Article - The Legal Challenges Facing Online Dispute Resolution: An Overview (August 2006)
- Definitions of ODR Terminology
- Legal Challenges in ODR
The global reach of cyberspace has engendered visions of a borderless marketplace emerging in which vast geographical distances will no longer prove to be a factor deterring parties from engaging in commerce.
In order to facilitate the complete realisation of such visions, however, Internet users must possess an ample degree of confidence that an effective avenue of redress exists should a dispute arise during the course of an electronic transaction. However, resorting to traditional courts to seek redress for online disputes is not a feasible option in most cases. This is because no international court exists which has jurisdiction over such disputes, and the use of territorially based courts subjects parties to high levels of uncertainty due to inconsistencies in legal principle amongst different jurisdictions. Moreover, the expense of initiating court action for online disputes is typically disproportionate to what are often low-value transactions.
It is in this context that the topic of online dispute resolution (ODR) becomes critically important. Parties involved in an online transaction can elect to place a term in the contract governing their relationship that binds them to submit any disagreement that may arise to an ODR service. In theory, this means the use of ODR enables parties to circumvent the jurisdictional difficulties that territorially based courts encounter when dealing with disputes arising from cross-border electronic transactions.
However, there are significant legal challenges that must be addressed before ODR can truly be hailed as the panacea enabling participation in e-commerce to flourish. This paper provides an overview of those challenges.
2. Definitions of ODR Terminology
ODR involves the use of information technology to facilitate the application of traditional alternative dispute resolution mechanisms in cyberspace. Common types of ODR include:
- Online Negotiation
Disputants are provided with a neutral forum in which they can discuss the issues underpinning their dispute and devise a mutually satisfactory resolution. Online negotiation does not normally require the involvement of a third party such as a mediator.
- Online Mediation and Arbitration
In mediation, disputants use online technologies to communicate with each other and a third party (the mediator) regarding the dispute. The mediator assists the parties to craft a mutually acceptable resolution. Online arbitration, like mediation, involves a third party (the arbitrator) in the ODR process. However, the arbitrator’s role is to consider the merits of the respective arguments of both parties and then issue a binding decision.
- Online Case Appraisal
A third party appointed by the ODR service provides a non-binding opinion as to the merits of each disputant’s case and the manner in which the dispute should be resolved.
- Automated Negotiation (or ‘blind bidding’)
This form of ODR is best suited to situations where the liability of a party is not in dispute, but the parties cannot agree on the amount of compensation payable (such as in cases involving insurance claims). The entire dispute resolution process is driven by software without the need for human intervention. Disputants submit monetary bids for a specified number of rounds. The bids represent the amount one party is demanding and the other is offering in order to resolve the dispute. If at any stage the amount of the offer exceeds the demand, the dispute is considered resolved. Alternatively, if the submitted amounts representing the offer and demand for a particular round are within sufficient proximity of each other, the dispute is settled for an amount representing the average of the two bids submitted.
3. Legal Challenges in ODR
3.1. Intellectual Property Laws and ODR
Organisations offering ODR services may invest significant amounts of time and money in order to develop new processes for resolving disputes online. It is therefore possible that an organisation might apply for a patent to protect a new ODR process they have created from being flagrantly adopted by other organisations. However, the grant of a patent to a particular organisation in such circumstances may stifle the ability of ODR to become a more widespread method of resolving disputes arising from e-commerce transactions. Thus, whenever a new paradigm for resolving disputes online is created, the expediency of applying intellectual property laws to protect that paradigm needs to be carefully weighed against the possibility that any new process for resolving disputes may be able to increase the global popularity of ODR.
3.2. Security in ODR
Parties to a dispute typically exchange large quantities of information during the course of the dispute resolution process. In the case of offline dispute resolution it is a relatively simple matter to keep the contents of proceedings confidential.
Conversely, many of the protocols which are utilised to communicate on the Internet have not been inherently designed with issues of security in mind. Yet, the need to ensure proceedings are kept confidential is critical to developing public confidence in ODR as a legitimate method of resolving disputes arising from e-commerce transactions. For this reason, it is imperative that ODR service providers implement appropriate security measures.
Broadly speaking, security in the context of ODR can be said to comprise the following elements:
- Parties to an online dispute need to be sure that communications made during the ODR process remain confidential and cannot be accessed by third parties without authorisation. This can be achieved by providing ODR participants with authentication credentials and encrypting data through the use of public key cryptography.
- The integrity of transmitted data needs to be guaranteed. The use of encryption techniques goes some way toward achieving this; the use of digital signatures by parties to an online dispute can further assist in verifying the integrity of communications. Digital signatures also help each disputant to verify the identity of the other party to the dispute.
- ODR service providers need to be conscious of the possibility that one of the disputants may attempt to compromise the integrity of ODR proceedings by distributing confidential information to third parties. One solution to this problem is the use of ‘split-key’ encryption, in which data exchanged during proceedings is encrypted using a key, with each party to the dispute retaining a portion of the code that comprises the key. Decryption can then only occur with the consent of both disputants.
Overall, there is an adequate range of security measures available to fortify the confidentiality of ODR proceedings. The vast speed at which technology evolves, however, means ODR service providers need to continually evaluate whether the security measures they have implemented are sufficient to ensure that the privacy of proceedings is maintained.
3.3. The Limits of Confidentiality in ODR
It is necessary to consider whether the confidentiality of ODR proceedings should also extend to prevent publication of resolutions reached upon the conclusion of those proceedings.
In this context it is submitted that ODR (unlike forms of offline dispute resolution) does not constitute an alternative method of resolving disputes arising between parties. As explained earlier, the jurisdictional difficulties associated with pursuing action via traditional court systems for disputes arising online means that ODR is likely to assume a role as the predominant method of resolving such disputes. Arguably, then, the publication of resolutions reached through the use of ODR is required in order to instigate a degree of legal certainty in cyberspace that traditional courts are incapable of creating. Specifically, the publication of resolutions to online disputes has the potential to allow a body of principles to develop that will assist Internet users in gaining a clear understanding of their rights and obligations when engaging in e-commerce. The creation of more legal certainty in cyberspace through the publication of resolutions would, theoretically, encourage more people to engage in e-commerce. However, the necessity to publish decisions in order to establish some semblance of legal certainty must be juxtaposed with the need to develop Internet users’ confidence in ODR. It is feasible to suggest that if an ODR service provider publishes resolutions reached through the use of its service, then this deprives ODR participants of a feature that has made offline dispute resolution increasingly popular: secrecy and confidentiality.
One possible solution to this conundrum would involve a short-term policy in which resolutions reached through the use of ODR are kept confidential, with only aggregate statistical data relating to proceedings being published. As ODR becomes an increasingly popular method of resolving disputes arising from e-commerce transactions, service providers could then begin to shift toward an increased level of transparency by publishing important decisions. Another option would involve ODR providers publishing details of key decisions, but removing any personal information that would enable the identification of either of the parties to the dispute.
3.4. Global Enforceability and ODR
The issue of enforceability in the context of ODR encompasses two elements:
- Enforceability of agreements to submit to ODR
Parties involved in an electronic transaction that has given rise to a dispute need to be sure that any contractual agreement they may have entered into to submit the dispute to ODR can be enforced.
- Enforceability of resolutions obtained through the use of ODR
In some situations, parties A and B will enter into a contractual arrangement binding them to comply with a resolution reached through the use of an ODR service. The ability of both parties to ensure that the other will comply with the resolution is imperative to the effectiveness of ODR.
With respect to forms of ODR other than online arbitration, there are no international instruments currently in operation that oblige courts to ensure a party complies with any resolution that purports to be binding or any agreement to submit a dispute to an ODR service. This means that different legal jurisdictions are free to adopt divergent methods of construing binding resolutions and agreements to submit disputes to ODR. This has two major consequences:
- Parties engaged in international disputes will have to endure the significant expense and inconveniences associated with initiating court action in multiple jurisdictions to compel compliance with a resolution obtained from or an agreement to submit to ODR.
- Parties are subjected to a high degree of uncertainty as to the result of any litigation they may initiate to enforce compliance. This is due to the inconsistency of laws amongst different jurisdictions regarding the enforceability of resolutions obtained from and agreements to submit disputes to ODR.
Arbitration is the one form of dispute resolution that is usually not subject to the latter consequence. This is because of the existence of a comprehensive system of bilateral and multilateral conventions, treaties, national laws and arbitration rules which ensures arbitral awards and agreements to arbitrate will be deemed enforceable by courts in most of the major trading nations of the world.
A principal instrument in this regard is the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (hereafter referred to as the ‘New York Convention’). More than 130 countries have signed the convention, which (in most circumstances) obliges courts in these jurisdictions to enforce arbitral awards and agreements to arbitrate.
However, one issue is whether agreements to submit to online arbitration and arbitral awards delivered by an ODR service attract the operation of the New York Convention, given that it was created prior to the phenomenon of dispute resolution taking place in an online context. Article 2(1) of the Convention, for example, requires that any agreement to submit to arbitration be ‘in writing’. An agreement in writing includes an arbitral clause in a contract or an agreement contained in an exchange of letters or telegrams. There has in the past been some doubt expressed as to whether agreements to submit to online arbitration entered into through the use of web-based communication can be said to be ‘in writing’.
The majority of modern academic thought does however suggest that these agreements, by analogy, fall within the province of the phrase ‘an exchange of telegrams’ and so attract the operation of the convention. Further support for this proposition is gleaned when one considers the recent adoption of the United Nations Convention on the Use of Electronic Communications in International Contracts. Article 9(2) of that convention states that where a law requires that a contract (such as an agreement to submit to online arbitration) be in writing, the requirement is satisfied by an electronic communication. It is therefore probable that parties entering into an electronic agreement to arbitrate online will still satisfy the writing requirement of the New York Convention. Clearly this is important because the convention provides increased certainty to parties regarding the enforceability of agreements to engage in online arbitration and arbitral awards obtained from an ODR service.
However, there will inevitably be some inconvenience associated with initiating court action in order to enforce the provisions of the convention if a party to an online dispute refuses to comply with an arbitral award or an agreement to submit to online arbitration. The following solutions have been proposed in response to this dilemma:
- The creation of ‘cybercourts’ that would enable a party to obtain (at a significantly reduced cost) a court order online to enforce a binding resolution obtained from an ODR service or a contractual agreement to submit a dispute to ODR.
- The use of trustmark schemes. This is a particularly effective measure in cases where the non-compliant party is an online merchant. In such schemes, the merchant pays a membership fee to a certain ODR service and undertakes to participate in their dispute resolution process should any dispute arise with a consumer. In return, the ODR service licenses the merchant to display its trustmark logo on the merchant’s website. If a merchant then refuses to submit a dispute to the ODR service, or refuses to comply with a particular resolution, they risk losing the licence to display the trustmark logo. This could jeopardise the merchant’s ability to attract potential customers.
These solutions have the potential to reduce the likelihood of non-compliance with resolutions obtained from ODR and breaches of agreements to submit a dispute to ODR, without duplicating the burden involved in initiating traditional court action. Their implementation would make ODR a more attractive proposition for resolving disputes arising from electronic commerce transactions.
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