English Commercial Court takes rare decision to refuse enforcement of arbitration award on public policy grounds in crypto case

The English Commercial Court has refused to enforce a foreign-seated arbitration award on the grounds that to do so would be contrary to public policy. The case concerned a dispute between Mr Chechetkin and the Payward group, which operates the Kraken cryptoasset trading platform. Payward received a favourable arbitration award in California which it sought to enforce in England.

Whilst emphasising that mandatory B2C arbitration is not in itself unfair, the English Court concluded that in the particular circumstances of the case, enforcement of the JAMS arbitration award would be contrary to public policy, because the specific public policy embodied in UK consumer legislation and the Financial Services and Markets Act 2000 (FSMA) required the issues in this case to be governed by English law and not to be decided overseas.

Background

As set out in further detail in our blogpost here, Mr Chechetkin, a UK-based lawyer by profession, undertook various trading activities on Payward's Kraken cryptocurrency trading exchange in 2020 and lost more than £600,000. Payward's terms of service (Terms) were set out in a clickwrap agreement and contained a Judicial Arbitration and Mediation Service Rules (JAMS) arbitration clause with disputes to be determined by sole arbitrator seated in San Francisco. The Terms were governed by California law and specified that effect would not be given to any conflict of laws principles that may provide for the application of the law of another jurisdiction.

Payward commenced JAMS arbitration in 2022. In response, Mr Chechetkin brought a jurisdictional objection and challenged the arbitrability of the dispute, on the basis that Payward had breached FSMA because it was conducting activities for which it did not have the necessary authorisation. The sole arbitrator ruled that the arbitration clause was enforceable under California law and that Mr Chechetkin could not properly advance claims based on English statute. The final award rendered in October 2022 declared that Payward was under no liability to Mr Chechetkin.

In February 2023, Mr Chechetkin commenced a claim in the English courts, in which he claimed that Payward had breached FSMA. As we reported in our blogpost here, in January of this year, the English Court dismissed Payward's jurisdictional objection to those proceedings, which remain ongoing.

In the latest English Court proceedings, Payward sought enforcement of the JAMS arbitration award in England. Mr Chechetkin resisted enforcement, relying, amongst others, on s103(3) of the Act, which gives the English Court discretion to refuse recognition or enforcement of an arbitration award if it is "in respect of a matter which is not capable of settlement by arbitration, or if it would be contrary to public policy to recognise or enforce the award". He argued that enforcement would be contrary to public policy based on both the Consumer Rights Act 2015 (CRA) and FSMA.

Decision

Mr Justice Bright considered the following issues: (i) whether Mr Chechetkin was a consumer for the purposes of the CRA (ii) whether the English Court was bound by the determinations made by the sole arbitrator (iii) whether the CRA and FSMA were expressions of public policy and (iv) whether enforcement would be contrary to public policy under the CRA and FSMA.

Was Mr Chechetkin a consumer under the CRA?

The judge held that Mr Chechetkin was a consumer because his sole profession was a lawyer, which was his source of income, and because he was assessed as a customer by Payward on the basis that he did not work in crypto or fintech, and he was acting on his own behalf with no intention to resell.

Was the English Court bound by the determinations of the arbitrator?

Although Payward argued that Mr Chechetkin should have brought his FSMA claim in the arbitration and that the arbitration award prevented him from raising the issue again, Mr Justice Bright held that he was not bound by any of the arbitrator's determinations, relying in particular on the case of Dallah Co v Ministry of Religious Affairs of Pakistan [2011] AC 763, on the basis that a tribunal's decision on its own jurisdiction does not bind a different enforcement court. However, the judge also noted that regardless of Dallah, the English Court should not be obliged to enforce an award that is contrary to English public policy based on an arbitrator's decision to the contrary.

Were the CRA and FSMA expressions of UK public policy?

The judge held that:

• The CRA was the UK's enactment of EU Directive 93/13 on unfair terms in consumer contracts (UTCCD), which had already been established as public policy following a number of CJEU decisions which bound the English court.
• FSMA is a UK statute with regulatory objectives and so too formed part of UK public policy.

Would enforcement be contrary to public policy of the CRA?

S74 of the CRA specifies that where a consumer contract has a close connection with the UK, the CRA applies, regardless of whether the parties have chosen a different governing law. Here, the contract had a close connection with the UK because it was between a UK national domiciled in England and a company incorporated in England, for services that were paid for in UK sterling to and from English bank accounts. The judge determined that this alone was sufficient to make the award unenforceable.

The judge also considered whether the arbitration clause was unfair pursuant to s62 of the CRA.  He was clear that "the mere fact that a consumer contract provides for disputes to be resolved in arbitration" did not make it unfair (see Mostaza Claro [2007] 1 CMLR 22 [35]-[38]), and that the question was whether a reasonable consumer in the position of Mr Chechetkin would have agreed to the contract. The judge concluded that whilst a reasonable consumer may have agreed to arbitration in the UK subject to the Act, they would not have agreed to arbitration in California under the JAMS rules and subject to the Federal Arbitration Act. There were a number of significant disadvantages for Mr Chechetkin here – including that there could be no appeal on the basis of an error of English law, that the US federal courts were not suitable for supervising disputes concerned with English law and UK statutes, that Mr Chechetkin had to use US attorneys, which was expensive and inconvenient, and that the arbitrator was not an appropriate tribunal for the issues in this case.

The judge also held that stifling Mr Chechetkin's claim under FSMA would be contrary to the public policy considerations under FSMA itself – including because claims advanced overseas are less likely to come to the attention of the FCA.

Comment

This is a rare example of the English Court's refusal to enforce a foreign arbitration award on the grounds of public policy and provides helpful guidance on the complex interaction between international arbitration and UK consumer legislation.

This judgment makes it clear that "the mere fact that a consumer contract provides for disputes to be resolved in arbitration does not make it unfair". Instead, each case will turn on its own facts, and the Court will consider in each case what a reasonable consumer in the position of the relevant party might agree to. Although California arbitration was not an appropriate forum for the issues raised in this case, the judge was clear that a different outcome may have been reached had the parties agreed on English-seated arbitration. It is also clear that a key consideration for the judge in this case was the desire not to stifle the claim under FSMA, which would have been stopped in its tracks had the arbitration award been enforced.

This case is an important reminder of the need to tailor dispute resolution provisions to the specific circumstances of the applicable relationship. In a consumer context, this may mean considering the jurisdiction in which the relevant customers are located.

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