiency when solving their disputes.

Footnotes:

[i]   Section 81, Cayman Islands Arbitration Law, 2012

[ii]   After the delay caused by the COVID-19 pandemic, plans have resumed to open the Cayman International Arbitration Centre (CIAC) as soon as possible.

[iii]   Angela Bilbow, ‘The nuances of energy and commodities arbitrations’, CDR News (8 August 2017), available at https://www.cdr-new.com/categories/arbitration-and-adr/7499-energy-and-commodites.

[iv]   CodeLegit White Paper on Blockchain Arbitration, available at: https://docs.google.com/documnet/d/1v_AdWbMuc2Ei70ghITC1mYX4_5VQsF_28OPsLckNM4/edit#

[v]   The Chain Analysis 2022 Crypto Crime Report, available at https://go.chainalysis.com/2022-Crypto-Crime-Report.html

[vi]   Fetch.ai Ltd and another v Persons Unknown Category A and others [2021] EWHC 2254 (Comm).

[vii]   Part VIII of the Cayman Islands Arbitration Law, 2012

[viii]   Section 54, Arbitration Law, 2012

Megan Paget-Brown
Megan is an attorney with Paget-Brown Chambers and is the CEO of the Cayman International Arbitration Centre. Her practice areas include Arbitration and Mediation, Trusts, Corporate Governance, Blockchain Technology and Digital Assets. She is admitted to Practice Law in the Cayman Islands, the District of Columbia, Wyoming and Missouri.