Cryptocurrency disputes and consumer arbitration: the next instalment

The English High Court has handed down judgment in another case concerning trades on a cryptocurrency exchange. The case of Chechetkin v Payward Ltd and others [2022] EWHC 3057 (Ch)  is a further illustration of the procedural and substantive complexity that can arise from arbitrating disputes in a consumer context.

With parallels to the Soleymani v Nifty Gateway case (see our blog post on that case here), this case concerned a cryptocurrency exchange that had mandatory terms and conditions providing for arbitration. Parallel arbitration and court proceedings were commenced, and the English Court was asked to determine a jurisdictional objection to the court proceedings. In dismissing the jurisdictional objection, the English Court found that recognition and enforcement proceedings relating to an arbitration award did not deprive the English Court of jurisdiction and that the jurisdictional application in question was not an appropriate way to have the English Court proceedings dismissed. The English Court also provided further guidance on the definition of "consumer" for the purposes of s15B of the Civil Jurisdiction and Judgments Act 1982 (CJJA).

Background

The claimant, a lawyer by profession, undertook various trading activities on the defendants' cryptocurrency trading exchange in 2020 and lost more than £600,000. Before trading on the exchange, the claimant had accepted terms and conditions containing an arbitration clause referring disputes to JAMS arbitration seated in San Francisco. The terms and conditions also stipulated that the state or federal courts of San Francisco would have exclusive jurisdiction over any appeals of an arbitration award and any "suit" that was not subject to arbitration.

Two sets of proceedings were commenced. The defendants commenced JAMS arbitration. In June 2022, the sole arbitrator confirmed her jurisdiction despite a number of objections raised by the claimant, and in October 2022, she issued a final award in which she concluded that the defendants were under no liability to the claimant. The defendants subsequently commenced enforcement proceedings in England under s101 of the English Arbitration Act 1996 (the Act).

In parallel, the claimant commenced a claim in the English courts, alleging that the defendants had breached the Financial Services and Markets Act 2000 and claiming repayment of sums. The defendants brought a jurisdictional objection to the English court proceedings under CPR 11. This provision enables a party who contests the jurisdiction of the English court to make an application for a declaration that the Court lacks jurisdiction.

The claimant's position was that the proceedings fell within s15B of the CJJA because they related to a consumer contract. Under UK consumer legislation, claims under £5,000 must be brought in the English courts because arbitration clauses are deemed automatically to be unfair. Consumer disputes over £5,000 may also be required to be brought in the English courts if the consumer contract is considered to have a close connection with the UK and the arbitration agreement is considered to be unfair. Although the claimant accepted that it might have been possible for the defendants to seek a stay of the proceedings under s9 of the English Act, the defendants had made no such application. Similarly, the defendants had not made any argument that the Californian courts should have jurisdiction.

The defendants advanced two arguments. The first was that the case did not fall within the CJJA because the claimant was not a consumer. The defendants argued that the claimant was a sophisticated person with a banking and finance background. He had opened a "pro account", which "increased the margin trading facilities" and enabled him to "undertake increased leveraged trades". The second argument was that under s101 of the English Act, there was a mandatory requirement to recognise the arbitration award, so the English Court was deprived of any jurisdiction in relation to a dispute which related to the same subject matter as the arbitral award.

Decision

Was the claimant a consumer?

Mr Justice Miles concluded that the claimant fell within the definition of consumer under section 15E of the CJJA: the sophistication, expertise and knowledge of a person was irrelevant for the purposes of the statutory definition – the test was simply whether the person had concluded the contract "for a purpose which can be regarded as being outside the person's trade or profession". It was clear here that the claimant was a lawyer and that the purpose of the contract was, therefore, outside his trade or profession.

Did the arbitration award deprive the English Court of jurisdiction? What was the effect of s101 of the English Act?

Mr Justice Miles concluded that an arbitration clause (or indeed an award) did not deprive the Court of jurisdiction. Even where the Court stayed proceedings under s9 of the English Act, that did not remove the Court's jurisdiction; it simply gave effect to contract between the parties.

The effect of s101 of the Act was that where the award was recognised, it could then be relied upon by way of defence, set-off or otherwise in English Court proceedings. S101 could not, however, be a mandatory recognition provision depriving the Court of jurisdiction, as the defendants contended. To test this conclusion, Mr Justice Miles explained that if the defendants' position was correct, then even where an award was subject to challenge at the courts of the seat, the defendants could nonetheless apply to dismiss English proceedings on the grounds of lack of jurisdiction. This would be problematic if the award were to be set aside at the seat.  Finally, Mr Justice Miles noted that s103 of the Act set out grounds for refusal of enforcement. As such, an argument based on s101 was not "an appropriate way of seeking to have the underlying legal proceedings" dismissed.

Comment

Following closely behind the Soleymani v Nifty Gateway judgment, this case is another illustration of the complexity that can arise in the arbitration of consumer disputes. In both cases, UK consumers using cryptocurrency exchanges have advanced arguments that disputes should fall to be determined by the English courts rather than arbitration tribunals. Although the English courts are yet to make any determination on the substantive arguments concerning the arbitration of consumer disputes (the Court of Appeal ordered earlier this year that the issues in the Soleymani case should go to trial), so far, those arguments have already led to significant procedural complexity, with parallel proceedings ensuing in both arbitration and the English courts.

As cryptocurrency disputes are on the rise, it will be interesting to see how these two cases develop next year and whether the English Court weighs in with some more concrete guidance concerning the interaction of UK consumer legislation with the international arbitration regime.

For more information please contact Simon Chapman KC, Partner, Charlie Morgan, Senior Associate, Liz Kantor, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.

[show_profile name="Simon" surname="Chapman KC" jobtitle="Regional Head of Practice - Dispute Resolution, Asia" phone="+852 21014217" email=simon.chapman@hsf.com link=https://www.herbertsmithfreehills.com/our-people/simon-chapman]