Digital technology revolution will soon dominate the shipping industry. We are at the doorstep of a new era.
The development of blockchain technology and its use by shipping companies, regulators and port authorities will become a common occurrence in the recent future. Many of the commercial contracts in the world may soon be smart contracts coded by computers. This previous blog describes the rise of Smart Shipping and the benefits of distributive ledger technology in the shipping industry.
What would be then the role of Litigation lawyers and the Dispute Resolution process in smart contracts in maritime law?
What is a smart contract?
Blockchain is capable of digitally tracking the movement of assets. For example, in cryptocurrency, the asset is a digital coin. However, you can move any asset that can be represented digitally – for example registration of land, intellectual property rights or contractual obligations. You can also attach rights to it and coded protections, e.g. regulating Dispute Resolution, while moving the asset. The rights operate automatically through coding. This is how you create a smart contract. A smart contract is a programmed code which is made out of a network of blockchains containing data.
Dispute Resolution and crypto-programming of shipping contracts
What are the main implications on the process of Dispute Resolution in crypto-coding shipping contracts using blockchain technology?
A smart contract is a contract operating automatically through coding. The amount of decisions, including questions arising around Dispute Resolution, will decrease because the contract will be self-executing, using "if this, then that" logic to automatically determine what happens. For example, the temperature in refrigerated containers can be monitored. If at any point during transportation the temperature exceeds specified thresholds then a pre-determined payment can be made to compensate for damage to goods be transported. This significantly streamlines the maritime business operations, which results in efficiency.
- Jurisdiction and governing law
A smart shipping contract can still include the jurisdiction and governing law clauses. The data can be coded, processed or passed anywhere in the world. The same applies to the cargo being shipped by sea. That's why it is important to decide on the conflict of laws issues ahead of creation and automatic execution of a smart contract.
- Digital International Private Law
Distributive ledger technology is borderless, which allows multiple parties to a transaction to modify records in several jurisdictions. In absence of the jurisdiction and governing law clauses chosen by the parties under the principle of autonomy, new International Private Law rules might emerge in cross-border shipping contracts. Digital International Private Law would reduce the uncertainty around the governing law of a platform using distributive ledger technology.
One theory is that the law of the platform will be chosen by the network participants as the platform cannot be located in any specific jurisdiction in international shipping contracts. Another theory is that the law of the place where the relevant administrator or encryption master keyholder is located will be the governing law. It could be also that the new rules would favour the shipper and their residence as the person who is transferring the asset on blockchain.
- Form of disputes
Would there be a need for courts in the era of blockchain technology?
The distributive ledger technology allows private parties to establish an arbitral system that is automatic and self-enforcing. On some blockchain platforms, the administrator is given the power to reverse or delete transactions. However, the administrator's role can be regulated by dispute resolution and arbitration clauses in smart contracts.
For example, in cryptocurrencies, parties to a transaction receive keys for authentication and encryption in order to send and receive funds. If a dispute arises, a party can ask a private adjudicator to use a third key to look into the transaction and determine who is entitled to the funds. In theory, this marginalises the courts and the traditional recognition and enforcement procedures.
The smart contract can bypass the courts because the courts do not control the arbitration award, which is the direction of funds to a party in the dispute. Blockchain can be a self-enforcing arbitration because the arbitral decision and the practical enforcement overlap and are executed within the platform.
However, during the baby steps of blockchain technology, high-value and important cases have been recently litigated in courts.
In the UK, in the case of Liam Robertson v Persons Unknown in 2019, an asset preservation order was issued over a million pounds worth of Bitcoin fraudulently obtained in a "spear phishing" attack. In the US, in United States v Zaslavskiy in 2018, an initial coin offering was held to be subject to US securities' laws.
Similarly, shipping smart contracts can still be under the jurisdiction of courts and arbitral tribunals. These recent court cases show the willingness of courts to adjudicate the threat of cyber fraud and novel questions arising from property and technology law. Common law, due to its flexibility, is well position to adapt to novel disputes involving internet technology, blockchain and data.
As long as clauses entailing subjective principles such as "reasonableness" and "best endeavours" are used in contracts, which cannot be applied by machines in the spirit of justice, a need for a human third party to determine the dispute will stay.
Shipping lawyers and smart contracts
Shipping and Litigation lawyers may be consulted by their clients on the benefits and risks of implementing blockchain technology in the shipping industry, and the contracts that underpin participation in and operation of the technology, including the rules or logic to be implemented through the smart contract. They will also advise on the Dispute Resolution procedures coded in smart contracts, laws regulating the distributive ledger platforms and regulation of cross-border disputes.
The types of disputes in the shipping industry will also change and it might be true especially in the standardised shipping contracts such as Bills of Lading, issued by the carrier to the shipper. Bills of Lading will be digitalised, dematerialised and crypto-coded. The blockchain technology will enable many of the issues arising from the current use of the Bills of Lading to be resolved.
- Fraud & Security
The use of cryptography will reduce the risk of fraud in its traditional sense. Disputes arising from fraudulent presentation of Bills of Lading should decline. Nevertheless, hackers and cybercrime cannot be underestimated. Smart contracts might not be fraud-proof but it would require more sophisticated effort to disrupt the working of a blockchain in comparison with paper form Bills of Lading.
- Delivery of cargo
The owner of the goods will receive a Bill of Lading automatically on blockchain. All parties to the contract will have copies of it on the distributive ledger. This will eliminate delays in the delivery of cargo upon arrival at the destination port. The owner of the cargo will no longer need to wait for the delivery of the Bill of Lading in its original, traditional form to claim the cargo.
There will also be no need to release the cargo without the original Bill of Lading being presented upon delivery in the destination port. The need for letters of indemnity will decrease with the use of smart contracts. This will result in a reduced risk for both parties.
Brodies have considerable expertise in reviewing shipping contracts and have a leading Dispute Resolution practice in Scotland. Our IP, Technology and Data Group also has specific expertise in relation to advising on projects involving the deployment of blockchain and distributed ledger technology across a number of sectors. If you require assistance in those areas, please contact your usual Brodies contact.