With the rapidly evolving cyber economy, the courts are struggling to draw boundaries in a decentralized world. A recent case suggests the way forward
In the book from 1997 Sovereign individual, the authors envisioned a global cyber economy in which individuals base themselves wherever they wish. Over two decades later, a blockchain economy emerges, which partially realizes this vision. In this new world, transactions and services are carried out in a boundless, decentralized way. This raises fundamental questions about legal systems designed for conventional businesses related to physical locations. A recent case gives an indication of how the English courts react in a dispute over blockchain-based non-fungible tokens (NFT) between a trading platform and the user (Soleymani v Nifty Gateway LLC [2022] EWHC 773 (Comm). In essence, the court sought to draw jurisdictional markers in this boundless dispute.
100 winners of one NFT auction
Mr S, an art collector in Liverpool, was an active user of the US-based NFT trading platform Nifty. In April and May 2021, Mr S participated in an auction of digital art held by Nifty, and placed a bid for an NFT associated with a work of art by Beeple entitled “Abundance”. His bid of $ 650,000 was the third highest. Nifty informed Mr S that he was a winner in the auction and had to pay the amount for his bid. According to Nifty’s rules, the 100 highest bidders were winners of a numbered edition of the artwork corresponding to the placement of their respective bids. Consequently, Nifty claimed that Mr S was obliged to pay for the third edition of Abundance. After learning about Nifty’s rules, Mr S refused to pay.
Nifty started arbitration in New York against Mr S, based on the terms and conditions, which it claimed Mr S agreed to after opening his account in February 2021. The terms require the parties to submit their disputes to JAMS, an arbitration service provider in New York York. Under the JAMS policy, in a consumer arbitration, additional standards of justice are applied in the proceedings. The arbitrator ruled that S met the definition of a consumer. Mr S applied to dismiss the arbitration, claiming that Nifty’s terms had not been brought to his attention. The arbitrator ordered a hearing in September 2022.
English legal proceedings
While disputing Nifty’s claims in the New York arbitration, Mr. S. started litigation in English courts, arguing that New York’s statutory provision and the arbitration clause in Nifty’s terms were unfair and should not be binding on him. Mr S relied on the Civil Jurisdiction and Judgments Act 1982 (CJJA), which states that consumers have the right to resolve disputes in their national courts. This reflects the revised Brussels Regulation (EU) No. 1215/2012 (Brussels Regulation), which regulates the recognition and enforcement of civil and commercial judgments in the EU.
Nifty contested the jurisdiction of the English court and sought an adjournment of the proceedings. Nifty claimed that the CJJA does not apply to arbitration-related claims. Despite acknowledging that the company had a global reach, Nifty also claimed that it did not target any marketing activity to the UK. S could therefore not establish jurisdiction under the CJJA.
In light of the New York arbitration, the court had to rule on two issues:
- Did the English court have jurisdiction under the CJJA?
- Could Nifty postpone the English trial under the English Arbitration Act 1996?
The court held that the CJJA provisions did not apply to S’s claim that the arbitration clause was unfair, because these provisions do not apply to arbitration. However, the arbitration exception did not apply to S.’s other claims. Consequently, the court had to decide whether there was a consumer agreement under the CJJA. In particular, it had to decide whether Nifty led commercial operations in the United Kingdom.
Taking into account the parties’ arguments, the court discussed the following factors to find for S:
- The court disagreed with Nifty’s argument that the business was “New York-centric”, as some of the activities were aimed at the United Kingdom. Uses the approach in Bitar mot Banque Libano-Francaise [2021] EWHC 2787 (QB), this also shows that getting business in the UK was not entirely coincidental or unimportant to Niftys marketing strategy
- Other activities were specifically aimed at the United Kingdom. For example, Nifty had promoted an NFT-related webinar hosted by a London-based group. Nifty’s founders had also taken part in an interview published in the British newspaper, The times.
- In light of the features of the NFT market (which was accepted by Nifty as limitless and global), some US-related factors were of limited weight. The evidence did not indicate that Nifty’s business activities were directed at US customers, unlike customers elsewhere.
- The relevant case-law (Pammer v Reederei Karl Schluter GmbH & Co KG [2011] 2 All ER (Comm) 888) related to businesses that provided services related to a specific location. Factors explored in Pammer was not aimed at businesses that are borderless and decentralized by nature. Consequently, Pammer does not mean that the CJJA must be interpreted as providing no protection to consumers of a global borderless business.
In these circumstances, the court found that Mr S provided plausible evidence to establish a jurisdictional sport under the CJJA for his allegations of the applicable law clause and the English Gambling Act.
Stay in favor of arbitration
Under the Arbitration Act, the English courts must adjourn the proceedings where the dispute is subject to an arbitration clause, “unless they are convinced that the arbitration agreement is null and void, inoperative, or incapable of being performed”. Mr S accepted that he was a party to the arbitration clause, but contested its enforceability. The court nevertheless concluded that S ‘claims should be postponed:
- The arbitration clause covered validity and enforcement issues, although the issues raised were issues of consumer protection based on English law.
- A number of factual questions were raised. Mr S acknowledged that the blockchain technology that formed the basis of the transaction gave rise to several new points that required a careful factual investigation. Mr S did not have a strong case on these issues of fact or arbitration which justified the summary decision of the court.
- Ultimately, the issues in the dispute concerned points of justice, rather than technical issues of English law. In the context of decentralized and limitless transactions, an English judge was not significantly better placed than an American judge or arbitrator to decide justice.
- There was no evidence to suggest any legitimate concern regarding the quality of the court, the arbitration process, the supervision of the courts of New York, the ability of New York law to protect consumers, or its ability to raise issues of English law.
“In the context of transactions that were recognized as ‘fundamentally decentralized and borderless’, an English judge cannot be said to be significantly better suited than a US judge or arbitrator to decide the issues of justice raised.”
MS CLARE AMBROSE QC, HIGH COURT JUDGE
Importance
Despite being fact – specific, this case highlights the English courts’ position on issues arising from blockchain – related transactions. For Internet companies, especially those that offer blockchain-related services (sometimes called Web3 companies), the following questions are worth considering:
Where is the business headed?
Although many Web3 companies offer services globally, the English courts may consider that their commercial activities are directed at a specific jurisdiction. Relevant factors include the service provider’s statement about its geographical coverage, the availability of the services and any business campaign closely related to a particular jurisdiction, such as the NFT London webinar and The Times article in this case.
Who are your users?
Internet companies are often less clear on this. This is especially the case for blockchain companies, where the parties often interact with each other on a pseudo-anonymous basis. Such transactions are pseudo-anonymous because a public blockchain address can be traced back to a personal identity. Consequently, many companies set qualification requirements for users in the standard terms. If users are considered consumers, relevant national legislation may provide them with additional protection.
Who has jurisdiction?
The questions above are relevant to assessing jurisdiction. While many Web3 institutions include arbitration clauses in their terms, users can still sue in their home courts. This is not the first time the user has relied on consumer protection laws to search for a more favorable forum. IN Ang v Reliantco Investments Ltd [2019] EWHC 879 (Comm), a user of a cryptocurrency platform relied on the Brussels Regulation, and asked the English court to disregard the platform’s standard terms, which gave Cypriot courts exclusive jurisdiction. The court in that case concluded that the user was a consumer under the Brussels Regulation and had the right to advance her claim in England.
Ultimately, we expect to see more conflicts between the dispute resolution clause in the Web3 companies ‘contracts and the local laws in the users’ domicile.
What does blockchain and cryptocurrency mean for arbitration?
The court in this case recognized the distinctive features of blockchain transactions and agreed that many existing authorities on conventional contracts are not entirely useful. Consequently, lawyers and arbitrators should be prepared to deal with new issues that arise from this area. Examples include:
- Establishment of applicable law for on-chain activities where there is no express agreement.
- Determine the relationship between an NFT (as an on-chain token) and its associated artwork. In Nifty’s auction, one work of art was linked to 100 NFTs.
- Assess whether a crypto platform or blockchain protocol is centralized or decentralized. This leads to the question of whether liability can be attributed to individual persons or entities.
New issues provide new opportunities. Many institutions in the cyber sector have adopted arbitration as their preferred dispute resolution mechanism. The usual benefits of arbitration, including simple enforcement, neutrality and participation in court elections, apply just as much to the blockchain economy as to the traditional economy. Arbitration seems to be the most popular gateway to justice in this boundless world.
