Enforcement of arbitral award refused in crypto-related dispute

The English High Court has refused to enforce a foreign arbitral award in a crypto-asset related dispute, as to do so would be contrary to public policy.

Background:

As set out in our previous Law-Now on this case, Mr. Chechetkin, a lawyer by profession, undertook a series of trades on Payward’s crypto-asset exchange, Kraken, which resulted in him losing more than £600,000. These trades were entered into pursuant to Payward’s contractual terms and conditions, which Mr. Chechetkin accepted was 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 arbitral award and over any “suit” between the parties not subject to arbitration.

Two sets of parallel proceedings were therefore commenced. Mr. Chechetkin commenced proceedings in the UK, arguing that the various trades between the parties involved breaches of the Financial Services and Markets Act 2000 (“FSMA”).

Payward, however, commenced arbitral proceedings under the JAMS rules. In those proceedings, Mr. Chechetkin argued 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 arguments and issued a partial award, confirming that the matter was arbitrable and that she had jurisdiction over the dispute. After this, on 22 October 2022, the sole arbitrator made a final award, reaffirming the jurisdiction of the tribunal and holding that Payward was not liable to Mr. Chechetkin (the “Award”).

Following the commencement of the arbitral proceedings, Payward made an application to the English High Court to dismiss Mr. Chechetkin’s proceedings and declare that the Court lacked jurisdiction over the claims brought. This application was dismissed by the Court.

Following this, Payward sought to enforce the Award in the English Courts. Mr. Chechetkin resisted the enforcement of the Award, arguing that, amongst other things, it would be contrary to public policy under s103(3) of the Arbitration Act 1996. In this regard, Mr. Chechetkin also relied on the Consumer Rights Act 2015 (the “CRA”) and on the FSMA to assist with his position that the Award should not be enforced as a matter of English public policy.

Decision:

In reaching its decision, the Court broadly considered three issues:

1. Was Mr. Chechetkin a “consumer” under the CRA;
2. Should Mr. Chechetkin’s FSMA claim have been brought in the arbitration; and
3. Whether the enforcement of the Award would breach English public policy.

Was Mr. Chechetkin a “consumer” under CRA?

The first issue was whether Mr. Chechetkin was a consumer under the CRA, which defines a consumer as an individual acting for purposes that are wholly or mainly outside that individual's trade, business, craft or profession. This was relevant because consumers have certain rights and protections under the CRA, such as the right to challenge unfair terms in contracts.

The Court held that Mr. Chechetkin was a consumer under CRA. In arriving at this conclusion, Mr. Justice Bright considered that Mr. Chechetkin’s only profession was a lawyer and that Payward had assessed him as a consumer.

Should Mr. Chechetkin’s FSMA claim have been brought in the arbitration?

The second issue was whether Mr. Chechetkin's FSMA claim should have been brought in arbitration, or whether it was excluded from the scope of the arbitration clause. The FSMA claim was based on the allegation that Payward had breached the FSMA by carrying out regulated activities in the UK without authorisation. Payward argued that the FSMA claim was covered by the arbitration clause, which stated that any dispute arising out of or relating to the user agreement or the services provided by Payward would be resolved by arbitration.

Mr. Chechetkin argued that the FSMA claim was not covered by the arbitration clause, because it was a statutory claim that could only be decided by a court. He also argued that the FSMA claim was governed by English law.

The Court's decision was that the Award, which enjoined Mr. Chechetkin from pursuing his FSMA claim against Payward, should not be enforced in England as it was contrary to public policy. The Court found that Mr. Chechetkin had a prima facie claim under FSMA, which involved issues of English law and regulatory policy, and that he could not realistically have brought this claim as a counterclaim in the arbitration. The Court considered the arbitrator's determinations on the applicable law, the arbitrator's (lack of) receptiveness to arguments based on English law, the arbitrator's (lack of) experience with English law and financial regulation, and the JAMS' prioritisation of speed and efficiency over detailed legal analysis. The Court concluded that the arbitration was not an appropriate forum for the FSMA claim, and that enforcing the Award to stop the FSMA proceedings would undermine FSMA, which aims to protect consumers and investors from unauthorised and misleading financial services.

Would enforcement be contrary to English public policy?

The Court decided that the enforcement of the Award would breach English public policy.

Here, the Court considered s74 of the CRA, which allows the application of the CRA despite a choice of foreign law in a consumer contract closely connected to the UK. The Court reasoned that the contract between Mr. Chechetkin, a UK national and resident, and Payward Ltd, a UK company, paid in GBP, was closely connected to the UK, and therefore s74 CRA applied. The Court therefore determined that this alone was capable of rendering the Award unenforceable.

Further, under the CRA, the Court found that the arbitration clause in the contract between Payward and Mr. Chechetkin was unfair and that the arbitral proceedings in California were not compatible with the consumer protection regime in the UK.

In relation to FSMA, the Court found that the enforcement of the Award would prevent Mr. Chechetkin from pursuing his prima facie claim that the contract was illegal and unenforceable under the FSMA, as it involved the provision of regulated financial services without authorisation. The Court held that this would be contrary to the public policy of allowing such claims to be determined by the English courts, as they involve the protection of the public interest and the integrity of the financial system.

Conclusion

The English court concluded that the enforcement of the Award would be contrary to public policy under section 103(3) of the Arbitration Act 1996. The Court found no circumstances that would justify enforcing the Award despite the public policy concerns.

Our thoughts:

Where international companies in the web3 space wish to have arbitration agreements in their standard terms and conditions, they should look to ensure that their arbitration clauses are fair and reasonable for consumers, especially if they operate in or have customers from the UK. Requiring consumers to arbitrate in a foreign jurisdiction under foreign rules may be deemed unfair and unenforceable. It is therefore important for close attention to be paid to the choice of law and the dispute resolution forum.