Claim of Consumer Rights: Online NFT Contract Governed by New York Law and Arbitration – Is It Fair? | Hogan Lovells

The case concerned the purchase of a non-functional token linked to a work of art by a high net worth individual (with assets inside and outside the UK) for US$650,000 through an online auction service that he registered for while in the UK.

The practical effect of this decision is that there are two parallel proceedings deciding overlapping legal and factual matters. The English courts will conduct a trial of the buyer’s consumer claim. An arbitration court in New York will hear the supplier’s claim for non-payment under the contract. This creates a risk of inconsistent decisions (between the English courts and the arbitral tribunal). It also presents enforcement risks. For example, if the English courts upheld the consumer claims, an award would be unenforceable in the UK and would likely lead to uncertainty about how courts in other jurisdictions would treat conflicting decisions.

To minimize these risks, suppliers offering goods or services to individuals in the UK should take steps to ensure that their contract terms will satisfy the fairness requirements of the English Consumer Rights Act and be prepared to defend any challenge that may be made in the English courts .

Facts

Mr Soleymani is a high net worth individual domiciled in England (and with assets located both in the UK and in other jurisdictions), who participated in online global auctions of Non-Fungible Tokens linked to works of art hosted by Delaware-incorporated Nifty Gateway. Prior to the current auction, Soleymani had participated in previous online auctions run by Nifty and purchased NFT artworks for over USD 2.5 million. These auctions were “conventional” auctions in that there was a single unique NFT that was auctioned with the highest bidder purchasing the NFT.

The auction in question was different, it was a “ranked” auction, meaning there were 100 NFTs attached to the same artwork and the top 100 bidders each got one NFT (equivalent to a limited edition rather than original painting) . Mr. Soleymani bid US$650,000 for an NFT of the digital artwork “Abundance” by Beeple and placed third. Soleymani claimed that he had bid on the basis that the auction was a conventional auction and refused to pay. Nifty initiated a claim for the bid value in an arbitration in New York under the JAMS rules, as set out in Nifty’s terms and conditions, which Mr Soleymani had accepted by clicking when he registered on Nifty’s online auction platform.

Mr. Soleymani challenged the validity of the arbitration agreement and commenced proceedings in England seeking a declaration that: (i) the arbitration agreement was unfair and therefore not binding, (ii) the applicable statute is unfair and not binding, and (iii) the contract was illegal ab initio in breach of the English Gambling Act 2005. The Court of Appeal noted that Mr Soleymani was an “unusual type of consumer” but that his case was properly arguable and to determine whether Mr Soleymani was a consumer and whether the contract met the fairness requirements of the Consumer Rights Act, a trial must be conducted to establish the necessary facts.

Nifty brought an application seeking to challenge the jurisdiction of the English courts and sought: (i) a declaration that the court has no jurisdiction, and (ii) a stay of the court under section 9 of the Arbitration Act 1996 (the “AA“).

At first instance, the English High Court granted the declaratory relief sought by Nifty and stayed the English litigation regarding the consumer rights claims in favor of the New York arbitration initiated by Nifty. Soleymani appealed these rulings. The Court of Appeal allowed the appeal to lift the stay of proceedings and granted a trial on the question of whether the arbitration agreement is invalid, ineffective or unable to be fulfilled in relation to the applicable law and requirements of the Gambling Act. The stand-alone claim regarding the unreasonableness of the arbitration clause itself was found to fall outside the jurisdictional gates. The Court of Appeal indicated, however, that if there had been a claim for disclaimer due to the unreasonableness of the contract as a whole or had been submitted after changes to the rules of civil procedure that came into force on 1 October 2022, then the claim would have been subject to the same analysis as the Regulation Act and the Gambling Act claim.

The Court of Appeal ruled that the public importance of having English consumer rights claims decided by the English courts outweighed the factors in support of granting a stay in favor of the New York arbitration, such as the fact that Soleymani was not an ordinary type of consumer (including being a high net worth individual with assets inside and outside the UK), that he would not suffer any procedural disadvantage because he had the financial means to participate fully in the arbitration and the arbitration was conducted in accordance with the JAMS Policy on Consumer Arbitration (which required that the tribunal should take into account fairness).

Observations

This case is important for suppliers of goods and services aimed at individuals in the UK. It was sufficient in this case that the UK was one of 49 jurisdictions to which the auction services were directed.

In its decision, the Court of Appeal noted that despite Soleymani being a high-net-worth individual and an unusual type of consumer, decisions affecting consumer rights are of public importance and should therefore be reviewed in a public court rather than an arbitral tribunal.

Any business that directs its commercial activities to individuals in England and Wales, regardless of where the business is located and its status as a “decentralized or borderless” business, must ensure that the terms of the contract meet the fairness requirements of English consumer protection law and be prepared to prove that this is the case in the English courts if challenged.

The Court of Appeal made it clear that in such a case the courts in England will themselves consider whether the terms, including applicable law and dispute resolution, are fair and consistent with consumer law in England and Wales before deciding whether to stay. proceedings in favor of arbitration or another agreed dispute resolution mechanism. Arbitration remains an attractive form of dispute resolution for online agreements due to the ability to enforce awards in 169 jurisdictions under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. However, where transactions involve individuals in the UK, consumer rights claims may be brought in the English courts as a precursor to or in parallel with arbitration or other dispute resolution proceedings under the relevant contract.

The next stage of the case will involve an English High Court trial to determine the merits of Mr Soleymani’s consumer rights claim. It is expected that the outcome of these proceedings may provide guidance regarding the application of consumer protection legislation to online transactions involving high net worth individuals.