Hong Kong: Court Refuses To Enforce Foreign Arbitration Award Against Cryptocurrency Exchange User

In 2020, Mr Chechetkin, a UK based lawyer, undertook various trading activities on a cryptocurrency exchange platform operated by Payward's UK subsidiary, Payward Ltd (Payward). To trade on the platform, Mr Chechetkin had to confirm the terms and conditions which governed the platform (the Payward Terms). One of the Payward Terms mandated that any disputes be resolved through Judicial Arbitration and Mediation Services (JAMS) arbitration, seated in San Francisco.

Mr Chechetkin incurred losses of over £600,000 on the platform, and sought to recover these funds by initiating proceedings in the English courts. He argued that Payward was undertaking regulated activities and, as it was not authorised, his contract with the company was unenforceable under s.19 of the FSMA and therefore his losses were recoverable.

In response, Payward initiated arbitration in California under the Payward Terms, seeking a declaration that it had no liability towards Mr Chechetkin. The arbitrator rejected the objections set out by Mr Chechetkin and ruled (in 2022) that Payward had no liability towards him. The arbitrator also held that Mr Chechetkin was required to arbitrate his disputes with Payward under clause 23 of Payward's Terms and therefore prohibited him from pursuing his FSMA claim in the English courts.

Payward then sought to enforce the arbitral award in England and Mr Chechetkin opposed the enforcement proceedings under section 103(3) of the AA 1996.

The parties' arguments

Payward sought to enforce its award in the English court on the basis that it was enforceable as a New York Convention award, and was therefore to be "recognised as binding on the persons as between whom it was made" and "enforce[able] in the same manner as a judgment or order of the court", pursuant to section 101 of the AA 1996.

Mr Chechetkin contended that enforcement of the award would have ended the FSMA litigation, as he would have been prohibited from continuing his claim before the English courts. He therefore opposed the enforcement proceedings under section 103(3) of the AA 1996, which enables the courts to exercise their discretion to refuse enforcement on 'public policy' grounds. The public policy grounds in question were the CRA and the FSMA.

Decision

In the enforcement proceedings, Mr Justice Bright considered three main issues: whether Mr Chechetkin had consumer status, the non-binding nature of arbitrator's determinations, and the public policy grounds.

First, the court had to determine whether Mr Chechetkin qualified as a consumer under the CRA. Section 2(3) of the CRA defines a consumer as "an individual acting for purposes that are wholly or mainly outside that individual's trade, business, craft or profession". The judge confirmed that he met the 'acting outside of profession' criteria under section 2(3) of the CRA, as (i) he was a lawyer and therefore did not have material knowledge or experience of cryptocurrency trading, and (ii) Payward had assessed him to be a customer, acting for non-commercial purposes.

Second, the court held that a JAMS arbitration before an arbitrator with no experience of English law was not the right forum to determine the FSMA claim. It relied on the case of Dallah Co v The Ministry of Religious Affairs of Pakistan [2011] AC 763 which found that a court in a different enforcing jurisdiction is not bound by a tribunal's finding on its own jurisdiction. The court distinguished the approach set out in Alexander Bros Ltd (Hong Kong SAR) v Alstom Transport SA [2020] EWHC 1584 (Comm) which prevents enforcing courts from reopening arbitrators' findings.

It did so on the basis that the tribunal in Alexander Bros had the jurisdiction to consider the relevant legal issues, whereas the Californian arbitrator had refused to apply English law and had given no real consideration to the FSMA-related arguments.

Finally, the court confirmed that both the CRA and FSMA formed part of English public policy. The CRA, it was decided, was established as public policy following several decisions from the Court of Justice of the European Union binding English courts. As the FSMA is a UK statute with regulatory objectives, it was also held to form part of UK public policy.

The Court ultimately held that the enforcement of the award would be contrary to UK public policy. If it allowed the enforcement of the award, the court would be disregarding its obligation to determine the fairness of clause 23 of the Payward Terms. This obligation is founded in both Mr Chechetkin's claim and also under section 71 of the CRA, which states that a court is required to consider the fairness of consumer contracts, even where this is not raised by the parties. As set out in section 74, the CRA applies where consumer contracts have a 'close connection' with the UK. It was held that the contract had a close connection with the UK because Mr Chechetkin resided in the UK, Payward was incorporated in the UK and payments were made in Sterling using English bank accounts. This meant that the arbitrator's refusal to consider English law was sufficient to make the award unenforceable as a matter of public policy.

Key Takeaways

It is very rare for the English courts to refuse to enforce a New York Convention award on public policy grounds. Although arbitration will likely remain the preferred option for internet service providers such as cryptocurrency platforms, they need to be aware of potential difficulties in enforcing any arbitral award against consumers. This is particularly relevant for many novel online financial services, whose standard terms often contain compulsory arbitration clauses and exclusive jurisdiction clauses purporting to exclude English law statutory protections.

However, it is worth noting that the case was decided within the specific context of consumer rights, and the court's decision appears to be driven by the unique circumstances and the need to safeguard consumer rights in the UK. It is therefore unlikely to be indicative of a broader trend of English courts refusing to grant arbitrational awards.

With thanks to Dani Bass for her assistance in preparing this post.

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