TERRAFORM NOT ON TERRA FIRMA - SINGAPORE COURT REFUSES TO STAY CRYPTO CLAIMS IN FAVOUR OF ARBITRATION

Singapore's High Court has declined to stay a cryptocurrency case in favour of SIAC arbitration.

The representative action was brought by users of a Singapore-based cryptocurrency platform, Terraform, following a dramatic decline in value of their tokens. The defendants applied to stay the claims in favour of arbitration. The Court held that, whilst there was prima facie evidence of an arbitration agreement in the parties' web-based contract, the defendants had taken steps in the litigation which amounted to a waiver of their jurisdictional objection.

The judgment is an important reminder of the need to design website architecture carefully in order to ensure that online terms, including arbitration clauses, are sufficiently brought to the attention of users. The judgment also emphasises the need for careful litigation strategy when seeking a stay of proceedings.

Background

The case was a representative action filed by two claimants on behalf of themselves and 375 other individuals against Terraform Labs Pte Ltd and others. Terraform is a Singapore-incorporated company which develops software and applications to run the Terra blockchain, enabling individuals to purchase TerraUSD (UST), a cryptocurrency. The claimants alleged that they were induced to purchase UST tokens in reliance on misrepresentations by the defendants, and that they had suffered significant losses when the value of UST plummeted.

The defendants applied to stay the case, arguing that there was an arbitration agreement between them and the claimants, stipulated in the terms of use on their websites. It was undisputed that the terms of use contained SIAC arbitration clauses, and that those clauses were wide enough to encompass this dispute. The issue was solely whether the website arbitration clauses applied to these claimants.

Assistant Registrar's Decision

The Assistant Registrar found no prima facie case of a valid arbitration agreement between the parties because the terms were not adequately brought to the attention of the users, and hence were not incorporated into the contracts. The AR found that: (a) the hyperlink to the Terms of Use was "tucked away at the bottom of the website such that it lacked prominence"; (b) the Terms could not be found on the homepage but only on the website 'dashboard'; (c) despite the (arguably) sophisticated users, the nature of the product being promoted by the websites meant that the terms ought to have been prominently displayed; and (d) arbitration clauses must be expressly brought to the attention of the contracting party. Alternatively, the Assistant Registrar held that Terraform had taken steps in the proceedings which amounted to a submission to the court's jurisdiction.

High Court

The High Court dismissed the defendants' appeal.

The Court noted that a stay will be granted in favour of arbitration where there is a prima facie case that (a) there is a valid arbitration agreement between the parties; (b) the dispute (or any part of it) falls within the scope of that arbitration agreement; and (c) the arbitration agreement is not null and void, inoperative or incapable of being performed. The court will only refuse to grant a stay where it is clear on the evidence that one or more of those requirements has not been met (see Tomolugen Holdings Ltd and another v Silica Investors Ltd and other appeals [2016] 1 SLR 373).

The Terraform websites deployed either browse-wrap agreements (where a website displays a notice that use of the site constitutes the user's agreement to the terms of use, which are accessible by separate hyperlink) or clickwrap agreements (which require users to scroll through terms of use and click a button to indicate agreement). With respect to browse-wrap agreements, the court referred to previous authorities that had considered these agreements but noted that these were distinguishable on the basis that they applied a balance of probabilities test to decide definitively whether there has been sufficient notice of an arbitration clause. On the lower prima facie standard, the court held that it was at least arguable that contracts had been formed via the browse-wrap agreement, particularly as the claims relied on representations accessed via a hyperlink, so it was not unreasonable to think that users would, in perusing the website, also have noticed the link to the Terms of Use which contained the arbitration clause. With respect to click-wrap agreements, the court concluded that this was strong evidence of either actual or constructive notice sufficient to find a prima facie agreement to arbitrate.

The court also discussed the difficulties that may arise where a prima facie case of an arbitration agreement is established in respect of some but not all the claimants in a representative action. However, the point was not decided as the prima facie finding applied to all claimants in this case.

Despite these findings, the court decided that Terraform had taken steps in the proceedings which precluded them from maintaining their challenge to the court's jurisdiction. Singapore law states that (a) an act will be considered a “step in the proceedings” where it cannot be explained except on the assumption that the defendant accepts the court's jurisdiction, or that any objection to the court’s jurisdiction has been waived (or was never entertained), and (b) parties should not be allowed to equivocate or hedge – they must be decisive as to whether they are insisting on arbitration in preference to litigation.  Under the Rules of Court, a defendant should apply for a stay and an extension of time to file a substantive defence if the stay is not granted, but should not file a substantive defence.  Terraform's express reservation of rights in its substantive defence did not alter this conclusion. The court further noted that Terraform had taken other steps in the proceedings which were clearly unrelated to its jurisdictional challenge including, for instance, applications for production of documents and to strike out the claims on their merits.

Comment

1. Incorporation of Online Terms: The decision provides guidance on the incorporation of arbitration clauses in online contracts. It highlights the need for users to have actual or constructive notice of the terms, which will be a fact-sensitive inquiry. The court suggested that if users are interacting with certain parts of a website, they may be expected to notice other parts such as links to terms of use. However, while click-wrap agreements may provide evidence of sufficient notice of the terms of use, the court did not express a view regarding whether a browse-wrap agreement generally would be sufficient. Parties seeking to rely on arbitration clauses in website terms of use should therefore ensure that the site architecture is carefully designed to give sufficient notice of the terms and to maximise the prospects of the arbitration clause being enforceable.

2. Collective Actions and Arbitration Agreements: The judgment touches on the complex interaction between collective actions and arbitration agreements. If some claimants in a representative action may be subject to an arbitration agreement whilst others are not, there may be conceptual and practical difficulties including whether to embark on an individual assessment of each claimant's circumstances, challenges with certification of class actions (depending on jurisdictional certification requirements) and conflicting parallel proceedings where some of the class is excluded from the courts.  These issues were discussed but did not have to be resolved in this case.

3. Consumer Arbitration Policy Considerations: The court acknowledged the broader policy concerns related to arbitration agreements, particularly in consumer contracts and collective actions. It noted that the potential for arbitration agreements to preclude effective legal remedies for consumers (due to the costs of arbitration) posed a significant issue that may require legislative attention.

4. Step in the Proceedings: The court clarified what constitutes a "step in the proceedings" under the Singapore International Arbitration Act and the Rules of Court 2021. Filing a defence on the merits, a counterclaim, or other substantive applications can indicate a submission to the court's jurisdiction, thus waiving the right to arbitrate. Parties cannot rely on general reservations of rights and similar drafting. This underlines the need for a clear and cautious litigation strategy in each case, to avoid any step which may appear to accept and engage the court's jurisdiction.

For further information, please contact Daniel Chia, Head of Litigation (Herbert Smith Freehills Prolegis), Alastair Henderson, Partner (Herbert Smith Freehills Prolegis), Liz Kantor, Professional Support Lawyer, Jake Savile-Tucker, Senior Associate, or your usual Herbert Smith Freehills contact.