Views
Blockchain Networks and European Private International Law
Written by Anton S. Zimmermann, Institute for Comparative Law, Conflict of Laws and International Business Law (Heidelberg)
Blockchain technology and its offspring have recently attracted considerable attention in both media and scholarship. Its decentralised nature raises several legal questions. Among these are, for example, the challenges that blockchain technology poses to data protection laws and the threats it creates with regard to the effective enforcement of legal claims.
This post sheds light on issues of private international law relating to blockchain networks from a European perspective.
The concept of blockchain technology and its fields of application
Blockchain technology – put simply – involves two fundamental concepts. Firstly, data is written into so-called “blocks”. Each block of data is connected to its respective predecessor using so-called “hashes” that are calculated for each individual block. Consequently, each block does not only include its own hash but also the hash of its predecessor, thereby fixating consecutive blocks to one another. The result is a chain of blocks – hence the name blockchain. Secondly, the entire blockchain is decentrally stored by the networks’ members. Whenever a transaction concerning the blockchain is requested, it isn’t processed by just one member. On the contrary: several members check the transaction and afterwards share their result with the other members in what can best be described as a voting mechanism: From among potentially different results provided by different members, the result considered correct by the majority prevails. This mechanism bears the advantage that any attempt to tamper with data contained in a blockchain is without consequence as long as only the minority of members is affected.
The potential fields of application for blockchain technology are manifold and far from being comprehensively explored. For example, blockchain technology can replace a banking system in the context of cryptocurrencies such as Bitcoin or it can be used to de-personalize monitoring and sanctioning of non-performance within a contractual relation. In short: Blockchain technology is an option whenever data is to be stored unalterably in a certain order without a (potentially costly) centralised monitoring entity.
Applicable rules of private international law
The first issue regarding blockchain technology and private international law concerns the applicable conflict rules. Blockchain technology involves a technical voting mechanism and, hence, requires a certain degree of cooperation between the members of the network. One might, therefore, be tempted to assume that blockchain networks constitute some kind of company. If this were indeed the case, the written conflict rules, especially those of the Rome I Regulation, would not be applicable (cf. Art. 1(1) lit. f) Rome I Regulation) and the unwritten conflict rules relating to international companies would claim application instead. However, this approach presupposes that the factual cooperation within a blockchain network suffices to create a company in the sense of European private international law. This is, however, not the case. The constitution of blockchain networks is only cooperative in a technical way, not in a legal one. The network is not necessarily based on a (written or unwritten) cooperation agreement and, therefore, lacks an essential prequisite of a company. Consequently, the determination of the law applicable to blockchain technology is not necessarily a question of international company law. Parties are, however, not precluded from creating a company statute that reflects the decentral structures of blockchain technology, whereas the mere decision to engage in a blockchain network does not suffice to create such a company.
Thus, the private international law of blockchain technology must also take into account the Rome I Regulation as well as the Rome II Regulation. Unfortunately, blockchain networks per se are not suitable as connecting factors: firstly, a decentralised network naturally escapes the classical European principle of territorial proximity. Secondly, the use of blockchain technology is usually not an end in itself but functionally subordinate to the purpose of another act, e.g. a contract, a company or a tort. This factor should, however, not be seen as a problem, but as a hint at a potential solution: although a superordinate act may render a blockchain network insufficient to determine the substantive law, the superordinate act itself can serve as a connecting factor.
The following two examples illustrate the proposed method of accessory connection and show that the European legal framework relating to private international law is capable to cope with several questions raised by novel phenomena such as blockchain technology. The remaining questions have to be dealt with on the basis of the principle of proximity.
First scenario: blockchain networks within centralised contracts
Blockchain technology often serves to achieve the goal of a centralised act. In this case, legal questions regarding the use, misuse and abuse of blockchain technology, e.g. access rights and permissions to write regarding data contained in a blockchain, should be governed by the substantive law governing the superordinate act.
To give an example: The parties of a supply chain decide to implement a blockchain in order to collectively store data concerning (1) when and in what quantity products arrive at their warehouse and (2) certificates of quality checks performed by them. As a result, production routes and quality control become more transparent and cost-efficient along the supply chain. Blockchain technology can thus be used e.g. to ensure the authenticity of drugs, food safety etc. The legal questions regarding the smart contract should in this scenario be governed by the substantive law governing the respective purchase agreement between the parties in question. The choice of law rules of the Rome I Regulation, hence, also determine the substantive law regarding the question how blockchain technology may or may not be used in the context of the purchase agreement. The application of blockchain technology becomes a part of the respective contract.
If one were to apply the substantive law governing the contract only to the contract itself but not to blockchain technology, one would create unjust distinctions: The applicable law should not depend on whether the parties pay an employee to regularly check on their warehouse and issue certificates in print, or whether they employ blockchain technology, achieving the same result.
Second scenario: blockchain networks within decentralised companies
The scenario described above shows that the decentralised nature of blockchain networks does not necessarily require special connecting criteria. This is a consequence of the networks’ primarily serving function to the respective superordinate entity.
Difficulties arise when parties agree on a company statute whose content reflects the decentralisation of blockchain technology. In this scenario, there is a decentral company that utilises only decentral technology as its foundation. A much-discussed case of this kind was “The DAO”, a former company based on blockchain technology. The DAO’s establishment was financed by investors providing financial resources in exchange for so-called tokens. These tokens can be described as the digital counterpart of shares and hence as an expression of the respective investor’s voting rights. Within the resulting investment community, voting rights were exercised in order to decide on investment proposals. The results of the votes were implemented automatically. The company thus consisted only of the investors and information technology but had no management body, no administrative apparatus, and no statutory seat.
Hence, the DAO did not only lack a territorial connection on the level of information technology, but also on the level of the companies’ legal constitution: it neither had an administrative seat nor a statutory seat. The connecting factors usually applied to determine the law applicable to companies were, therefore, ineffective. Because the DAO was a company, it was also exempt from the scope of the Rome I Regulation (cf. Art. 1 (2) lit. f. Rome I Regulation).
This vacuum of traditional conflict rules necessitates the development of new ones. There is no other valid connecting factor that could result in a uniform lex societatis: Especially the habitual residence or nationality of the majority of members is arbitrary as the company is built on a concept of decentralism and territorial detachment. Moreover, possible membership changes would lead to an intertemporally fluctuating statute whose current status could hardly be determined. The lack of a uniform connecting factor raises the question whether or not the ideal of a uniform lex societatiscan be upheld. The fact that members of the DAO do not provide a feasible uniform connecting factor suggests a fragmentation of the applicable law (dépeçage).
Assuming that there is no uniform lex societatis for the DAO and that the applicable substantive law has to be fragmented, acts by the company become conceivable connecting factors. One might, for example, assume that preliminary questions concerning the company, i.e. its legal capacity, are subject to the substantive law that would govern the act in question. If the DAO enters into a contract that – given its validity – is governed by German substantive law according to Art. 4 of the Rome I-Regulation, German law should also determine the legal capacity of the DAO with respect to this particular contract. One might object that the Rome I-Regulation exempts both companies and legal capacity from its scope of application. This, however, only means that the Regulation is not binding within those fields. As the conflict rules of International company law do not lead to conceivable results, the principle of proximity has to be the guiding factor in the search for a new unwritten conflict rule. As the closest territorial connections of decentral organisations are their respective acts, e.g. contracts, the principle of proximity suggests that the respective act is what determines the closest connection of the company. The resulting conflict rule states an accessory subjection of the lex societatis to the law governing the company’s respective acts. While the proposed solution does indeed lead to an indirect application of the Rome I Regulation, it nonetheless constitutes a self-reliant, unwritten conflict rule which is consequently not precluded by the catalogue of exemptions contained in the Rome I Regulation.
This fragmentation of applicable laws turns a membership in the DAO into a risky und legally uncertain endeavour, as – neglecting the tremendous practical and legal problems of the enforcement of claims – different legal orders impose different requirements for legal capacity, limitation of liability and other privileges.
Concluding thoughts
Blockchain technology is a novel phenomenon, but it does – in most cases – not necessitate new connecting factors or conflict rules. If, however, the legal entity in question mirrors the decentralised structure of a blockchain network, the legal assessment becomes more complicated.
In those cases, the usually uniformlex societatishas to be fragmented which leads to a high chance of personal liability of the members. Whether or not one accepts this fragmentation largely depends on the definition of the hierarchy of technical-economic progress and the lex lata. In my opinion, technical developments may and should act as an impetus to legislatorsfor legislative amendments but should not prevail over the existing rules of law. Those who desire legal advantages – such as a limitation of liability or even a uniform statute – must in exchange fulfil and adhere to the laws’ requirements.
This post is based on A. Zimmermann, Blockchain-Netzwerke und Internationales Privatrecht – oder: der Sitz dezentraler Rechtsverhältnisse, published in IPRax 2018, 568 ff. containing references to further literature.
Private International Law, Labour conditions of Hungarian truck drivers, and beyond
Written by Veerle Van Den Eeckhout
On 23 November 2018 the Dutch Supreme Court referred a question for preliminary ruling to the CJEU in a case with regard to labour conditions of Hungarian truck drivers, particularly with regard to the Posting of Workers Directive, 96/71/EC (see here for the Dutch version, see here for the decision of the same day).
The preliminary question will certainly attract the attention of many who have a particular interest in the specific theme of labour conditions of mobile East European workers – a theme in which rules of Private International Law matter.
“The Nature and Enforcement of Choice of Law Agreements” (2018) 14 Journal of Private International Law 500-531
This blog post presents a condensed version of Dr Mukarrum Ahmed’s (Lancaster University) article in the December 2018 issue of the Journal of Private International Law. The blog post includes specific references to the actual journal article to enable the reader to branch off into the detailed discussion. The journal article is a companion publication to the author’s recent book titled The Nature and Enforcement of Choice of Court Agreements: A Comparative Study (Oxford, Hart Publishing 2017).
The article examines the fundamental juridical nature, classification and enforcement of choice of law agreements in international commercial contracts. At the outset, it is observed that choice of law considerations are relegated to a secondary position in international civil and commercial litigation before the English courts as compared to international jurisdictional and procedural issues. (See pages 501-503 of the article) Significantly, the inherent dialectic between the substantive law paradigm and the internationalist paradigm of party autonomy is harnessed to provide us with the necessary analytical framework to examine the various conceptions of such agreements and aid us in determining the most appropriate classification of a choice of law agreement. (See pages 504-508 of the article and Ralf Michaels, ‘Party Autonomy in Private International Law – A New Paradigm without a Solid Foundation?’ (2013) 15 Japanese Yearbook of Private International Law 282) In binary terms, we are offered a choice between choice of law agreements as mere “factual” agreements on the one hand or as promises on the other. However, a more integrated and sophisticated understanding of the emerging transnationalist paradigm of party autonomy will guide us towards a conception of choice of law agreements as contracts, albeit contracts that do not give rise to promises inter partes. This coherent understanding of both the law of contract and choice of law has significant ramifications for the enforcement of choice of law agreements. It is argued that the agreement of the parties on choice of law will be successful in contracting out of the default choice of law norms of the forum and selecting the applicable law but cannot be enforced by an action for “breach” of contract.
It is argued that the emerging transnationalist paradigm of party autonomy supports a conception of choice of law agreements which borrows from both the internationalist and substantive law paradigms of party autonomy but cannot be comprehensively justified by either. This assimilated and coherent understanding of choice of law and the law of contract has led to the conclusion that the choice of law clause is a procedural contract but a contract nonetheless. (See Jürgen Basedow, The Law of Open Societies: Private Ordering and Public Regulation in the Conflict of Laws (Brill Nijhoff 2015) 145 and Maria Hook, The Choice of Law Contract (Oxford, Hart Publishing 2016) Chapter 2)
Professor Briggs’ promissory analysis of choice of law agreements is a seminal contribution to legal scholarship. (See Adrian Briggs, Agreements on Jurisdiction and Choice of Law (OUP 2008) Chapter 11) However, it is unlikely that the parallel existence of choice of law agreements as privately enforceable agreements will attract the attention of the CJEU and the EU legislature. The common law judicial authority coupled with the preponderance of opposing academic opinion has meant that the conventional “declaratory” classification of choice of law agreements has prevailed over the “promissory” approach. (See pages 508-517 of the article; Ace Insurance v Moose Enterprise Pty Ltd [2009] NSWSC 724 (Brereton J); Navig8 Pte Ltd v Al-Riyadh Co for Vegetable Oil Industry (The Lucky Lady) [2013] EWHC 328 (Comm), [2013] 2 Lloyd’s Rep 104, [2013] 2 CLC 461 (Andrew Smith J)) In assessing the relevance and significance of attributing an obligation to adhere to the chosen law in a choice of law agreement, the internationalist paradigm’s understanding of the fundamental nature of private international law rules and their inherent function has helped develop the counterargument.
If the choice of law regime of the forum is conceptualised as a set of secondary rules for the allocation of regulatory authority, the descriptive, normative and interpretive narrative of the promissory perspective loses its perceived dominance and coherence as it fails to yield a complete and satisfactory justification for what we really understand by those rules. In the mantle of secondary power conferring rules as opposed to primary conduct regulating rules, choice of law rules perform a very significant public function of allocating regulatory authority. From this perspective, it is misplaced and misconceived to interpret choice of law clauses as promissory in essence. The promissory justification does not adequately account for the authorisation of party autonomy by the choice of law rules of the forum, the supervening application of the laws of the forum and other states and ultimate forum control. (See pages 517-524 of the article) Moreover, the pragmatic attractiveness of anti-suit injunctions and claims for damages for breach of choice of law agreements may be unsound in principle from the standpoint of a truly multilateral conception of private international law based on mutual trust or a strong notion of comity. An international private international law will always seek to promote civil judicial cooperation between legal systems rather than encourage the clash of sovereign legal orders by interfering with the jurisdiction, judgments and choice of law apparatus of foreign courts. (See pages 524-529 of the article)
To reiterate, the more reconciled transnationalist paradigm of party autonomy strikes a balance between the competing demands of the internationalist and the substantive law paradigms. It is argued that a conception of a choice of law agreement as a contract, albeit one that does not give rise to any promises inter partes provides an appropriate solution.
On the one hand, the choice of law agreement is a legally binding contract as opposed to a mere “factual” agreement. On the other hand, the function of this agreement is not to regulate private law rights and obligations inter partes: it is to contract out of the forum’s default choice of law norms and to select the applicable law. Such a contract will not contradict the intrinsic logic of choice of law rules because the international allocative function remains paramount and is not compromised in any way by promises inter partes. The fact that the choice of law agreement is a contract which only gives rise to procedural consequences does not mean that it is not a contract per se. (See pages 530-531 of the article)
News
Concluding ELI Webinar on the “Application of the EU Succession Regulation in the Member States”
On 15 May 2023, the comparative findings of the ELI Webinar Series on the EU Succession Regulation (previously reported here) will be presented in a concluding webinar. The organizers kindly invite anyone interested into the actual practice regarding cross border succession cases to register for this final event within the series:
“Join us for the concluding webinar on the ‘Application of the EU Succession Regulation in the Member States’!
The webinar organized within the Special Interest Group on Family and Succession Law of the European Law Institute will take place on Monday, May 15th, 3-5 pm CET and shall present important results gathered during the five webinars on the application of the EU Succession Regulation in the Member States organized in 2022.
Attendance is free of charge. A ZOOM link will be sent to those who register by sending an e-mail to zivilrecht@uni-graz.at”
First Issue for Journal of Private International Law for 2023
The first issue for the Journal of Private International Law for 2023 was just published today. It contains the following articles:
D McClean, “The transfer of proceedings in international family cases”
There is general agreement that jurisdiction over issues concerning children or vulnerable adults should lie with the court of their habitual residence. There are particular circumstances in which that is not wholly satisfactory and four international instruments have provided, using rather different language, the possibility of jurisdiction being transferred to a court better placed to decide the case. They include Brussels IIb applying in EU Member States since August 2022 and the Hague Child Protection Convention of growing importance in the UK. This paper examines that transfer possibility with a detailed comparison of the relevant instruments.
M Lehmann, “Incremental international law-making: The Hague Jurisdiction Project in context”
The Hague Conference on Private International Law is currently working towards a new instrument on jurisdiction and parallel proceedings. But critics ask if we need another instrument, in addition to the Hague Choice of Court Convention of 2005 and the Hague Judgments Convention of 2019. This article gives reasoned arguments for a “yes” and explores possibilities for the substantive content of the new instrument. It does so by looking back and contextualising the new instrument with regard to the two preceding Conventions, and by looking forward to what is still to come, ie the interpretation and application of all three instruments. On this basis, it argues that a holistic approach is required to avoid the risk of a piecemeal result. Only such a holistic approach will avoid contradictions between the three instruments and allow for their coherent interpretation. If this advice is heeded, incremental law-making may well become a success and perhaps even a model for future negotiations.
B Köhler, “Blaming the middleman? Refusal of relief for mediator misconduct under the Singapore Convention”
The discussion surrounding the Singapore Convention on Mediation 2018 has gathered steam. In particular, the refusal of enforcement based on mediator misconduct as prescribed in Article 5(1)(e) and (f) has been the focus of debate and is widely perceived to be the Convention’s Achilles heel. These two provisions, already highly controversial in the drafting process, have been criticised as ill-suited to a voluntary process and likely to provoke ancillary dispute. This article defends these grounds for refusal, arguing that they play an indispensable role in guaranteeing the legitimacy of mediated settlements enforced under the Convention. It addresses some of the interpretative challenges within Article 5(1)(e) and (f) before discussing the tension between the provisions on mediator misconduct and the confidentiality of the mediation. The article then offers some guidance on how parties may limit the effects of the provisions, concluding with a brief outlook for the future.
A Yekini, “The effectiveness of foreign jurisdiction clauses in Nigeria: an empirical inquiry”
Business entities do not often include terms in commercial agreements unless those terms are relevant and are designed to maximise the gains of the parties to the agreement. To realise their reasonable and legitimate expectations, they expect that contractual terms and promises would be respected by the parties and courts. There is a growing body of literature suggesting that Nigerian courts are not giving maximum effects to foreign jurisdiction clauses (FJC). What is largely missing from the scholarly contributions is that no one has worked out a principled solution to overcome this conundrum. This article significantly contributes to the existing literature through an empirical analysis of Nigerian appellate court decisions on FJCs with a view to gaining deeper insights into the attitude of Nigerian courts to FJCs. Compared to the US where the national average of enforcement is 74%, a 40% rate for Nigeria does not project Nigeria as a pro-business forum. This outlook can potentially disincentivise cross-border trade and commerce between Nigeria and the rest of the world. To address this problem, the paper proceeds by presenting a normative framework, built principally on economic and contract theories, for enforcing FJCs. As most of the cases are B2B transactions, the paper invites the courts to treat FJCs and arbitration clauses equally and to replace forum non conveniens considerations with a more principled approach which limits non-enforcement to overriding policy, and a strong cause that is defined by reasonableness and foreseeability.
MM Kabry & A Ansari, “The enforcement of jurisdiction agreements in Iran”
Parties to a contract may designate the court or courts of a particular country to decide their disputes which have arisen or may arise from a particular legal relationship. Many countries give party autonomy its binding effect in selecting the competent court and enforcing jurisdiction agreements. There is complete silence in Iranian law regarding the enforcement of jurisdiction agreements. The current study examines the enforcement of jurisdiction agreements under Iranian law. This study investigates whether parties in international disputes can agree to confer jurisdiction to Iranian non-competent courts and whether they can agree to exclude the jurisdiction of competent Iranian courts in favour of foreign courts. The study contends that parties can agree to grant jurisdiction to Iran’s non-competent courts unless the excluded foreign court has exclusive jurisdiction to hear the dispute. On the other hand, parties may agree to exclude the jurisdiction of the competent Iranian courts in favour of foreign courts unless the Iranian courts assert exclusive jurisdiction over the dispute.
The article examines the question of admissibility of recognition of foreign judgments on commencement of bankruptcy proceedings on the basis of international treaties on legal assistance. It examines the background of these international treaties, as well as the practice of their application in respect of this category of foreign judgments. The authors conclude that foreign court decisions on opening of insolvency (bankruptcy) proceedings should be regarded as “judgments in civil matters” for the purpose of the international treaties on legal assistance. This category of foreign judgments should be recognised on the basis of international treaties in the Russian Federation, despite the existing approach of Russian courts (including the Judgment of the Arbitrazh (Commercial) Court of the Ural District of 09.10.2019 in case No. A60-29115/2019).
AMEDIP’s upcoming webinar: The Construction of Private International Law – 27 April 2023 (at 14:30 Mexico City time) (in Spanish)
The Mexican Academy of Private International and Comparative Law (AMEDIP) is holding a webinar on Thursday 27 April 2023 at 14:30 (Mexico City time – CST), 22:30 (CEST time). The topic of the webinar is the Construction of Private International Law and will be presented by Prof. Jorge Alberto Silva (in Spanish).
The details of the webinar are:
Link: https://us02web.zoom.us/j/85789687012?pwd=aXlKWFpzb2Qyb2VoNklwMWxyQ082UT09
Meeting ID: 857 8968 7012
Password: AMEDIP
Participation is free of charge.
This event will also be streamed live: https://www.facebook.com/AmedipMX