The High Court has recently handed down judgment in the case of Chechetkin v Payward Ltd and others [2022] EWHC 3057 (Ch), accepting jurisdiction to consider a consumer claim for repayment of sums lost trading crypto assets, despite the fact that the Claimant had signed up for arbitration, arbitration proceedings had already concluded and that the tribunal had already issued a final award dismissing the claims.
Similar issues were also recently considered by the Court of Appeal in Soleymani v Nifty Gateway LLC[1], which partially overturned the High Court’s decision to stay a consumer’s claim in favour of a New York arbitration initiated by the Defendant, pursuant to its terms of use.
Background:
In the present case, the Claimant, Mr Chechetkin, undertook a series of trades on the Defendant’s crypto-asset exchange, Kraken, which resulted in him losing more than £600,000. These trades were entered into pursuant to the Defendant’s contractual terms and conditions, which the Claimant accepted were binding on him. Importantly for the present claim, the terms and conditions contained an arbitration clause referring disputes to JAMS arbitration in San Francisco and also outlined that the state or federal courts of San Francisco have exclusive jurisdiction over any appeals of an arbitration award and over any “suit” between the parties not subject to arbitration.
Two sets of parallel proceedings were therefore commenced. The Claimant commenced proceedings in the UK, arguing that the various trades between the parties involved breaches of the Financial Services and Markets Act 2000.
The Defendants however commenced arbitration proceedings under the JAMS rules. In those proceedings, the Claimant looked to argue that the sole arbitrator lacked jurisdiction and also raised a number of objections regarding the enforceability of the arbitration clause. However, on 29 July 2022, the sole arbitrator dismissed those contentions and issued a partial award, confirming that the matter was arbitrable and that she had jurisdiction over the dispute. This was followed by the sole arbitrator making a final award on 22 October 2022, in which she reaffirmed the jurisdiction of the tribunal and held that the Defendants were not liable to the Claimant.
Following the arbitration proceedings, the Defendants therefore made an application to the High Court of England & Wales to dismiss the Claimant’s proceedings and declare that the Court lacked jurisdiction over the claims brought.
Arguments:
The Claimant argued that the application should be refused as the case related to a consumer contract whereby the Claimant was domiciled in the UK and therefore fell within s15B of the Civil Jurisdiction and Judgments Act 1982 (“CJJA”). It is important to note here that UK legislation already recognises and incorporates the provisions on unfair terms in consumer contracts in the Consumer Rights Act 2015 in relation to a term which constitutes an arbitration agreement. Compulsory arbitration clauses relating to claims of £5,000 or less are automatically regarded as unfair.[2] For claims over £5,000, these clauses must pass the fairness test under the CRA 2015, meaning that claims may be required to be brought in the courts of England & Wales if (i) the consumer contract has a close connection with the UK and (ii) the arbitration agreement is deemed to be unfair.
The Defendants broadly advanced two arguments. First, the Defendants alleged that the Claimant was not a consumer and that, accordingly, the case did not fall within CJJA. Here, the Defendants argued that the Claimant was, in fact, a sophisticated financial investor who had opened a “Pro” account on the platform. Secondly, it was argued that because of the partial and final awards by the sole arbitrator, there was a requirement for the courts to decline jurisdiction over the dispute under s101 of the Arbitration Act 1996 (“AA 1996”).
The Court therefore had two broad questions to decide:
- Whether the Claimant was to be considered a consumer under the CJJA; and
- Whether the prior arbitration awards meant that the English courts did not have jurisdiction.
Held:
Was the Claimant a consumer?
The Court held that the Claimant was to be considered a consumer for the purposes of the contract with the Defendant. Importantly, Miles J concluded that the sophistication and knowledge of the Claimant was irrelevant for the purposes of the CJJA and that the test was simply whether the Claimant had entered into the contract for a purpose regarded as outside his trade or profession. Despite the Claimant’s experience as a banking lawyer, it was held that the trading of digital assets was clearly outside his trade or profession and therefore he was to be considered a consumer.
Did the arbitration award mean that the English courts did not have jurisdiction?
Miles J also held that neither the arbitration clause nor arbitration award deprived the English court of jurisdiction over the claim. Instead, the effect of s101 AA 1996 was that the award could be recognised as a defence or as set-off against the substantial proceedings in England & Wales.
Our thoughts:
In our experience, international companies in the web3 space, such as crypto asset exchanges and trading platforms, have typically contained arbitration clauses in their standard terms and conditions. As such, although the substantive issues in this dispute have not yet been considered, it is clear that this case (as well as the decision in Soleymani) is to be viewed as a warning that inappropriate consumer terms that may be considered unfair are vulnerable to challenge from consumers in England & Wales.
With the volume and complexity of crypto-related disputes rising, further guidance on the validity of these arbitration agreements and how they interact with UK consumer legislation will be welcomed. We will therefore be keeping a close eye on any developments on this case, as well as the trial in Soleymani, in due course.
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