‘Add to Cart’: The Role of Alternative Dispute Resolution in Online Commerce

Posted on May 31st, 2019

By Noella Lubano | Jill Barasa | Eva Mukami

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Simply put, e-commerce refers to the sale or purchase of goods and services conducted over computer networks by methods specifically designed for the purposes of receiving and placing orders. The spectrum of goods and services sold online is wide, encompassing goods and services delivered physically, as well as intangible digital goods such as music, films, books, software and services such as online banking.

The United Nations Conference in Trade and Development (UNCTAD) reported that as of 2017, e-commerce accounted for six percent (6%) of all purchases made in Kenya. A natural consequence of electronic trading is implications under intellectual property laws or tort such as negligence and defamation. Electronic trading may also raise issues on privacy and data protection. Majority of online transactions were in the form of business-to-consumer or consumer-to-consumer transactions as opposed to business-to-business transactions, raising the question on the need for an effective dispute resolution mechanism. Albeit a relatively emerging area, online dispute resolution (ODR) may be one of the suitable dispute resolution mechanisms for online transactions.

Several definitions have been formulated to describe ODR, for example, the American Bar Association defines ODR as follows:
ODR uses alternative dispute resolution process to resolve a claim or dispute. ODR can be used for disputes arising from online, e-commerce transactions, or disputes arsing from an issue not involving the internet called an “offline” dispute. It is an alternative to the traditional legal process which usually involves a court judge and possibly a jury.

Authors Kah-Wei Chong and Len Kardon in the publication E-Commerce: An Introduction describe ODR in the following manner:- “ODR uses the internet as a more efficient medium for parties to resolve their disputes through a variety of methods similar to traditional ADR. It brings parties online to participate in a dialogue about resolving their disputes.

It is clear that the term ODR is used to describe the process by which a dispute is resolved on an online platform such as the internet by means of arbitration, mediation or negotiation, all of which are alternatives to litigation or court processes.

Some of the means employed in ODR include, video conferencing, emailing, fax, virtual meetings in chat rooms, teleconferences etc. Parties may upload their written claim, evidential documents and written submissions, respond to questions from the arbitrator on email and receive the arbitrator’s decision on email.
With traditional arbitration increasingly incorporating modern technology into its proceedings, the distinction between online arbitration and traditional arbitration is becoming less clear. It is therefore imperative that legal practitioners and jurists continuously keep themselves abreast and familiarise themselves with technological developments to avoid falling on the wayside.

Why does ODR Matter?
In The World is Flat by Thomas L Friedman, the author argues that the advancement of the internet and computers has equalised the playing field in commerce. This is because a vendor located in different part of the world can sell his products to a consumer located in another part of the world without the two (2) ever physically meeting.

Indeed, it is impossible to deny the rapid rise in the number of commercial transactions that happen on an online platform. This has been further enhanced by the rise in use of the mobile phones that have internet connectivity capabilities. It is now no longer necessary to physically walk into a shop or meet a vendor before one can purchase an item. Many of the day-to-day commercial functions that we undertake are now a “click” or a “swipe” away. Only recently, it was announced that Tesla, the largest electric car dealer in the world had taken the decision to close most of its stores and shift to online–only sales.

It is inevitable that the increase in online commercial transactions would result in an increase in disputes on the same, thereby informing the need for a quick, efficient and cost effective dispute resolution mechanism that is suited for online transactions.

Most online purchases involve parties located in different parts of the world and are unlikely to involve large or significant sums of money. As a result, the traditional means of dispute resolution which primarily involve courtroom litigation may in the case of an online purchase dispute be inconvenient, impractical, time consuming and prohibitive.

Of concern therefore, is whether consumers of online purchases are sufficiently protected from injury and have an efficient, effective and cost efficient means of seeking redress for such injury.

Related to this issue is whether there is a need for the formulation of a legal framework for ODR. As things stand, there is no law in Kenya that governs or addresses ODR nor is there any indication of an intention by Parliament to pass laws to regulate ODR.

This second question must be considered against the divergent regulatory approaches of the United Kingdom and the United States with the former preferring to pro-actively regulate ODRs while the latter prefers a self regulatory approach which leaves the task of regulation to private actors involved or participating in ODR.

These issues are all part of and should be looked at as part of a broader discussion on the Constitutional right to access to justice and consumer protection guaranteed under Articles 48 and 46 respectively of the Constitution of Kenya.

How Does ODR Work in Practice?
The Virtual Magistrate Project (the VMAG) launched in the US in 1996 was one of the first ODR initiatives. The VMAG served as an arbitrator for online disputes submitted to it and all proceedings would be done by email and decisions transmitted within days.

However, this initiative collapsed because several complaints were not within its jurisdiction, a lack of awareness of the service, failure by parties to participate and the inability of the VMAG to enforce its decisions.

Another significant ODR initiative is the Internet Corporation for Assigned Names and Numbers (ICANN) which resolves disputes regarding domain names. As commercialisation of the internet grew, domain name registry services identified potential issues surrounding the jurisdictional nature of trademarks and their involvement in potential litigation.

At the time of registering a domain name, parties agree to be bound by the ICANN dispute resolution mechanism. What makes ICANN effective is once an arbitrator decides that a domain name should be transferred or cancelled, the decision is binding on the domain name provider who will effect the change as determined by the arbitrator. The decision is however not binding on the parties and may be referred to court. Also, the domain name is instantly suspended on the submission of a complaint. The entire process is concluded using online procedures within about two (2) months. So far ICANN has resolved over five thousand (5,000) domain name disputes.

Other ODRs are Square Trade which has partnered with among the largest online businesses such as eBay, and PayPal among others and has resolved over two hundred thousand (200,000) disputes to date. Also worth mentioning is CyberSettle which was established in 1998 uses a three-round blind bidding system to settle monetary disputes particularly insurance related and workers compensation disputes. CyberSettle is a software technology that automatically compares the ranked bids to determine if the parties have arrived at a settlement. So far it has assisted in settling claims worth approximately USD 500,000 (KES 50 Million).

Advantages of ODR
The following are some of the advantages of ODR that make a compelling case for its adoption as a formally recognised dispute resolution mechanism in Kenya:

  • It is cost effective as it eliminates the necessity of expenses associated with printing paper, travel, accommodation, hiring meeting rooms among others
  • It is less time consuming as most claims are completed online
  • It is less confrontational because of the removal of the physical presence of an opponent also, given that everything is done on
    email, it allows parties to reflect on their positions before articulating them without time pressure
  • The internet provides a “neutral” forum for resolution of the dispute and denies either part a “home court advantage”
  • It facilitates record keeping as the entire dispute resolution process is committed to writing which is transmitted electronically

Disadvantages of ODR

  • The impersonal nature of ODR means that the subtleties of non-verbal communication are lost and the lack of face-to-face
    interactions deprives mediators and arbitrators an opportunity to evaluate the credibility of parties and witnesses
  • Inadequate security and confidentiality as the internet is susceptible to hacking thereby compromising the security of confidential documents
  • Inability of a party to verify or confirm the authenticity of the communications received and whether they originate from the
    other party and not a third party that has impersonated any of the parties to the dispute
  • Online arbitration agreements may face validity problems on account or their failure to meet the “writing” requirement under
    various domestic laws which may give rise to problems in the enforcement of an award arising from an online arbitration
    agreement
  • ODR also presumes that parties and their counsels have unlimited access to the internet, email and other technologies involved in ODR and may also fail to appreciate that parties may not be sophisticated enough to effectively use the ODR technologies
  • ODR is only suited for a very limited class of disputes such as e-commerce disputes and domain disputes, in most cases, the size of a claim arising from an online transaction will not correspond with the cost of possible litigation proceedings

Way Forward for ODR in Kenya
It has been said that when law and technology converge, change is inevitable. It is therefore doubtful that Kenya will have a choice in the matter other than to adapt to the changing faces of dispute resolution. Rather than wait for private actors to shape and develop ODR, there may be merit in a pro-active approach that is continuously and actively working to formulate regulatory legislation which has the objective of protecting online consumers and promoting their right to access to justice which are both Constitutional guarantees.

Kenya will need to develop a regulatory framework for ODR before this initiative is overtaken by more complex online dispute resolution initiatives such as smart contracts and block chain arbitrations among others.

Worth Your While?: Cost Effectiveness of International Arbitration

Posted on December 12th, 2018

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Arbitration as a preferred method of dispute resolution has gained popularity in the recent past because it is considered to be flexible, allows for party autonomy and confidentiality, and more importantly, saves time and money in comparison to litigation. There is however, increased concern and discussion around the costs of international commercial arbitrations and the length of time within which disputes are resolved.

It has been particularly noted that arbitral proceedings are increasingly exhibiting the negative aspects associated with litigation such as high costs, delay and inefficiency. The question of cost effectiveness and efficiency in international commercial arbitration is one that cannot be over emphasised.

Parkinson’s law states that work expands to fill the time available for its completion. This adage is especially true where the person executing the task is remunerated on an hourly basis as is customary in most if not all international arbitrations. In the context of an international arbitration, this means that the lengthier the proceedings, the higher the costs.

Fortunately, arbitration as a dispute resolution mechanism is designed to allow parties to control the costs and the procedure or process within which this can be done. Party autonomy in arbitration means that parties are the masters of the arbitration process and they can determine and agree on virtually all the steps taken from the commencement to the conclusion of the arbitral proceedings. If utilised effectively, party autonomy can be a powerful tool for controlling the costs and avoiding delays in arbitral proceedings.

In this article, we discuss various factors that parties to arbitral proceedings must consider if they wish to have the dispute resolved in a cost effective, expeditious and efficient way.

The general costs associated with international arbitration mainly include the arbitrators’ fees and expenses, legal or other costs of the parties such as witness expenses, investigation fees, expert witnesses and the fees and expenses of the arbitral institution concerned. Interestingly an analysis of the breakdown of general arbitration costs done by Louis Flannery of Stephenson Harwood reveals that administrative costs (fees of the administering institution) amount to two percent (2%) of the total cost, the arbitrator’s fees and expenses amount to sixteen percent (16%) of the total cost, while legal counsels’ costs for legal representation amount to eighty-two percent (82%) of the total cost.

What this data shows is that greater focus should be on bringing down the costs for legal representation. In this article, we identify various stages of an arbitration at which costs may be controlled.

a) Administering Bodies and Institutional Rules

From the outset, the parties should decide between an institutional (or administered) arbitration versus an ad hoc (non-administered) arbitration. There are numerous institutions that provide assistance in running the arbitration in exchange for a fee. These institutions assist in the administrative aspects of the arbitration such as organising hearings, handling communication between the parties and the arbitrators, and handling payments. However, they do not decide on the merits of the dispute - this is left entirely to the arbitral tribunal. An ad hoc arbitration on the other hand, places the burden of running the proceedings on the parties and the arbitrators. However, parties may choose a set of arbitration rules designed to aid in ad hoc arbitrations such as those developed by the United Nations Commission on International Trade Law (UNCITRAL).

An institutional arbitration may particularly be beneficial to parties without arbitration experience as it will provide guidance and avoid time consuming discussions between the parties on preliminary issues that are incidental to the main dispute.

Examples of leading international arbitration institutions include; the International Chamber of Commerce (ICC), London Court of International Arbitration (LCIA), the American Arbitration Association (AAA), the International Centre for Settlement of Investment Disputes (ICSID), China International Economic and Trade Arbitration Commission (CIETAC), and the World Intellectual Property Organisation (WIPO). However, some of these institutions are specific to certain types of disputes, for example, ICSID only caters to legal disputes arising out of an investment between a state party to the ICSID convention and a national of another state party to the ICSID convention.

It should be noted however, that fee structures differ depending on the institution, with some institutions charging on the basis of the amount in dispute and others charging on a flat hourly rate basis. The decision to use or not to use an administering body and institutional rules or institutional rules will have an impact on the costs of the arbitrations and parties are encouraged to compare costs of the various institutions beforehand.

b) Drafting the Arbitration Agreement

A well drafted arbitration agreement or clause will avoid preliminary arguments such as whether the dispute is subject to arbitration. Disputes as to the meaning or scope of the arbitration agreement clause are ordinarily determined first and tend to substantially add to the length and cost of the arbitration. Parties should as far as possible, avoid attempting to limit the scope of disputes that are subject to the arbitration unless special circumstances require it. This is because, even when drafted carefully, exclusions may provide an opportunity for preliminary arguments to be raised regarding the jurisdiction of the arbitral tribunal to hear and determine the dispute.

A good arbitration agreement or clause should be clear and should specify the number of arbitrators, the arbitration institution and rules if any, the seat of the arbitration, having regard to practical considerations such as neutrality, availability of hearing facilities, proximity to witnesses and evidence. While the seat of the arbitration does not determine the governing law of the contract and the merits, it determines the law that governs certain procedural aspects of the arbitration. Where parties choose institutional arbitration, ideally, the rules adopted should coincide with the institutional rules. It is also advisable that the parties use the model clause recommended by the institution as a starting point for drafting the arbitration agreement as this would have been tried and tested.

c) Choice of Counsel

Given the significant costs and expenses of international arbitrations, it would be foolhardy for a party to declare a dispute and initiate arbitration proceedings without first carrying out a cost benefit analysis. A lawyer with experience in international arbitration and is familiar with the fee structure and workings of the various administering bodies would be in a position to provide a legal opinion on the merits of the dispute which can then assist a party to take a commercial view on the matter.

Ultimately, the parties should set a realistic budget for the arbitration at the initiation of the arbitration and cross-check with their legal counsel on whether the funds set aside will suffice. Parties may also require that their counsel seek their approval before exceeding a set limit.

The choice of legal counsel is therefore vital if a party is to keep the costs and length of the arbitration down. Parties are encouraged to select lawyers with a reputation for efficiency and availability. Selected lawyers should also have specific arbitration expertise as opposed to litigation. In fact, there is nothing to prevent a party from interviewing or pre-screening potential legal counsels and requiring that they confirm their “availability for an efficient and reasonably expeditious schedule.”

d) Terms of Reference and Case Conferences

The terms of reference and case management conferences have been hailed as the kernel of cost effectiveness in international arbitration. Both are very useful tools for managing arbitrations in order to ensure the fast and efficient progress of arbitral proceedings as they set out framework of the arbitration from the beginning to the end.

The terms of reference are drawn and signed by mutual consent of the parties and include information relating to the parties and arbitrators, a summary of the pleas and defences of the parties, the claims, the dispute in question, and the procedural provisions which shall be applied. More importantly it may be used to compel the parties to provide case summaries in order to narrow down the issues and empowers the arbitral tribunal to decide procedural issues while dispensing with physical meetings as much as possible and using conference calls.

At this stage, parties may also consider whether it is necessary to join other parties or consolidate disputes with a view to avoiding a multiplicity of suits thereby cutting down costs and enhancing efficiency.

e) Evidence Production, the Hearing and the Award

The production of numerous unnecessary documents that are not material to the matters in dispute can spike the costs of arbitration and cause significant delays in the expeditious resolution of the dispute. It is therefore imperative that parties produce only those documents that are material to the dispute rather than all documents that are relevant to the dispute. For example, there is no need to produce documents in respect of non-controversial facts. Parties should also agree on an organised system of producing and identifying the documents and as far as possible avoid duplication and adopt a coherent system of numbering. As a general rule all documents should be submitted in electronic form and should be considered authentic unless their authenticity is challenged. As a preliminary matter, parties should consider whether it is entirely necessary to have an oral hearing, and whether the dispute can be determined on the basis of the documents produced by the parties. This can significantly cut down the on the costs of witnesses, accommodation, travel expenses, hiring a venue among others. It also greatly reduces the length of the arbitration.

The existence of a hearing agenda, a fixed timetable and time keeper as well as regular “housekeeping” sessions throughout the hearing aid in saving time. Other considerations include, whether the location of the hearing is convenient for all parties, whether the number of witnesses may be limited, whether consecutive hearing dates can be scheduled to avoid back and forth travel and minimise travel costs and conducting a pre-hearing conference in order to discuss logistics of the hearing; At the end of the hearing, parties should seriously consider whether closing submissions are necessary, and if they are, they should elect to have either oral or written submissions but not both. It will also save time and costs for the arbitral tribunal to specify the questions that they wish to be addressed in the closing submissions.

The arbitral tribunal must use its best efforts to submit the draft award to the administering institution as quickly as possible and within the timeline set by the administering institution if any and must ensure that time has been reserved in their diaries after the hearing for deliberation on the dispute. It may be prudent to select an administering institution that scrutinizes and reviews the award before it is issued as it avoids further litigation that may be initiated in local courts as grounds for setting aside the award.

Conclusion

Whereas there are a wide range of tools and devices that are available in arbitrations to ensure that the arbitration is conducted in a cost effective and efficient manner, the ultimate decision depends on the various stakeholders involved in international arbitration that are key in monitoring and determining the ultimate cost and length of the arbitration. These are, the parties to the arbitration (or in-house counsel), external counsel, the administering institution and the arbitral tribunal, all of whom have a role to play in assessing the objectives and merits of the arbitration, drafting the arbitration agreement, engaging in pre-arbitration negotiations, setting a budget for the arbitration, selecting the arbitral tribunal, determining the procedure and procedural rules applicable to the arbitration among other matters. Arbitration may indeed be cheaper than litigation. However, in the realm of international institutional arbitration, the cost effectiveness of the arbitral process requires conscious effort from the various stakeholders.

Eva Mukami

Posted on August 1st, 2018

Eva Mukami

Associate

 

T: +254 709 250 000/709 250 721

E: emukami@oraro.co.ke

 

Eva is an Associate in the Litigation Department and specialises in Arbitration & Mediation and Dispute Resolution.

She has advised local and international clients from various target sectors such as energy, oil, manufacturing and financial services in arbitration & mediation, constitutional law, land disputes, debt recovery, banking & commercial litigation, and insolvency matters.

Eva recently advised a bank on enforcement of third party securities under the Insolvency Act, 2015 as well as advising an oil company on its prospective claim against the National Land Commission for denial of fair administrative action under the Constitution in its compulsory acquisition of the oil company’s land.

Eva has a Bachelor of Laws (LLB) from Moi University and a post-graduate diploma in Law from the Kenya School of Law.

“Eva has advised a regional bank in an international arbitration”

Experience
  • Part of a team that is assisting in giving Kenya law advice and representing a Canadian based energy company as co-counsel in the International Centre for Settlement of Investment Disputes proceedings brought against the Kenyan Government in respect of the unlawful revocation of the company’s geothermal licence.
  • Part of the team representing a regional bank in an international arbitration at the ICC in a claim of USD 25 million brought by a Zambian borrower who claims he never authorised the bank to disburse funds to the borrower.
  • Part of a team that advised an international agricultural equipment company on registration of securities under the Movable Property Security Rights Act, 2017.
  • Part of a team that represented a landlord in its claim against an insolvent tenant that involved interpretation of the rights of a landlord under the Insolvency Act, 2015.
  • Part of a team that advised an oil company on its prospective claim against the National Land Commission for denial of fair administrative action under the Constitution in its compulsory acquisition of the oil company’s land.
  • Part of a team that advised an international tobacco processing company and its Kenyan subsidiary on their prospective claim for fraud and/or negligence against individuals in its employment.

About Us

Oraro & Company Advocates is a full-service market-leading African law firm established in 1977 with a strong focus on dispute resolution and corporate & commercial law. With a dedicated team of 10 partners, 4 senior associates, 10 associates, 1 lawyer and 36 support staff, the Firm has been consistently ranked by leading legal directories such as Chambers Global, IFLR 1000 and Legal 500 as a top-tier firm in Kenya.

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