NFTs and arbitration: A recent case of interest

30th May 2022

Walker Morris Commercial Dispute Resolution Partners Gwendoline Davies and Nick McQueen and Associate Kieran Craddock consider a recent case where the court stayed a consumer claim relating to an online auction bid for an NFT in favour of arbitration in New York.

Confused by the terminology? See our videos What is a blockchain? and What is an NFT? and our article Understanding blockchain, NFTs & smart contracts for a brief explainer.

Why is this case of interest and what practical advice arises?

Soleymani v Nifty Gateway LLC [1] is one of the first English court decisions concerning this type of digital asset and is yet another example of this jurisdiction continuing to position itself at the forefront of developments in this area [2].

The decision also reinforces the arbitration-friendly approach of the English courts and highlights their reluctance to interfere with the jurisdiction of the arbitral tribunal, even where questions of English consumer law are involved. It is interesting to see the court’s consideration of the factors tipping the balance in favour of leaving the US arbitrator and the New York court to decide issues going to the validity of the arbitration clause and to supervise the arbitration.

Arbitration remains a popular alternative to court litigation and is the method of choice for resolving cross-border disputes. Governing law and jurisdiction clauses can present numerous traps for the unwary, often resulting in unnecessary time and cost being spent further down the line when a dispute arises. Parties should ensure that they give careful thought to the drafting of these essential clauses from the outset, tailored to the particular circumstances [3].

How we can help

Walker Morris has a large team of specialists experienced in all aspects of commercial dispute resolution across all sectors, including national and international arbitration. Three of our partners are Fellows/Members of the Chartered Institute of Arbitrators. Our Technology & Digital experts are well placed to advise on disputes involving blockchain and other technologies.

If you trade internationally and/or are considering arbitration, or need any assistance or advice on drafting, dispute resolution options or strategy, please contact Gwendoline, Nick or Kieran.

What were the facts of this case?

The claimant, a UK resident, took part in an auction on the defendant’s online platform where digital assets can be bought and sold. He placed several bids for a blockchain-based NFT associated with a piece of digital artwork. The defendant informed the claimant he had been a “winner” and was liable in the sum of his last bid, which the claimant disputed. There was an issue as to what the claimant would have seen or reasonably understood before making bids.

The defendant, a Delaware-registered corporation with business premises in New York, commenced arbitration in New York for breach of contract. It relied on the arbitration clause in its terms of use, which also contained a New York governing law clause. The claimant commenced court proceedings in England for declaratory relief concerning the contractual basis of his participation in the auction.

The claimant argued that the defendant’s arbitration clause (either alone and/or in conjunction with the governing law clause) was not binding on him, by reason of being unfair under the Consumer Rights Act 2015 (CRA) and inconsistent with his rights under the Civil Jurisdiction and Judgments Act 1982 (CJJA).

The CJJA, which implemented the EU regime on judgments and jurisdiction, was amended in light of Brexit to include specific provisions on jurisdiction in consumer contracts. It provides that a consumer has the right to sue or be sued in their home jurisdiction. While the CJJA expressly follows the equivalent EU legislation in that it does not apply to arbitration (the ‘arbitration exception’), the claimant argued that the special protection afforded to consumers took the matter outside the scope of that exception.

The claimant also argued that any contract entered into arising from the placing of his bid was void for illegality under the Gambling Act 2005.

The defendant disputed jurisdiction. The court had to decide whether to decline jurisdiction or stay the proceedings under its general case management powers and/or section 9 of the Arbitration Act 1996 (the Act) [4].

What did the court decide?

The defendant was entitled to a stay of all parts of the claim under section 9 of the Act. It was also entitled to an order that the court had no jurisdiction in relation to the claim for a declaration that the arbitration clause was unfair and not binding on the claimant.

The ‘arbitration exception’

The claim for a declaration that the arbitration clause was not binding fell within scope of the arbitration exception. The claimant’s attempt to characterise the claim as falling outside the exception was inconsistent with English and EU court decisions. There was no basis to suggest that the CJJA gives a consumer resident in England an entitlement to have the validity of an arbitration clause in a consumer contract decided in England, and nowhere else.

The claims in relation to the governing law clause and the Gambling Act did not fall within the exception as their main focus was not arbitration.

The CRA

As to whether the CRA was applicable at all, the court was satisfied that section 89 of the Act (which provides that the CRA is extended to apply to an arbitration agreement and applies “whatever the law applicable to the arbitration agreement”) is part of English law and applies to an arbitration agreement regardless of the place of arbitration and the governing law of the arbitration agreement.

The stay of court proceedings

It was common ground that the claimant was party to a concluded arbitration clause, even if it was disputed whether that clause could be enforced against him. Whether applying English or New York law the arbitration clause clearly covered issues going to its validity and enforceability, even if the issues raised were consumer protection ones based on English law.

It was accepted that the Gambling Act claim and the dispute as to whether the governing law clause was unfair did not call into question the arbitration clause. They were plainly matters within its scope, even if they involved English law questions. Accordingly a stay had to be granted under section 9 of the Act, unless the claimant could satisfy the court under section 9(4) that the clause was “null and void, inoperative or incapable of being performed” on the balance of probabilities.

The claimant was entitled to raise issues under section 9(4) and the court has choices (and must take a view) on how to approach them. It can decide them on the evidence before it (a ‘summary determination’), order a trial of those issues, or decline to order a trial and stay the proceedings (typically on the basis that they can be addressed in the arbitration).

Key factors in deciding to grant a stay in this case

• There was an express choice of New York law (and seat) and the claimant’s evidence was not conclusive on the factual issues. The relevance of English law therefore remained highly disputed. In those circumstances, the balance was in favour of leaving the US arbitrator and the New York court to decide issues going to the validity of the arbitration clause (especially since they were linked to the underlying merits of the debt claim), and supervise the arbitration. The questions of consumer protection raised by the claimant were not matters that could only be adjudicated upon by an English court.

• English law recognises that the starting point is that an agreement as to the seat of an arbitration is an exclusive jurisdiction clause in favour of the courts of the seat [5]. This principle, together with the approach under section 9 of the Act and the English application of the established concept in international arbitration that an arbitral tribunal has the ability to rule on its own jurisdiction, meant that the existence of English law issues raised by the claimant did not tip the balance in favour of the English court deciding those issues.

• While efficiency is always important the mere fact that a consumer is invoking consumer rights does not justify a summary determination.

• The arbitration was already subject to the JAMS Policy on Consumer Arbitration (JAMS was the alternative dispute resolution provider nominated in the arbitration clause), which included questions as to whether the arbitration clause met minimum standards of fairness. There was a real risk that an enquiry by the English court would overlap.

• It was not inevitable that questions of fairness would come back to be decided in the English court, whether on enforcement or otherwise. The claimant’s evidence was that he had cryptoassets and other property interests outside the jurisdiction. The issues he was raising could also be raised within the arbitration or before the New York court.

• The questions were ones of fairness rather than technical English law questions. In the context of transactions that the claimant acknowledged to be “fundamentally de-centralised and borderless” an English judge could not be said to be significantly better placed than a US judge or arbitrator to decide the questions raised.

• There was no evidence to suggest any legitimate concern as to the quality of the arbitral tribunal or process in New York or the supervision of the New York courts, or the applicable New York law or its ability to protect consumers, or its ability to address questions of English law including matters of public policy.

• There was no evidence that there would be greater delay and cost in the New York arbitration. It was significant that JAMS caters for consumers taking part in arbitration, and the definition it gives for consumer is consistent with that applied under English law. The arbitrator had already taken into account the claimant’s concerns that he would be deprived of the right to appear in person at a hearing in New York, noting the possibility that matters could be dealt with remotely.

• There was no evidence of “an unfair arbitration” or even procedural imbalance. The claimant appeared to have been given a very full opportunity to raise his arguments on jurisdiction (including the fairness of the arbitration agreement) in the arbitration.

[1] [2022] EWHC 773 (Comm)

[2] See, for example, Ground-breaking Digital Dispute Resolution Rules published, English law can accommodate smart legal contracts, English court grants wide-ranging relief after cryptocurrency scam and Blockchain and commercial disputes: new Law Society guidance

[3] See our earlier briefings The importance of drafting effective dispute resolution clauses and Arbitration clauses and the need for clear drafting

[4] Where court proceedings are brought against a party to an arbitration clause/agreement, in respect of a matter which is to be referred to arbitration in accordance with that agreement, the party may apply to the court under section 9 for a stay of those proceedings. See our recent briefing.

[5] Enka v Chubb [2020] UKSC 38, see our earlier briefing