Soleymani v. Nifty Gateway LLC

In Soleymani v. Nifty Gateway LLC [2023] 1 WLR 436, the English Court of Appeal has now ordered a full trial into the validity of the New York JAMS arbitration clause under English law in the ToS of the Nifty Gateway NFT platform.

The dispute arose when the plaintiff, Mr Soleymani, participated in an NFT auction held on Nifty’s platform, in which he sought to purchase an NFT associated with art by the artist Beeple. When a dispute arose and Mr Soleymani refused payment, Nifty commenced New York JAMS arbitration as provided for in the Nifty ToS. However, Mr Soleymani issued concurrent proceedings in the English courts, seeking declarations that the New York governing law clause and the JAMS arbitration clause in Nifty’s ToS were unfair and so not binding, and that Nifty was in breach of the Gambling Act 2005 (the Gambling Act).

The first-instance judge stayed the court proceedings in favour of the arbitration. Mr Soleymani then appealed to the Court of Appeal and sought to establish the jurisdiction of the English courts under section 15B of the CJJA. He contended that the arbitration agreement in the ToS was unfair under the CRA, and that the entire applicable contract was void for contravening the Gambling Act.

While the Court of Appeal ultimately ordered that the issue of the validity of the arbitration clause could be decided in the English courts, it only did so in respect of certain claims. The English courts did not have jurisdiction to hear the issue of whether the arbitration agreement was unfair and not binding on him, as the CJJA regime did not apply to claims where the “principal focus” or “essential subject matter” of the claim was the validity or invalidity of an arbitration agreement.³ That issue would therefore be left for the arbitrator to decide.

However, the two questions regarding governing law and the effect of the Gambling Act could be resolved by the English courts. The Court of Appeal directed a trial on whether these issues rendered the arbitration clause null and void, inoperative, or incapable of being performed per section 9(4) of the AA. In support of its decision to allow these parallel proceedings, the Court of Appeal stated that vindication of a consumer’s rights under domestic law is best decided by a domestic court, because a domestic court is better placed to undertake the fairness assessment under domestic law than a foreign arbitrator. This exercise is not only for the benefit of the individual consumer but for the benefit of consumers as a class. In this regard, the inherent privacy in arbitration is not an advantage in a consumer context since decisions about consumer rights should normally be made in public in a court.⁴

Nifty now faces a full trial in the English courts before it will know whether the arbitration clause in its ToS is enforceable in England and Wales.

Chechetkin v. Payward Ltd & Ors

In Chechetkin v. Payward Ltd & Ors [2022] EWHC 3057 (Ch) (the First Decision), the English High Court first held that, notwithstanding the San Francisco arbitration agreement in the ToS of the cryptocurrency trading platform Kraken, or indeed the fact that in this case a tribunal had been formed and issued a final award, the court still retained jurisdiction over the dispute. Subsequently, the court held in Chechetkin v. Payward Ltd & Ors [2023] EWHC 1780 (Comm) (the Second Decision) that the final award should not be enforced because it was inter alia contrary to public policy considerations underlying domestic consumer rights legislation.

The plaintiff Mr Chechetkin, a lawyer by profession, traded on the Kraken trading platform and suffered losses, out of which the dispute arose. Kraken’s ToS contained an arbitration agreement specifying JAMS arbitration seated in San Francisco, and that the state or federal courts of San Francisco would have exclusive jurisdiction over any appeals of an arbitration award and any suit that was not subject to arbitration. Kraken’s operating company, Payward, commenced JAMS arbitration and in June 2022, successfully obtained an interim award that the arbitrator had jurisdiction and a final award dismissing Mr Chechetkin’s claims.

For his part, Mr Chechetkin commenced parallel proceedings before the English High Court contending that the trades were legally unenforceable because they were prohibited under the Financial Services and Markets Act 2000 (the FSMA).

In view of the arbitration agreement, Payward applied to the court to dismiss the proceedings and declare that it lacked jurisdiction in the matter.

In the First Decision, the court considered whether section 15B of the CJJA applied, which in turn required determining whether Mr Chechetkin was a “consumer” as defined in section 15E, namely “a person who concludes the contract for a purpose which can be regarded as being outside the person’s trade or profession”. Payward contended that the case did not fall within section 15B because Mr Chechetkin was not such a “consumer”, but rather a sophisticated person with a banking and finance background, garnered through his experience as a lawyer, who had opened a “pro account” that “increased the margin trading facilities” and “enabled him to undertake increased leveraged trades”.

However, the court found that Mr Chechetkin was indeed a consumer for these purposes and, despite the arbitration agreement, was entitled to bring claims in the English courts. Applying strictly the test in section 15E of the CJJA, the sophistication, expertise and knowledge of Mr Chechetkin was irrelevant to the strict question of whether that person had entered into the contract for a purpose which can be regarded as being outside the person’s trade or profession. In this case, Mr Chechetkin was a lawyer and the purpose of the contract was for dealings with digital assets, so such purpose was therefore outside his trade or profession.

The court also examined in the First Decision the interplay between the English regime for enforcement of foreign arbitration awards, and the circumstances in which an English court had the jurisdiction to hear the same matter under, for example, consumer protection legislation. Payward had contended that section 101 of the AA, concerning the enforcement of foreign arbitral awards, imposed a mandatory requirement to recognise the arbitration award, so the English court would be deprived of any jurisdiction in relation to a dispute which related to the same subject matter as the arbitral award. However, the court rejected this argument. In paragraph 52, the judge found that even a successful stay in favour of arbitration “does not remove the court’s jurisdiction over any existing proceedings”, but rather that it “enables a party to the arbitration agreement or award apply to stay them and to give effect to the contract between the parties by doing so”.

In the Second Decision, the court considered if the final award issued by the JAMS tribunal in San Francisco should be enforced in England and Wales or if its enforcement would be contrary to public policy considerations, including consumer protection legislation. This again turned on whether Mr Chechetkin was considered a “consumer” under the CRA, defined under section 2(3) to be “an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession”.

Payward argued that because Mr Chechetkin had used his account frequently and the sums invested were “reasonably large”, it followed that his trading was “knowledgeable, experienced and sophisticated” and entered into in order to “generate an income stream with which to support himself and his family”.

However, after hearing Mr Chechetkin’s oral evidence, the court had no difficulty in finding that he was indeed a “consumer”, given that he worked full time as a lawyer, it was his sole source of income, he had no experience in cryptocurrency trading at the time he applied for an account with Payward,⁵ his application was assessed on the basis that he did not work in the crypto or fintech fields, and he was acting on his own behalf without the intention to resell.

The court then considered Payward’s argument that Mr Chechetkin should be estopped from pursuing his FSMA claim before the court, given that he had not pursued such claim in the JAMS arbitration prior to the issuance of the final award by the tribunal. In this regard, the court noted the U.S. tribunal’s refusal to consider English law based on the wording of the arbitration clause, and considered itself not bound by any of the tribunal’s decisions, including those on its own jurisdiction.⁶ In any event, the court was not obliged to enforce an award “contrary to English public policy” simply because the tribunal had decided otherwise; it must “form its own view of the award’s consistency” with English public policy and may reach a different conclusion where necessary.

Given that the CRA and FSMA were unquestionably expressions of English public policy, when determining the enforcement of an arbitration award, the court is obliged to consider the issue of fairness under section 71 of the CRA.⁷ To start, the court found that enforcement of the final award would be contrary to the specific public policy embodied in section 74 of the CRA, where if a consumer contract had a “close connection with the UK”, the consumer rights issues falling within the CRA should be dealt with thereunder rather than under any foreign law. Mr Chechetkin’s contract with Payward was one with a close connection with the UK because it was a contract “between a UK national, domiciled in England, and a company incorporated in England, for services that were paid for in UK sterling and paid for under transactions to and from English bank accounts”: this alone was found to be sufficient to make the final award unenforceable.

Further, the arbitration clause in question was unfair not because it applied Californian law, but because it required disputes to be resolved in arbitration in California under the JAMS rules, rather than through the application of the CRA. Applying section 62(4) of the CRA, which states that a term is unfair if, contrary to the requirement of good faith, it causes a “significant imbalance in the parties’ rights and obligations to the detriment of the consumer”, the court held that a reasonable consumer would not have agreed to arbitration in California under the JAMS rules and the Federal Arbitration Act, where the application of English law is disadvantaged due to the lack of legal competence by U.S. federal courts to supervise disputes concerned with English law. In addition, since the arbitration forum was in California and U.S. attorneys were a practical necessity, a reasonable consumer would find hiring U.S. attorneys “both expensive and inconvenient”, whereas San Francisco was where the Payward group appeared to be headquartered. Crucially, the court noted that a U.S. arbitrator (such as the one appointed in this case) was not appropriate in determining matters of English law and financial services markets regulations. In this regard, the court also concurred with the Court of Appeal’s ruling in Soleymani, particularly the Court of Appeal’s reasoning that an English court was better placed than a U.S. arbitrator to deal with issues of English law, and overseas arbitration would place a significant burden on a UK consumer.

More fundamentally, the court found that enforcement of the final award would stop the proceedings in their tracks and stifle Mr Chechetkin’s claim under the FSMA, which would be contrary to the public policy considerations underlying that statute. In addition, if consumers were required to arbitrate in confidential proceedings in California, the Financial Conduct Authority’s ability to perform its statutory function would likely be hindered.

Thus, although the San Francisco arbitrator had already rendered an award, the English court was entitled to continue hearing the claim, and the platform’s claims against the court’s jurisdiction and for the enforcement of the final award were dismissed.

Lessons for platforms

The Nifty and Payward matters illustrate how domestic consumer legislation can give rise to procedural uncertainty, cost and complexity for VA platforms seeking to avoid or resolve disputes with their users. In both cases, the platform and user faced both arbitration proceedings, and parallel proceedings in the English courts.

Consumer-facing businesses, including VA platforms, should be alert to such challenges, and implement steps to reduce the relevant risks to the extent possible. This might include (a) conducting jurisdictional reviews to ensure that ToS are as compliant as possible with the mandatory requirements of their key markets; (b) identifying at the account opening stage documents whether a user is acting in a professional capacity; (c) 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; (d) establishing protocols to seek the user’s post-dispute consent to arbitrate; (e) otherwise minimising any perceived imbalances in the user’s rights to their detriment; and/or (f) 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.

As the industry matures, many of these requirements will become more commonplace. For instance, the Hong Kong Securities and Futures Commission’s Guidelines for Virtual Asset Trading Platform Operators require licensees to take steps to identify “each client’s financial situation, investment experience, and investment objectives”.⁸

1. Although as below, Article 1(2)(d) of the EU Exit Regulations excludes the CJJA’s application to arbitrations.
2. Sections 61, 62 and 71, and Part 1 of Schedule 2 of the CRA.
3. The Court of Appeal found that the application of section 15B of the CJJA is limited in scope by Article 1(2)(d) of the Recast Regulation, which expressly excludes the CJJA’s application to arbitrations. This would mean that the English court would not have jurisdiction in the circumstances where the “principal focus” or “essential subject matter” of the claim is the validity or invalidity of an arbitration agreement. That said, as of 1 October 2022, the expansion of the gateways in paragraph 3.1 of the Civil Procedure Rules Practice Direction 6B may now assist consumers in bringing a claim before the English courts to seek a declaration that an arbitration agreement is unfair and unenforceable.
4. The Court of Appeal held that this was part of the purpose of section 71 of the CRA so that decisions on consumer rights may have precedential value.
5. The court referred to section 62(5)(b) of the CRA as relevant when looking at the timing of when the “consumer” test should be applied. This section provides that whether a term is fair is to be determined “by reference to all the circumstances existing when the term was agreed”.
6. In particular, the court relied on the House of Lords decision in Dallah Co v. Ministry of Religious Affairs of Pakistan [2011] 1 AC 763, especially per Lord Mance at [21]-[23] and per Lord Collins of Mapesbury at [79]-[98].
7. Here, the court cites the Court of Appeal’s decision in Soleymani at [145]
8. Hong Kong Securities and Futures Commission’s Guidelines for Virtual Asset Trading Platform Operators, June 2023, section 9.5.

In-depth 2023-200