High Court considers contractual remedies for failure to transfer cryptocurrency

A recent High Court decision has provided useful insights into the courts' approach to remedies for breach of an obligation to transfer cryptocurrency – in this case, a default on a loan of Ethereum tokens. The court upheld the County Court's decision to award damages rather than specific performance, but questioned the judge's assumption that damages should be based on the tokens' value at the date of the breach, rather than the date of judgment (almost four years later, when their value had increased almost tenfold): Southgate v Graham [2024] EWHC 1692 (Ch).

In line with previous authorities, the decision demonstrates the difficulty of obtaining specific performance of an obligation to transfer cryptocurrency – at least where the obligation does not relate to specific or unique digital assets. It suggests that, in such cases, the court's starting point is likely to be that the failure to transfer cryptocurrency can be adequately compensated in damages. The court may also take into account potential hardship to the defendant, including the fact that an order for specific performance may expose a defendant to contempt proceedings if they do not comply (unlike an order to pay damages, which cannot be enforced by committal - as discussed in this blog post).

The decision suggests that even extreme movements in a cryptocurrency's market value may not, on their own, make damages an inadequate remedy and warrant specific performance. The court considered that the proper way to address such price volatility was through its approach to the measurement of damages – and in particular the appropriate valuation date.  

The court emphasised that this question will be highly fact-specific, and remitted it back to the trial judge to determine as part of the remedies hearing. However, notably, the court did express the view that there appeared to be "real merit" in the argument that the valuation date in this case should be the date of judgment rather than the date of breach, including because the nature of the agreement was closer to a loan contract than a contract of sale.  

Given the potential impact of valuation date on the quantum of damages in cryptoasset disputes, it is likely that the issues highlighted in the judgment will be explored in more detail in future caselaw.

Background

The dispute related to an oral agreement in June 2018 under which the claimant provided funding to the defendant by advancing to him 144 Ethereum tokens ("ETH"), then worth approximately £50,000. The claimant's position was that the agreement required the return of the same or an equivalent number of ETH, plus 10% more as a premium. The defendant sought to argue that the ETH was simply the vehicle for a loan of £50,000 and that his obligation was to repay that fiat amount, plus 10%.

The defendant made a repayment of £6,000, which the clamant applied in discharge of a portion of the ETH, leaving 115.69 ETH outstanding. When a demand to repay that balance was unmet, the claimant brought an action for breach of contract. He sought specific performance of the obligation to transfer the outstanding ETH or, alternatively, damages in respect of their loss - assessed as at the date of judgment. Owing to the volatility of the price of ETH, their value then was substantially higher than the original £50,000.

In the County Court's judgment (in September 2023), the trial judge accepted the claimant's interpretation of the contract and held that the defendant should have re-transferred the outstanding ETH by 1 October 2019. However, he:

• refused to order specific performance, instead ordering damages in lieu (to be assessed at a separate remedies hearing); and
• directed that the damages should be assessed as at the date of the breach, ie. 1 October 2019.

The claimant appealed both those aspects of the decision. 

Decision

The High Court (Mr Justice Trower) dismissed the appeal in respect of specific performance but allowed the appeal regarding the assessment of damages, directing that the appropriate valuation date be determined at the remedies hearing.

Specific performance v damages

The court noted that, unlike damages, specific performance is a discretionary equitable remedy which is not available to a successful claimant as of right. In particular, it is not normally available where damages are adequate to compensate for a loss. 

The trial judge's reasoning for refusing specific performance did not expressly consider the adequacy of damages. The sole reason identified was hardship on the defendant – ie. that he was unlikely to be able to comply with an order that would require him to purchase the outstanding number of ETH tokens (said to be worth over £300,000 by that time) in order to reimburse the claimant. The trial judge considered that such an order, which would no doubt be backed by a penal notice, would "set him up to fail" and would be unfair, disproportionate and unnecessary.

In the appeal, the High Court rejected the claimant's submission that the evidence did not justify the judge's assessment of the likely hardship on the defendant. There was no basis to interfere with the trial judge's evaluation of the facts in that regard.

The claimant's primary argument in favour of specific performance was that damages were an inadequate remedy - because the method of quantification chosen by the trial judge (by reference to the date of breach) did not provide sufficient compensation for his loss given the rise in the price of ETH. He argued that that outweighed any hardship on the defendant. Trower J rejected that analysis for several reasons:

• The judge was entitled to take the view that the nature of the hardship here was, of itself, sufficient to justify refusal of specific performance. In particular, it was legitimate for him to have regard to the fact that non-compliance with an order for specific performance of what was essentially a pecuniary obligation might give rise to contempt proceedings, whereas a failure to pay an award of damages in lieu could not do so.
• The agreement did not concern unique property or goods. While there was no reason to think that a contract for the return of cryptocurrency might not be specifically performable in an appropriate case, it was also open to the trial judge to decide (consistently with the approaches in B2C2 Ltd v Quoine Pte Ltd [2019] SGHC(I) 03 and Wang v Darby [2022] Bus LR 121) that the nature of ETH is such that any loss as a result of a failure to return the tokens was, as a matter of principle, capable of being adequately compensated in damages. To the extent this may have been an unstated factor in the trial judge's reasoning, it was a valid additional reason for refusing specific performance.
• The answer to the claimant's argument lay in adopting the correct approach to the assessment of damages in lieu, rather than "seeking to stretch the remedy of specific performance beyond its proper bounds".

Cryptocurrency valuation date

The court concluded that the trial judge was wrong to reach a settled view as to the correct valuation date for the assessment of damages at the conclusion of the trial rather than at the later-scheduled remedies hearing. This was because:

• it was contrary to the parties' shared expectation that, if the claimant succeeded on liability and the remedy granted was damages, any issues regarding their assessment would be dealt with at a subsequent remedies hearing. The parties had therefore not developed their respective cases on damages in their oral submissions or evidence; and
• the judge had assumed that the date of breach must be the correct starting point for assessment, without hearing proper submissions and without making any findings as to whether it had been possible and reasonable for the claimant to have gone into the market at that time to acquire replacement ETH.

The court directed that those questions and any other issues going to the assessment of damages should be determined at the remedies hearing, potentially taking into account factual evidence as to what did or could have happened between the date of breach and the date of judgment.  

However, while not making any final determination, Trower J did express a view that there appeared to be "real merit" in the claimant's argument that the date of judgment was a more appropriate valuation date than the date of breach.  His reasons for that view were as follows:  

• While valuation at the date of breach is often thought to be the general rule, the overriding aim is to put the wronged party in the same position they would have been in if the contract had been performed. In this case, given that the agreement was for re-transfer of ETH, valuation at the date of breach risked leaving the claimant significantly out of pocket if, following the judgment, he were to acquire the same quantity of ETH on the market at the substantially increased price.
• Unlike in the case of an unperformed contract for the sale of goods, the claimant here had already performed his side of the bargain. Depending on the factual evidence, that could provide an argument against a suggestion that he should have mitigated his loss by going to the market earlier and entering into a substitute contract.  
• Damages in lieu of specific performance are awarded under section 50 of the Senior Courts Act 1981. The effect of the House of Lords' decision in Johnson v Agnew [1980] AC 367 is that, because refusal of specific performance occurs at the date of judgment, the court will normally assess damages under section 50 by reference to values as at that date – provided that the innocent party has acted reasonably in pursuing specific performance.  As this is again a fact-specific inquiry, it should also be considered at the remedies hearing.