The UK’s commitment to ADR: Compulsory mediation

On 25 July 2023, the UK Government – the Ministry of Justice (MoJ) adopted a compulsory mediation for all small civil claims valued up to £10,000 starting with specified money claims which amount to 80% of small claims. Indeed, this should not come as a surprise as the Government has been employing innovative manners to ease effective dispute resolution without any need for a mandatory court referral. It was only a year ago when the Government published a Public Consultation on “Increasing the use of mediation in the civil justice system”. Further, there is already serious work being done across the Government to implement the United Nations Convention on International Settlement Agreements Resulting from Mediation (the Singapore Convention), which the UK signed on 3 May 2023 (The Singapore Convention on Mediation: The UK’s Serious Commitment to ADR – The Institute of International Shipping & Trade Law (IISTL) Blog). As an integral part of the UK justice system, mediation may save businesses around £5.9 billion per year in management time, relationships, productivity, and legal fees with the value of UK mediated cases each year being estimated at approximately £20bn as of February 2023. The UK’s implementation of the Singapore Convention is expected to bolster the UK’s £17.5 billion mediation sector and underscore its leading role in international commercial dispute resolution and the MoJ’s latest decision will incredibly serve to this target. Along these lines, the Digital Markets, Competition and Consumers Bill will also strengthen oversight of dispute resolution opportunities available to consumers; an initiative which would have been more constrained whilst in the EU. According to the newly adopted system, after he filed a defense on a small claim and allocation of the case to the court, mediation will be the next phase and parties will get notified about this. Once they have filled out a ‘directions questionnaire’ the case will move to HM Courts & Tribunals’ free small claims mediation service in a form of an hour-long telephone conversation with the mediator. In case parties will agree on a settlement, the court will register a legally binding formal agreement between them. Otherwise, a judge will hear the dispute. This is indeed a very welcome policy decision and legal reform to ensure easy and accessible dispute resolution by everybody and save both time and expenses while decreasing the workload of the courts. On another note, the intended reforms such as setting a compulsory mediation for all claims issued under the Civil Procedure Rules Part 7 will necessitate a serious planning and strategy. Indeed, the new scheme will provide an avenue for learning the best lessons and adopting them in the later reform stages.  

Digital assets and private law: the Law Commission’s recommendations for reform

Over the last couple of years, the Law Commission for England and Wales has successfully launched several law reform projects related to digital assets, smart contracts, and electronic trade documents and DAOs (see the previous blog post here: One more move: Decentralised Autonomous Organisations (DAOs) – The Institute of International Shipping & Trade Law (IISTL) Blog).

With the UK’s target of becoming a tech leader and ever-increasing digitalisation and advancement of technology, in March 2020, the Ministry of Justice asked the Law Commission to review the law on crypto-tokens and other digital assets and to consider whether the law of England and Wales required reform to ensure that it can accommodate such assets. The project contained a call for evidence on the ways of the use of digital assets, an interim update, and a consultation paper on a detailed consideration of private law issues concerning digital assets. After all the detailed analysis of the responses, today, 28 June 2023, the The Law Commission of England and Wales has published recommendations for reform and development of the law relating to digital assets.

The report demonstrates a rigorous analysis of whether the common law of England and Wales is/can be in alignment with such an emerging modern reality. In fact, the report asserts that the law in this country is well placed to ensure a consistent and comprehensive framework for emerging technologies and is capable of providing further clarity and extra security for users of digital assets and market participants.

The Commission makes only very few recommendations for law reform. This pragmatic approach is because as concluded, the common law of England and Wales is, in general, sufficiently flexible, and already able, to accommodate digital assets, and secondly, because the Commission wants the recommendations to be as direct and as implementable as possible. The report presents a tripartite approach to law reform:

a) The existing common law of England and Wales (section 53(1)(c) of the Law of Property Act 1925) is generally sufficiently flexible and already able to accommodate digital assets, so any reform should be through further common law development. Thus, the possibility is left open in case any reform might be necessary in the future as the market evolves.

b) Any targeted statutory law reform should only confirm and support the existing law position or where common law development is not realistically possible.

c) Arrangements should be enhanced for industry expert’s further guidance which would support both the common law and statute.

Within this context, the Commission made the following recommendations in the report:

  • The statutory confirmation that a thing (a digital asset in this case) will not be deprived of legal status as an object of personal property rights merely by reason of the fact that it is neither a thing in action nor a thing in possession.
  • The Government should nominate a panel of industry-specific technical experts, legal practitioners, academics, and judges with expertise in the cryptotoken markets to provide advisory guidance on the complex and evolving issues relating to control (and other issues involving digital objects more broadly).
  • An amendment to the Financial Collateral Arrangements (No 2) Regulations 2003 (“FCARs”) is needed: (1) to clarify the extent to which and under what holding arrangements crypto-tokens, cryptoassets (including Central Bank Digital Currencies and fiat currency-linked stablecoins) and/ or mere record/register tokens can satisfy the definition of cash, including potentially by providing additional guidance as to the interpretation of “money in any currency”, “account” and “similar claim to the repayment of money”, and (2) to confirm that the characterisation of an asset that by itself satisfies the definition of a financial instrument or a credit claim will be unaffected by that asset being merely recorded or registered by a crypto-token within a blockchain or DLT-based system (where the underlying asset is not “linked” or “stapled” by any legal mechanism to the crypto-token that records them).
  • If an asset satisfying the definition of a financial instrument or a credit claim is tokenised and effectively linked or stapled to a cryptotoken that constitutes a distinct object of personal property rights from the perspective of and vested in the person that controls it, the linked or stapled token itself will similarly satisfy the relevant definition.
  • Laws applicable to UK companies should be reviewed to assess the merits of reforms that would confirm the validity of and/or expand the use of cryptotoken networks for the issuance and transfer of equity and other registered corporate securities. Further, any such review should consider the extent to which applicable laws could and should support the use of public permissionless ledgers for the issuance and transfer of legal interests in equity and other registered corporate securities.
  • As a matter of priority, the Government sets up a multi-disciplinary project to formulate and put in place a bespoke statutory legal framework that better and more clearly facilitates the entering into, operation, and enforcement of (certain) cryptotoken and (certain) cryptoasset collateral arrangements.

Together with the pragmatic recommendation, the report also presents the Commission’s overall conclusions:

  • Firstly, factual control (plus intention) can find a legal proprietary interest in a digital object. Accordingly, such a control-based legal proprietary interest can also be separated from (and be inferior to or short of) a superior legal title.
  • Secondly, it is possible (with the requisite intention) to affect a legal transfer of a crypto-token off-chain by a change of control or on-chain by a transfer operation that affects a state change.
  • Thirdly, a special defence of good faith purchaser for value without notice applicable to cryptotokens can be recognised and developed by the courts through incremental development of the common law. The latter can also be extended to other third-category things.
  • Fourthly, under the law of England and Wales, crypto-token intermediated holding arrangements can be characterised and structured as trusts, including where the underlying entitlements are (1) held on a consolidated unallocated basis for the benefit of multiple users, and (2) potentially even commingled with unallocated entitlements held for the benefit of the holding intermediary itself. The best way to understand the interests of beneficiaries under such trusts is as rights of co-ownership in an equitable tenancy in common.
  • Fifthly, recognition of a control-based legal proprietary interest could provide the basis for an alternative legal structure for custodial intermediated holding arrangements in addition to trusts. This could take the form of holding intermediaries being recognised as acquiring a control-based proprietary interest in held crypto-token entitlements that is subject to a superior legal title retained by users.
  • Finally, the Commission concludes that it would be constructive for the courts to develop specific and discrete principles of tortious liability by analogy with, or which draw on some elements of, the tort of conversion to deal with wrongful interferences with third category things.

Overall, the recommendations aim to create a clear and consistent framework for digital assets and achieve greater clarity and security for users and market participants. Furthermore, the Commission supports the Government’s goal of attracting technological development to cement the position of England and Wales as a global financial hub for cryptotokens and cryptoassets.

Needless to say, the area is emerging and the relationship of the market users with digital assets and their property rights is becoming more alarming than ever. Certainly, there will be plenty of issues arising with regard to conflict of laws issues (jurisdiction and choice of law), tax, data protection, etc. Thus, the work shall be in progress to meet the developments meantime but before going further with the specifics, it seems. It seems the next stage should focus on drafting legislation for implementing the Commission’s recommendation. This would in turn serve the objective of our private law in England and Wales to remain a dynamic and globally competitive framework in this area.

For details of the project and relevant documents see: Digital assets – Law Commission.