Reed Smith In-depth

Key takeaways

  • Virtual asset platforms are increasingly facing disputes with users which rely on their domestic consumer protection laws to avoid arbitration and seek instead to have the matter heard by their local courts.
  • Two recent decisions of the English court demonstrate the issues that can arise and consequences which follow.
  • Platforms which are alert to such challenges can implement steps to reduce the relevant risks to the extent possible.
  • This might include conducting jurisdictional reviews to ensure that ToS are as compliant as possible with the mandatory requirements of their key markets; identifying at the account opening stage documents whether a user is acting in a professional capacity; and putting in place protocols for external counsel to review higher profile disputes early in the course of any particular dispute so as to avoid incurring additional costs at a later stage.
  • It may also include: establishing protocols to seek the user’s post-dispute consent to arbitrate; otherwise minimising any perceived imbalances in the user’s rights to their detriment; and modifying the arbitration procedure to allow for consideration of the user’s domestic consumer protection laws, for example by providing that the presiding arbitrator be a lawyer qualified in the user’s jurisdiction.

Virtual asset (“VA”) trading platforms are increasingly encountering disputes with their users. There has therefore never been a better time for platforms to take stock of consumer protection legislation and its interplay with arbitration agreements contained within platforms’ terms of service (“ToS”).

Risk for VA platforms

Companies with consumer-facing contracts, such as centralised and decentralised cryptocurrency exchanges, often bring or defend claims against users in circumstances of alleged breach of contract, arising from manifestation of counterparty, smart contract, oracle, or software risk. Typically in their ToS these platforms choose to have disputes resolved by international arbitration, allowing for a flexible, confidential procedure, selection of specialist adjudicators, and binding awards which are readily enforceable across international borders.

However, even where its ToS specifies arbitration, a platform still faces the jurisdictional constraints posed by the users’ local consumer protection legislation. These are intended to redress imbalances in bargaining power and experience between consumers and business. For platform operators, this means that if a dispute arises, the platform might find itself contesting the validity of the arbitration clause in the user’s home courts, under the user’s own consumer protection laws.

The English regime

Two of the leading recent cases in this area have been decided by the English courts. The UK statutory regime allows individual users of a VA platform to bring claims in their local courts even where the platform’s ToS provides for arbitration.

Relevant provisions include:

  • Section 15B of the the Civil Jurisdiction and Judgments Act 1982 (CJJA), as amended by the Civil Jurisdiction and Judgments (Amendment) (EU Exit) Regulations 2019 No 479 (the Recast Regulation), entitling UK-domiciled consumers to bring claims relating to consumer contracts in the UK courts regardless of the domicile of the other party, subject to certain exceptions.1
  • Part 2 of the Consumer Rights Act 2015 (the CRA), providing protections for consumers against unfair terms in consumer contracts.2
  • Sections 89 to 91 of the Arbitration Act 1996 (the AA), extending the application of Part 2 of the CRA to arbitration agreements, with the effect that for consumer claims under £5,000, arbitration clauses are automatically unfair and foreign law clauses are automatically disapplied, whereas for consumer claims above £5,000, assuming the close connection provision in section 74 of the CRA applies, the clause is subject to the fairness provisions of the CRA irrespective of a choice of foreign law clause.

Having said that, when it comes to the interaction between arbitration and consumer protection, courts and jurisdictions might seek to strike a balance. On the one hand, the courts will seek to protect genuine consumers who have agreed to arbitration without fully appreciating the implications of doing so; on the other hand, the courts may not wish to undermine the parties’ legitimate agreement to refer disputes to arbitration, especially in view of obligations assumed under international instruments, such as the New York Convention, that impose a duty on each contracting state’s courts to recognise and enforce arbitration agreements.