Consumer win on crypto arbitration clause: dispute set for the English Courts?

Consumer win on crypto arbitration clause: dispute set for the English Courts?

In the recent Court of Appeal decision in Soleymani v Nifty Gateway LLC [1], the Court found that the jurisdictional protection for UK consumers in having their rights determined in public court takes priority over an arbitration agreement. In ruling this, the Court overturned a High Court decision [2] which had granted a stay of the English Court proceedings in favour of arbitration.

The case relates to a cryptoasset transaction and the judgment is a further development in the emerging jurisprudence in cryptoasset related litigation. It explores how jurisdiction may be allocated in cryptoasset transactions, whilst providing a helpful analysis of the interplay between the UK legal framework for consumer protection and arbitration. Both the Court’s decision and the Competition and Markets Authority’s intervention emphasises the extent of consumer protection in the context of arbitration agreements included in standard terms and conditions. 

Facts

In brief, Amir Soleymani (the Appellant), a UK-based digital artwork collector, took part in an auction held on an online platform owned by Nifty Gateway LLC (the Respondent) bidding on a blockchain based non-fungible token (NFT) associated with an artwork. The platform provided bidders with online terms that included a New York governing law clause and a dispute resolution clause which referred the parties to arbitration in New York, administered by JAMS, a US ADR services provider.

A dispute arose following the auction, when the Appellant claimed that the NFT he actually received was different to what he had been promised and refused to pay.  The Respondent commenced arbitration in New York, pursuant to the platform’s terms. The Appellant applied to stay the arbitration and commenced a claim before the English Court.

The Appellant sought the following declarations:

  1. that the arbitration agreement was unfair and not binding upon him as contrary to English consumer protection legislation (the Consumer Rights Act 2015) (CRA): the Arbitration Claim
  2. that the governing law clause in the platform’s terms was unfair and not binding on the same grounds as above: the Governing Law Claim and
  3. that the contract formed as a result of the auction was illegal as contrary to the Gambling Act 2005: the Gambling Act Claim.

The Appellant sought to establish the court’s jurisdiction via the gateway introduced in sections 15A-E of the Civil Jurisdiction and Judgments Act 1982(CJJA), which incorporated into domestic law the provisions of the Recast Brussels Regulation (RBR) in relation inter alia to consumer contracts (and, unlike much of the RBR, remains in force after Brexit). The Respondent applied to strike out the claim contesting the court’s jurisdiction and alternatively sought a stay of the English proceedings under section 9 of the Arbitration Act 1996 (AA).

First instance

In March 2022, the Judge at first instance held that the court had no jurisdiction to determine the Arbitration Claim, dismissing the Appellant’s argument that the subject-matter of his claim was “consumer rights” rather than “arbitration”. She accepted jurisdiction for the Governing Law and the Gambling Act claims, but exercised her discretion under section 9(4) of the AA to stay those claims so that they could be determined by the New York arbitrator.

Appeal

The Appellant appealed on three grounds:

  1. that the court erred in finding that it did not have jurisdiction under the CJJA and in applying Article 1(2)(d) of the RBR, arguing that his English consumer protection rights were the subject matter and the main focus of his Arbitration Claim (Ground 1)
  2. that the court, after having accepted having jurisdiction over the Governing Law and the Gambling Act claims and there being no dispute that the arbitration agreement did not meet the requirements of section 15B(6) of the CJJA, erred in concluding that section 15D(1) of the CJJA did not apply to those claims (Ground 2) and
  3. that the court erred in staying the proceedings under section 9 of the AA without determining the issue of the fairness of the arbitration agreement or directing a trial before the court of the issues raised by that objection (Ground 3).

The Competition and Markets Authority (CMA) intervened in the appeal and provided written submissions in relation to Ground 3 as to the issue of fairness of arbitration agreements. The CMA’s submissions were that in a consumer context, compulsory clauses, particularly those which specify a foreign seat, are generally unfair and not binding; and in consumer cases the English court should itself determine the issue of arbitrability and should not leave that issue to an arbitrator, particularly one with a foreign seat (per section 71 of the CRA).

Decision

The Court of Appeal (judgment of Popplewell LJ) upheld the Judge’s finding that the Arbitration Claim was outside of the Court’s jurisdiction on the basis of the CPR regime at the time the Appellant’s claim was issued, noting that as of 1 October 2022 the amendments to the CPR would provide English jurisdiction for such claims going forward.

Upon review of the relevant authorities, and focussing on the hierarchy of the RBR as between arbitration and consumer rights legislation, the Court concluded that when the CCJA was amended to incorporate the provisions of the RBR, it adopted the existing hierarchy of the RBR, which provides that if arbitration is the subject matter of the proceedings, these are excluded from the scope of the RBR, meaning that section 15B(2) of the CJJA could not be relied upon to invoke the English courts’ jurisdiction. The Court was not convinced that this position would be different in the context of consumer rights and dismissed the appeal on the first two grounds.  

However, the Court (judgment of Birss LJ) allowed the appeal on Ground 3 and overturned the first instance court’s finding that the proceedings ought to be stayed under section 9 of the AA, noting that the Governing Law and the Gambling Act claims fell within the jurisdiction gateway under 15B(2) of the CJJA and could be tried in the UK. In deciding so, he considered whether the Appellant could be classified as “consumer” and the relevant contract as a “consumer contract”.

He concluded that a stay of the court proceedings would not be appropriate for three reasons:

  1. the importance (as a matter of public policy) of having consumer rights cases being ruled upon in public in a court and not left to be decided in private arbitration proceedings
  2. as the court was satisfied that there was a consumer contract with a close connection to the UK and even if the arbitral tribunal applied English law the English consumer protections rights involve domestic legal concepts which an English court would be better placed to adjudicate than a New York arbitrator and
  3. staying the proceedings in England would prejudge the issue of whether the arbitration agreement operates unfairly on the Appellant. 

Accordingly, the Court directed that there be a trial of whether the arbitration agreement was “null and void, inoperative, or incapable of being performed”, highlighting the fact that although there are a number of factors weighing in favour of granting a stay "these are not at all sufficient… to overcome the powerful factor in favour of refusing a stay arising from the fact that the challenge to the arbitration agreement under s9(4) is based on a vindication of a claimant's arguable consumer rights."[3]

Comment

This is an important decision for UK consumers who will gain comfort by the fact that the Courts are keen to ensure that all consumer rights issues are dealt with by domestic courts, and are supported in this by the CMA.  Whilst this was just an interim jurisdiction decision and not a decision that the arbitration agreement is unenforceable, the Court’s pro-consumer approach, especially in the context of a relatively high value transaction and ‘sophisticated’ consumer, emphasises the importance of consumer protection. This is particularly helpful in the context of commercial transactions involving cryptoassets and NFTs, whose decentralised and anonymised nature could be seen as presenting practical obstacles to legal intervention. We will be updating on the outcome of the trial in due course.

Footnotes

[1] Soleymani v Nifty Gateway LLC  [2022] EWCA Civ 1297
[2] Amir Soleymani v Nifty Gateway LLC [2022] EWHC 773 (Comm)
[3] Paragraph 149 of the judgment