Stop scrolling and read the Ts and Cs: Arbitration agreements in crypto disputes
Tuesday 13 December 2022
Jessica Lee
Brown Rudnick, London
jslee@brownrudnick.com
David Weinstein
Brown Rudnick, New York
dweinstein@brownrudnick.com
A recent English High Court decision1 concerning a non-fungible token (NFT) auction has brought into focus the use of arbitration agreements in crypto disputes. It is a caution to crypto and NFT holders worldwide, who may find themselves bound to arbitrate their disputes with crypto exchanges and NFT marketplaces in a foreign jurisdiction and applying a foreign law.
Nifty Gateway v Soleymani
A dispute arose between British digital art collector Amir Soleymani and the United States-based Nifty Gateway, an online marketplace for the sale and storage of NFTs concerning an NFT auction. Soleymani had placed a bid of $650,000 through Nifty Gateway’s platform on a digital piece titled Abundance by artist Mike Winkelman, aka Beeple, who in March 2021 sold an NFT titled The First 5000 Days for $69.3 million at Christie’s auction house.
Unfortunately for Soleymani, his bid placed second after Ethereum co-founder Taylor Gerring’s winning bid of $1.2 million. However, as one of the 100 highest bidders in the auction, Soleymani was informed that he was a ‘winner’ and was required to pay his bid amount in exchange for a second edition of the piece. Soleymani refused to pay, claiming that the terms of the auction had not been clear as he had understood that he was bidding only on the first edition piece.
Nifty Gateway filed a JAMS arbitration in New York against Soleymani pursuant to the arbitration agreement contained in Nifty Gateway’s standard terms of use, which Soleymani had accepted upon registration on the platform. Soleymani responded by issuing proceedings in the English court requesting a declaration that the arbitration agreement in Nifty Gateway’s terms of use was unfair and not binding upon him, and that any contract arising from the bid was void.
The key issues before the English High Court were:
1. whether the English court had jurisdiction over the dispute; and
2. if so, whether Nifty Gateway was entitled to a stay under section 9 of the Arbitration Act 1996 (AA) in favour of the JAMS arbitration in New York.
Did the English court have jurisdiction?
Soleymani sought to rely on Section 15B of the Civil Jurisdiction and Judgments (Amendment) (EU Exit) Regulations 2019 (CJJA), which mirrors Article 18 of the EU Brussels (Recast) Regulation and enables consumers to have disputes resolved in their place of domicile.
However, the High Court rejected Soleymani’s attempt to characterise the subject matter of his claims as consumer rights and held that the principal focus and subject matter of Soleymani’s claim was whether he was legally obliged to arbitrate, which therefore fell within the arbitration exception in the Recast Regulation such that the court did not have jurisdiction over the claim.
Some of Soleymani’s claims fell outside of the arbitration exception, so the High Court also considered whether the court had jurisdiction over those claims on the basis that Soleymani had concluded a consumer contract. Despite having an internationally accessible website with a mission statement to grow its business globally, achieve 1 billion NFT collectors and having hosted a marketing event in Bonhams in London, Nifty Gateway sought to argue that it did not direct its business activities outside of the US. The High Court was not persuaded and held that, where a trader purposefully directs its services and activities to consumers on a global, borderless and de-centralised basis, it would be ‘artificial to conclude that business activity only counts if it has a specific geographical boundary’.
Should proceedings be stayed in favour of the JAMS arbitration in New York?
Section 9 of the AA enables a party to an arbitration agreement to seek a stay of those proceedings where the proceedings concern subject matter which under the agreement is to be referred to arbitration. The court is required under section 9(4) of the Act to grant a stay unless the ‘arbitration agreement is null and void, operative, or incapable of being performed’.
The High Court considered that the wording of the arbitration clause in Nifty Gateway’s terms of use clearly extended to questions of its own validity and enforceability, and found that the consumer protection issues raised by Soleymani could be appropriately addressed by the arbitral tribunal. In ordering a stay, the court held that:
‘There was no evidence to suggest any legitimate concern as to the quality of the arbitral tribunal or the arbitral process in New York or the supervision of the New York courts, or indeed 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.’
This is consistent within the English courts’ tendency to defer to arbitral tribunals in trusted jurisdictions in the absence of major public policy concerns.
The approach in other jurisdictions
On the other side of the Atlantic, US courts are increasingly faced with questions as to the validity of arbitration clauses found in the terms of use of cryptocurrency trading platforms. Several crypto traders in the US have recently filed claims against the world’s leading NFT marketplace, OpenSea, for allegedly failing to protect some of its users from hackers who took advantage of a flaw in OpenSea’s coding to steal and/or purchase at an artificially low price several of the famed Bored Ape Yacht Club NFTs from some of the platform’s users.
One of the claims against OpenSea alleges that, in breach of duties owed to the user, OpenSea failed to prevent a hacker from accessing the user’s account, who then sold to himself a rare and valuable Bored Ape NFT for a mere 0.01 Ethereum (ETH) (which, on the 31 May 2022, is worth around $20), before then reselling the NFT for 99 ETH (around $200,000).
The claimant’s position is that OpenSea ought to have properly informed its users of the coding glitch and as a result put appropriate security measures in place, and is suing OpenSea for the return of the Bored Ape NFT, damages equivalent to the valuation of the NFT, and/or monetary damages over $1 million. The claimant estimated the value of the stolen NFT by reference to the NFTs’ ‘rarity score’, noting that a less rare Bored Ape NFT was purchased by Justin Bieber at 500 ETH, or $1.3 million, suggesting that the stolen NFT was worth even more.
In response to the claim, in May 2022, OpenSea filed a motion to compel arbitration in the US District Court of Texas arguing that the claimant was bound by an arbitration agreement contained within OpenSea’s terms of use. OpenSea claims that the claimant was bound by the terms by having frequently used the platform to purchase NFTs, requiring him to connect his crypto wallets to the platform and to sign into the platform’s mobile application. The arbitration clause in OpenSea’s user agreement provides that:
‘You agree that any dispute, controversy, or claim relating in any way to your access or use of the Service, to any products sold or distributed through the Service, or to any aspect of your relationship with OpenSea, will be resolved by binding arbitration, rather than in court, including threshold questions of the arbitrability of such dispute, controversy, or claim.’
Given the historic approach by the US courts in tending to defer to inclusive arbitration clauses, the Court may well grant OpenSea’s motion to compel arbitration, further bolstering the recognition by US courts of arbitration clauses in blockchain platform user agreements.
In a further example of arbitration based on a dispute resolution clause in a crypto exchange’s standard terms, a ‘class’ of approximately 700 users of the crypto platform Binance have filed for arbitration under the rules of the Hong Kong International Arbitration Centre pursuant to the arbitration clause in Binance’s terms of use.
At the heart of the Binance dispute is one of the most volatile days in the history of cryptocurrency trading. On 19 May 2021, Binance’s trading platform crashed and was unavailable for a several hours, preventing the claimants from accessing their accounts to mitigate the damage of the dramatic plummet in cryptocurrency values which occurred on that day. It has been reported that the claimant class includes hundreds of cryptocurrency derivative traders who were affected by the Binance platform crash on that day, with an estimated collective loss of at least $100 million.
A key aspect of this dispute is likely to centre on Binance’s corporate structure, given the platform’s self-declared modus operandi of anonymity through decentralisation, which may mean that attaching liability to a particular Binance entity is not straightforward. This novel issue may also arise in the context of the validity of the arbitration clause in Binance’s terms of use as against various Binance entities (who may or may not be signatories to or bound by the same terms of use) and in the context of enforcing any subsequent arbitral award.
Since that arbitration was filed, Binance, along with many other crypto exchanges and marketplaces, have incorporated drafting into their terms of use attempting to limit users from bringing class actions against them.
Comment
Courts around the world are swiftly establishing precedent for the recognition of arbitration clauses in terms of use for cryptocurrency trading platforms; however, many novel issues are yet to be determined and the scope for disputing enforceability remains open.
Those involved in blockchain-based trading should take note, as they may be unwittingly bound by arbitration clauses. Users may need to get creative if seeking to dispute the enforceability of such agreements.
---
1. Nifty Gateway v Soleymani [2022] EWHC 733 (Comm)