On-line Arbitration: Issues and Solutions

Richard Hill,[1] December 1998

This article has been published in the April 1999 issue of Arbitration International

Abstract

This article summarizes certain legal issues that may arise in connection with on-line arbitration, that is, arbitration conducted at least partly through electronic means such as the Internet, and shows how they can be resolved. We conclude that there are no significant legal obstacles to on-line arbitration and that there is no need to modify existing laws or international treaties.

1. Introduction

There has been increasing interest in the question of whether an arbitration conducted by the use of electronic means (for example, electronic mail — E-Mail) is valid within the current legal framework provided by national laws and international treaties (of which the most important is the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards — NYC).[2]  Amongst the issues raised, the following appear to be worthy of in-depth discussion:

- Does an arbitration agreement formed by electronic means[3] satisfy the formal requirements of the NYC?

- Can electronic means be used to conduct the arbitration proceedings? And if so, where is the seat of arbitration?

- Can the arbitrators deliberate by electronic means, rather than in person?

- Can the award be issued in electronic form?

2. An arbitration agreement can be formed by electronic means

2.1 Exchange of E-Mail messages

Arsic[4] has argued convincingly, with citations to relevant authorities and case-law, that an exchange of E-Mail messages containing an arbitration clause satisfies the formal requirements of Article II(2) of the NYC, because an exchange of E-Mails can be equated to an exchange of telegrams. This argument is correct because, even though there are important technical difference between telegrams and E-Mails, the essential features of an exchange of telegrams can be reproduced through appropriate use of E-Mail.[5]

The important differences between telegrams and E-Mail are:

- the telegraph office was (at least theoretically) able to verify the identity of the sender; in contrast, it is relatively easy to forge an E-Mail;

- it was very difficult from a technical point of view to change a telegram during its transmission; in contrast, E-Mails transmitted over the Internet are not inherently protected against inadvertent or deliberate changes;

- telegraph companies could be assumed to have delivered the telegram with a very high degree of certainty; in contrast, E-Mails can easily fail to be delivered.

However, these shortcomings of E-Mail can be easily overcome. One way is by using encryption methods, but this is not as simple as many believe.[6] A far simpler way is to apply common-sense business practices, for example:[7]

- verify from the context and content of the E-Mail that it really does come from the party that is purported to have sent it; this is no different from what is done with ordinary letters or facsimilies (FAX) — indeed, with today's computer technology, it is easier to forge a letter or a FAX than it is to forge an E-Mail;[8]

- maintain printed copies of all sent and received E-Mails; these can be used to show that there were (or were not) transmission errors; again, the situation is no different than that for letters or FAX;

- request the recipient always and systematically to confirm the receipt of E-Mail messages; this reproduces the reliability of return-receipt registered mail.

It is sometimes said that E-Mail does not constitute a means of telecommunications that provides a record. This is incorrect. If proper operating procedures are used, E-Mail can provide a record that is as reliable as physical letters, FAX, or any other methods of transmission. John Poindexter, former US National Security Advisor, found this out to his surprise and regret when a copy of an E-Mail made from backup audit files was admitted into evidence at the criminal trial concerning the Iran-Contra affair.[9] Indeed, technical means and operating procedures routinely used by companies often provide reliable records of E-mail electronic communications.[10] Two recent thorough and learned analyses show that properly implemented and operated E-Mail systems will produce information that will satisfy the rules for legal evidence.[11]

It has also been said that an E-Mail lacks the solemnity of a signed writing. Indeed a "writing requirement" cautions the actors that they are entering a solemn matter and it promotes deliberation and seriousness.[12] E-Mail is not, at this time, the equivalent of physical writing from that point of view.

However, Article II(2) of the NYC, allows an arbitration agreement to be formed by an exchange of telegrams. Article 7(2) of the Model Law has extended this to an exchange of telex or "other means of telecommunication which provides a record" which, as swown above, certainly includes E-Mail. Courts have extended Art. II(2) to telex in several cases and some eminent authorities believe that it should also be extended to facsimile.[13]

In fact, from a technical point of view, it is difficult to see much difference between telegrams, telex, facsimile, and E-Mail, apart from the issues of proof and evidence dealt with above.

For each technology, a message is converted to a digital format, transmitted over a telecommunications network, and then converted to a human-readable form. The only difference at reception is that telegrams and telex are always printed, FAX is usually (but not always) printed, and E-Mail is printed only if the recipient requests a print. A difference at transmission is that a FAX is usually (but not always) created from a conventional writing. E-Mail, telegrams, and telex share the feature that, at transmission, they need not be created from a conventional writing, and that the printed copy of the transmission is created contemporaneously with the transmission itself. Another difference is that a printed copy is always created for a telegram, usually for a telex, but only if the sender requests it for an E-Mail.

These differences do not appear to be of sufficient import to differentiate between these electronic media for what concerns the NYC.

It has also been said that E-Mail is "immaterial" or "not physical". From a scientific point of view, this is incorrect. Any form of communication requires the physical, material alteration of a physical, material medium, for example the electrical state of a copper wire. There are of course differences between conventional writing and electronic communications, but these would not appear to be significant for the purposes of the NYC:

- Electronic communications may be transient. True, but paper also has a finite life-span. If proper backup methods are used, records of electronic communications last several years. Records made on CD-Roms actually have longer life-spans than most paper records.

- Electronic communications are not readable by the naked eye. True, but neither are micro-films, which are universally accepted as substitutes for conventional writings.

- In conventional writings there is a transfer of matter (ink molecules are deposited on paper), which is not the case for electronic communications. True, but in electronic communications there is a transfer of energy (magnetic fields are altered). Also, there is no transfer of matter when micro-films or thermal-paper-FAXs are created, only a transfer of energy.

Finally, it is worth noting that copyright law in some countries is being extended to cover the short-lived electronic copies that are made within computers and telecommunications networks.[14]

We conclude that, although many courts are not yet familiar with E-Mail, there can be little doubt that E-Mail messages are admissible as evidence, although appropriate precautions need to be taken in order to satisfy considerations of evidentiary integrity and reliability.

2.2 Acceptance of an offer on a World-Wide-Web site

What of the situation where a World-Wide-Web (WWW) Internet site contains an offer, and the offer refers to terms and conditions which contain an arbitration clause?

In order to understand this situation, it is necessary to review the actual flow of bits that takes place when the offer is viewed and accepted by the buyer. The bits comprising the offer are stored on the seller's computer, transmitted through a telecommunications network to the buyer's computer (usually a personal computer or some other type of individual workstation) and stored (at least temporarily) on the buyer's computer.

Thus there has been a transmission of information from the buyer to the seller. This is analogous to the transmission that takes place when an E-Mail or FAX is sent, the only difference being that the recipient initiates the transmission in the case of the WWW, whereas the sender initiates the transmission in the case of E-Mail or FAX. This difference has no impact on the validity of the exchange.

Although the information on the WWW can be structured and presented in many different ways, an offer would typically include some facilities for indicating buyer acceptance and transmitting that acceptance back to seller. Typically, the offer is presented as an electronic form, the buyer completes certain blank fields, and then initiates a "submit" or "transmit" or "accept" function.

Thus, the bit stream comprising the offer and resident in buyer's computer, is modified by buyer and the modified version is transmitted back to seller.

Therefore, there has been an exchange of information entirely analogous to the exchange that takes place when E-Mails or FAXs are exchanged. If the seller's offer contained an arbitration clause, or a reference to an arbitration clause, then an arbitration agreement has been validly formed, in accordance with Article II(2) of the NYC, provided that the portion of the offer containing the "submit" or "transmit" or "accept" function clearly and conspicuously referred to the existence of an arbitration clause (and other terms and conditions). Absence of a clear and conspicuous reference could lead to objections on the basis of lack of informed consent by the buyer.

3. Use of electronic means to conduct the arbitration proceedings

There is no doubt that the parties are free to agree on the use of electronic means for the conduct of arbitral proceedings or on the exclusion of such use. This flows from the fundamental concept of party autonomy, which is explicitly mentioned in many arbitration laws. Failing agreement by the parties, the arbitral tribunal may agree on electronic means, provided that this does not create a situation such that one party is unable to access some information. For example, it would not be acceptable to impose transmission of documents via CD-Rom if one party states that it does not have the facilities for reading CD-Roms. Indeed, video-conferences have been used to hear witnesses in several major international arbitrations. Of course the use of electronic means should be appropriately documented and formalized in procedural orders issued by the arbitral tribunal.

However, when the arbitration is subject to institutional or other standard rules, great care should be taken to identify which, if any, communications are required to be "in writing" according to the rules. Whether the use of the terms "writing" and "signed" in any rules would prevent the use of E-Mail is a matter than can be argued. In the USA, it is commonly accepted that for contractual matters an E-Mail is a "writing". However, it is the case that an E-Mail need not be considered a "writing" for administrative matters. In Switzerland, it is clear that an E-Mail cannot be considered a "writing", because the law defines "writing" in a way that excludes electronic communications.

If there are such writing requirements in the applicable arbitration rules, then they should be specifically overridden by an explicit agreement amongst the parties, since the rules are deemed to be an agreement amongst the parties, and violation of the rules would be a violation of the agreement of the parties, which could result in a refusal to enforce the award in accordance with Art. V(1)(d) of the NYC. Indeed, as noted above, not all courts will be ready to accept prima facie that the term "writing" applies to E-Mail.

Arsic has argued that problems may arise with respect to arbitration proceedings conducted by electronic means because there is no identifiable seat of arbitration. This view has been disputed by Hill, who shows that the physical place of hearings or other proceedings, or lack of a physical place of hearings or other proceedings, is irrelevant, since the seat of arbitration is either the seat chosen by the parties or the seat chosen by the arbitrators in accordance with applicable arbitration rules and law.

Questions have also arisen regarding the supposed lack of confidentiality of electronic means. Does the fact that certain types of electronic communications are inherently insecure mean that they should not be used in arbitration? No, unless the parties feel that especially stringent security measures should be taken. Despite that fact that Internet communications are inherently less secure than physical mail, FAX, or telephone, it is far easier, in most cases, to eavesdrop at the point of origin or reception (for example, by suborning office-cleaning personnel; or by placing a microphone in an office) than it is to intercept Internet communications.

Furthermore, interception and eavesdropping of electronic communications is a crime in many jurisdictions. Thus, there is no more a waiver of confidentiality when electronic means are used than there is when conventional letters are sent and someone steals the letters and illegally opens them.

4. Deliberations amongst the arbitrators by electronic means

A sentence of the Swiss Supreme Court shows that the arbitrators need not meet in person and are free to conduct deliberations by electronic means, including E-Mail, provided that suitable precautions are taken. This sentence concerns an arbitration conducted under the regime of the Concordat sur l'arbitrage (CIA), an arbitration law which would normally no longer be applicable to international arbitrations. However, the provisions of the more recent law, the Swiss Private International Law Act (LDIP), are analogous to those of the CIA for what concerns this matter, so the sentence should be applicable to arbitrations conducted under the regime of the LDIP.

According to the Court, "the only mandatory requirement ... is that all the arbitrators must participate in a real way in each discussion and decision". "... [the law] does not mandatorily impose any particular procedure concerning the deliberations of the arbitrators and their decision-making process; it authorizes equally decisions made in the presence of all the arbitrators — generally orally — as well as decisions made `amongst absent people' — generally in writing." "Thus the arbitration contract can contain a clause to this effect. In the absence of such a clause and given the silence of the law, the procedure to be followed must [be determined by agreement amongst the parties, or in the absence of agreement by the arbitral tribunal]; in the absence of agreement amongst the parties, the arbitral tribunal might decide that deliberations and voting take place `amongst absent people' in accordance with a mode defined by it; otherwise, in the absence of unanimity, decisions must be made in the presence of all the arbitrators." "A procedural decision by the arbitrators, according to which the award shall be made by circulating a draft amongst the arbitrators, must not leave any doubt concerning its purpose".

Thus the arbitrators may make an award after discussing the case and any draft awards either by synchronous electronic means (such as audio-conference) or by asynchronous electronic means (such as circulation of drafts and comments by E-Mail), provided that:

a) all the arbitrators agree to such electronic means;

b) all the arbitrators participate in the discussion, or one arbitrator is excluded for valid reasons such as illness or refusal to participate in any form of deliberation, including conventional physical presence;

c) the parties have not ruled out such electronic deliberations;

d) the agreement of the parties to such electronic deliberations, or, in the absence of such party agreement, the agreement of the arbitrators, is properly documented, for example in a procedural order.

When the arbitration is subject to institutional or other standard rules, care should be taken to ensure that the rules do not preclude electronic deliberations. If they do, then that point must be specifically overridden by an explicit agreement amongst the parties, since the rules are deemed to be an agreement amongst the parties, and violation of the rules would be a violation of the agreement of the parties, which could result in a refusal to enforce the award in accordance with Art. V(1)(d) of the NYC.

5. Form of the awards

Arsic has argued that arbitral awards, whether final or provisional, must be written on paper and be signed, in ink and by hand, by the arbitrators, at least until laws and courts routinely accept electronic signatures. This view deserves support. Indeed, an arbitral award deemed to be made in Switzerland must be written on paper and be signed by hand, unless the parties have explicitly agreed otherwise.

It would also appear wise on the part of the arbitrators (or the administering arbitral institution) to send the awards to the parties using conventional registered return-receipt physical mail.

6. Conclusion

Provided that appropriate precautions are taken, arbitration agreements can be concluded by electronic means and arbitration proceedings can be conducted by electronic means, within the framework of existing national laws and international treaties.

1. Hill & Associates, 6 ch. du Port-Noir, CH-1207 Geneva, Switzerland. This article is based on discussions with Pierre-André Beguin, Dominique Brown-Berset, Pierre-Yves Gunter, Laurent Levy, Gerald Page and Janine Uzan-Spira in the context of the working group on on-line arbitration of the Geneva Chamber of Industry and Commerce. Any errors are the sole responsibility of the author.

2. An early analysis of the issues raised by on-line dispute resolution schemes is Jack Goldsmith and Lawrence Lessig, "Grounding the Virtual Magistrate", Electronic Dispute Resolution: an NCAIR Conference (http://www.law.vill.edu/ncair/disres/groundvm.htm, 22 May 1996). Jasna Arsic, "International Commercial Arbitration on the Internet" Journal of International Arbitration (Vol. 14, no. 3, September 1997), p. 219, gives an excellent overview of electronic means appropriate for arbitration and shows that an exchange of E-Mails satisfies the requirements of the NYC with respect to formation of an agreement to arbitrate, but argues that the use of E-Mail to conduct the proceedings might pose a problem with respect to the question of where the arbitration takes place; this last point is disputed by Richard Hill, "The Internet, Electronic Commerce, and Dispute Resolution: Comments", Journal of International Arbitration (Vol. 14, no. 4, December 1997). Frank A. Cona, "Internet Arbitration of International Commercial Disputes" (http://www.ipwarehouse.com/IP_Library/general_articles/arb_art.htm, 1996) and same author, "Application of Online Systems in Alternative Dispute Resolution" (http://www.ipwarehouse.com/IP_Library/general_articles/arb_art.htm, 1997), states that national laws and The New York Convention would have to be modified to allow online arbitration; however, Cona does not support his arguments with any analyses of arbitration case-law or citations from authorities on arbitration law and the purpose of this article is to dispute that view.

In this article, the term "electronic" will be used to refer to all means of communication commonly used in the computer and telecommunications sectors; those means include acoustic, electric, magnetic, and optical methods for encoding, storing, transmitting, and decoding information.

op. cit., p. 216.

Accord, public statements by V. V. Veeder and other distinguished arbitration scholars at the Fourteenth Congress of the International Council for Commercial Arbitration (ICCA) (3-6 May 1998, Paris, France).

Simon Garfinkel with Gene Spafford, Web Security & Commerce (O'Reilly, 1997) give a thourough discussion of how to achieve security and of the related complications.

A very thourough discussion of such methods is given by Benjamin Wright, The Law of Electronic Commerce: EDI, Fax, and E-Mail: Technology, Proof, and Liability (Little Brown, 1991).

Knowledge of the technologies of the author, who is a computer and telecommunications specialist.

United States v. Poindexter (Crim. No. 88-0080-1) (D.D.C. 1990). A full discussion of this affair is given in Wright, op. cit., p. 72.

Wright, op. cit., section 5.4 and chapters 6 and 8.

Richard Alan Horning, "Has HAL Signed a Contract: The Statute of Frauds in Cyberspace", Santa Clara Computer and High Technology Law Journal (Vol. 12, no. 2, August 1996), pp. 290-298; and Clive Gringras, The Laws of the Internet (Butterworths, 1997), pp. 233-236.

Wright, op. cit., p. 280

P. Fouchard, E. Gaillard, and B. Goldmann, Traité de l'arbitrage commercial international (Litec 1996), p. 392, no. 618. Note also sections 5(6) and 100(2) (last sentence) of the 1996 English Arbitration Act: the expression "in writing" of the 1958 Act has been replaced by "recorded by any means". More generally, see the UNCITRAL Model Law on Electronic Commerce and Richard Hill and Ian Walden, "The Draft UNCITRAL Model Law for Electronic Commerce: Issues and Solutions", The Computer Lawyer (Vol. 13, No. 3, March 1996), p. 18.

See Wendy L. Addiss and Ronald S. Katz, "WIPO Treaties, Euphoria Should Wait", The Computer Lawyer (Vol. 14, no. 4, April 1997), p. 1.

"Bit" is the technical term of art for an indivisible unit of information stored or transmitted by electronic means.

Or, more frequently, on a computer operated by some third party who rents storage space and other services to the seller.

With respect to the issue of incorporation by reference, see W. Laurence Craig, William W. Park, and Jan Paulsson, International Chamber of Commerce Arbitration (Oceana 1990), paragraph 5.08, p. 94; Stephan Netzle, "Arbitration Agreements by Reference to Regulations of Sports Organizations", ASA Special Series No. 11 (November 1998), p. 51; Lucius Huber, "Arbitration Clauses `by Reference'", ASA Special Series No. 8 (December 1994), p. 81; and the Tradax case, Swiss Federal Tribunal (ATF 110 II 54).

This argument is supported by the analysis in Richard Hill, "Swiss Supreme Court Decision of 16.1.1995, Compagnie de Navigation et Transports S.A. vs. MSC Mediterranean Shipping Company SA Revisited: The Writing Requirement of the New York Convention", ASA Bulletin (1996, no. 3), p. 488.

For example, Art. 182 of the Swiss Private International Law Act (LDIP); or Art. 19 of the UNCITRAL Model Law on International Commercial Arbitration.

Equal access to information is required by the principle of equal treatment of the parties. See for example the Swiss Private International Law Act (LDIP) Art. 182.1, or the UNCITRAL Model Law on International Commercial Arbitration, Art. 18.

In this context, see Yukiyo Ltd. V. Shiro Watanabe, d/b/a Bident Ceramics, et al., United States Court of Appeals for the Federal District (15 April 1997; 1997 WL 178009), summarized and commented in The Computer Lawyer (May 1997, Vol. 15, no. 5), p. 18.

Private communications with parties or arbitrators.

For example, the new ICC Rules specify that most of the communications between the parties and the arbitral tribunal must be in "writing". See for example Articles 3.1, 4.2 in conjunction with 3.1, 5.3 in conjunction with 3.1, 7.2, 7.3, 11.1, 12.3, 18.2 (Terms of Reference must be "signed"), and 20.2. The UNCITRAL Arbitration Rules use the term "writing" in Articles 18.1, 19.1, and 22. The new LCIA Rules require "writing" in Articles 1.1, 2.1, 5.3, 15, and 20.3.

See 4.3.1 below and also Richard Hill and Ian Walden, "The Draft UNCITRAL Model Law for Electronic Commerce: Issues and Solutions", The Computer Lawyer (Vol. 13, No. 3, March 1996), p. 18.

See Hill and Walden, op. cit..

Article 14.1 of the Swiss Civil Code of Obligations states: "A signature must be written by hand by the person who incurs the obligation [agrees to a contract]." And Article 13.1 states: "A contract for which the law requires the written form must be signed ...". However, an arbitration agreement contained in an E-Mail would, under Swiss law, almost certainly be considered a valid arbitration agreement, because Article 178.1 of the LDIP (Private International Law Act) specifies that an arbitration agreement is valid if it is made by a means of communication "which permits it to be evidenced by a text". The use of the word text, rather than writing, in the LDIP is deliberate and thus the strict definition of "writing" should not apply to an arbitration agreement.

op. cit., p. 219.

"The Internet, Electronic Commerce, and Dispute Resolution: Comments", Journal of International Arbitration (Vol. 14, no. 4, December 1997).

Worth noting in this context is a recent sentence of the Swiss Federal Tribunal, which states, when denying an appeal for annulment of an arbitral award, that the fact that the arbitrators had never physically met in Lausanne, the seat of arbitration, was of no significance. Bundesgericht, I. Zivilabteilung, T AG vs. H Company (24 March 1997), published in ASA Bulletin (no. 2, 1997), pp. 329-330. Accord, French Cour de de Cassation, Société Procédés de préfabrication pour le béton c/ Libye (28 October 1997), published in Revue de l'arbitrage (no. 2, 1998), pp. 399-407. The French court states: "the seat of arbitration is a purely legal concept, which has important consequences, notably concerning the jurisdiction of national courts regarding appeals for annulment; it [the choice of the seat] depends on the will of the parties; it is not a physical concept [notion materiélle] which depends on the place where the hearings took place or the place where the award was signed, places which can vary according to the fancy or clumsiness of the arbitrators" (author's translation).

Knowledge of the technologies of R. Hill; and Lloyd Conklin "Sound Bites and Documents Bites vs. Electronic Message Bytes", OnTheInternet (January/February 1998), p. 30. See also Richard A. Horning, "The Ethics of Attorney-Client E-Mail Communications: to Encrypt or not to Encrypt, that is the question", BNA's Corporate Counsel Weekly (November 26, 1997), p. 8, who documents the trend of US bar associations towards accepting that E-Mail communications between attorneys and their clients are sufficiently confidential and thus permissible.

In this context, see Albert Gidari, "Privilege and Confidentiality in Cyberspace", The Computer Lawyer (Vol. 12, no. 2, February 1996), p. 1; Victoria A. Cundiff, "Trade Secrets and the Internet: A Practical Perspective", The Computer Lawyer (Vol. 14, no. 8, August 1997), p. 8; and Wright, op. cit., p. 61 ff.

Societé S. contre Societé K., Iere Cour civile, 23 October 1985 (ATF III Ia, p. 336).

Accord, Philippe Fouchard, Emmanuel Gaillard, Berthold Goldman, Traité de l'Arbitrage Commercial International (Litec, 1996), p. 762, no. 1372. Also French Cour d'Appel de Paris: "no particular form is imposed for the deliberations of the arbitral tribunal; in international arbitrations it is difficult to hold multiple meetings of a group of people who live in different countries" (author's translation), IMR c/ Lynx Machinery (22 December 1978), commented in Revue de l'arbitrage (1979), p. 266. This sentence was confirmed by the Cour de Cassation (28 January 1981), commented in Revue de l'arbitrage (1982), p. 425. See also the comments in Revue de l'arbitrage (1998), p. 138.

See Art. 176.1 LDIP. The Concordat will apply to parties in an international situation only if the parties explicitly specify its application (Art. 176.2).

Societé S. contre Societé K., Iere Cour civile, 23 October 1985 (ATF III Ia, p. 336), p. 338. Authors' translation. The Court cites Art. 31.1 of the CIA. The LDIP does not contain a comparable explicit provision, but it would appear implicit that an award made without consultation of all the arbitrators would be invalid, unless there were valid reasons for the non-consultation, such as illness or refusal to participate by one arbitrator.

op. cit., p. 338. Authors' translation. The Court cites Art. 1 of the CIA, which corresponds to Art. 182.1 of the LDIP.

op. cit., p. 338. Authors' translation. The Court cites Art. 24 of the CIA, which corresponds to Art. 182.2 of the LDIP.

op. cit., p. 339. Authors' translation.

op. cit., p. 217.

Art. 189.2 of the LDIP, in conjuction with Art. 14.1 of the Code of Obligations, which defines "signature".