UK: High Court Considers Application Of Gateways For Service Out Of The Jurisdiction To Cryptoassets Removed From The Jurisdiction

A recent High Court decision suggests that there is some doubt as to the proper construction of the gateways allowing service out of the jurisdiction for claims relating to property in the jurisdiction, and for claims in constructive or resulting trust relating to assets within the jurisdiction. In particular, the decision suggests that it may not be sufficient that the relevant property or assets are within the jurisdiction when the cause of action arose, if they are no longer within the jurisdiction when the application for permission to serve out is made: Osbourne v (1) Persons Unknown Category A (2) Persons Unknown Category B (3) Thembani Dube [2023] EWHC 39 (KB).

If this approach is adopted in other cases, it may present particular challenges to victims of fraud or theft of cryptoassets, given the ease and speed at which such assets may be transferred internationally. Even if the relevant time is when the cause of action arose, it may be difficult to rely on these gateways to serve proceedings out of the jurisdiction on defendants who later received the assets but were not party to the original theft. The same difficulty arises, in relation to such defendants, in relation to the gateway for claims in constructive or resulting trust arising out of acts committed within the jurisdiction.

In the present case, relating to stolen NFTs, the court accepted that there was a good arguable case that the assets were located in England and Wales when they were first transferred out of the claimant's wallet, as the claimant was domiciled in England. However, given that the assets had subsequently been transferred to persons unknown who may have been domiciled outside the jurisdiction, it was not clear that the assets remained in England when any cause of action arose against further defendants as constructive trustees, or that the claims against those defendants arose out of acts committed within the jurisdiction.

However, the court did allow service out of the jurisdiction under the gateway for claims in constructive or resulting trust which are governed by English law. This gateway may provide a fallback in many cases where there is a theft of cryptoassets which, at the time, were located in England but the above gateways are unavailable due to subsequent transfers of the assets.

In addition, the court allowed service to be made by the alternative means of an NFT (in line with the recent decision in Jones v Persons Unknown [2022] EWHC 2543 (Comm), considered here).

Background

The background to this case was considered in our blog post on a previous decision in this case, Osbourne v Persons Unknown [2022] EWHC 1021 (Comm). In summary, the claimant was given two NFTs which were held in a wallet linked to a marketplace trading as Opensea. These were removed from her wallet by hackers and transferred multiple times to other wallets linked to Opensea.

In March 2022, HHJ Pelling KC granted an injunction restraining the first defendants (the alleged hackers) from dealing in the NFTs, allowed service out of the jurisdiction by alternative means, and ordered Opensea (the second defendant) to provide information about the holders of wallets to which the NFTs had been transferred. Opensea provided some email addresses to the claimant, but no responses were received to emails sent to those addresses.

Subsequently, the claimant obtained evidence that one of the NFTs had been transferred to a different wallet connected to an individual living in South Africa, Thembani Dube, and was being advertised for auction. The court permitted the claimant to amend the claim form and particulars of claim to add the third and fourth defendants (Persons Unknown Category B, being those who possessed the stolen NFTs, and Thembani Dube) under CPR 19.2(2)(b), as there was an issue involving them and the claimant which was connected to the matters in dispute, i.e. whether the third and fourth defendants held the NFTs on constructive trust for the claimant.

The court was asked to consider the claimant's applications for (i) service of the amended documents out of the jurisdiction, (ii) an interim injunction against the third and fourth defendants, and (iii) service of the amended documents by the alternative means of an NFT containing embedded hyperlinks.

Decision

The High Court (Lavender J) granted the interim injunction and gave permission to serve the claim form and other documents out of the jurisdiction by means of NFT to the relevant wallets.

Interim injunction

Lavender J considered that it would be appropriate to grant an injunction against the third and fourth defendants based on the principles in American Cyanamid Co v Ethicon Ltd [1975] A.C. 396. He agreed with HHJ Pelling that there was at least a realistically arguable case that NFTs are to be treated as property under English law, noting that a similar conclusion was reached in relation to cryptoassets such as Bitcoin in a line of cases including AA v Persons Unknown [2020] 4 W.L.R. 35, considered here, Ion Science v Persons Unknown (unreported) 21 December 2020, considered here, and Fetch.ai Ltd v Persons Unknown [2021] EWHC 2254 (Comm)).

He was also satisfied that there was a serious issue to be tried whether the third and fourth defendants held one or both of the NFTs on constructive trust for the claimant. There was evidence that the two NFTs were property obtained by the first defendants by fraud and transferred in breach of trust to the third and fourth defendants.

Lavender J agreed with HHJ Pelling that damages would not be an adequate remedy for the claimant, the cross-undertaking in damages offered by the claimant would be sufficient protection for the defendants, and the balance of convenience lay in favour of granting the injunction.

Service out of the jurisdiction

The judge noted that, to obtain permission to serve out, the claimant had to establish: (i) a serious issue to be tried; (ii) a good arguable case that the claim falls within one of the 'gateways' set out in sub-paragraph 3.1 of PD 6B; and (iii) that England and Wales is clearly the most appropriate forum for the trial of the dispute.

Lavender J was satisfied as to limbs (i) and (iii). In relation to limb (ii), he addressed the two main gateways the claimant relied on:

The claimant relied on Ion Science to submit that there was at least a serious issue to be tried that the lex situs of a cryptoasset was the place where the person who owned it was domiciled. HHJ Pelling had also made remarks to this effect in his judgment of March 2022. Lavender J accepted that there was a good arguable case that the two NFTs were located in England and Wales when they were in the claimant's wallet. However, the NFTs were then transferred to a wallet in the possession/ control of persons unknown who may have been domiciled outside the jurisdiction, and further transfers took place later on.

As the judge noted, this highlighted an issue as to when the property has to be located in the jurisdiction for gateways 11 and 15(b) to apply. He noted that the judgments in Fetch.ai and D'Aloia v Persons Unknown [2022] EWHC 1723 focused on where the assets were located before the justiciable act occurred, but said he thought there was room for doubt as to whether that proposition was correct. In his view, the wording of the introduction to paragraph 3.1 of PD6B suggested that the relevant determination should be made when the application is made for permission to serve out of the jurisdiction, not when the cause of action accrued. In any event, it was not clear on the facts that the NFTs remained in England and Wales at the time any cause of action accrued against the third or fourth defendants.

In relation to gateway 15(a), Lavender J noted that there was a question of construction as to which acts need to take place within the jurisdiction for the gateway to apply. On the facts here it could not be assumed that the transfers of the NFTs to wallets in the possession or control of the third and/or fourth defendants took place within the jurisdiction.

Lavender J did however find that there was a strongly arguable case, in relation to gateway 15(c), that the claim against the third and fourth defendants was governed by the law of England and Wales. In his view it was strongly arguable that the constructive trust alleged to have been created when the hackers transferred the NFTs from the claimant's wallet was governed by English law and, as a result, that the question whether the third and fourth defendants became constructive trustees when they received the trust property was also governed by English law. Service out of the jurisdiction was therefore permitted under this gateway.

Alternative service

The claimant submitted that, with the exception of email service on the fourth defendant, it had no means to serve the amended claim documents on the other defendants apart from NFTs sent to the relevant wallets that were now thought to contain the NFTs. Lavender J allowed alternative service on this basis.

Since the NFT transfer would be 'on the blockchain' and the hyperlinks containing court documents would be visible to the public, the judge allowed the claimant to submit redactions for approval (on the condition that unredacted versions would be offered to the defendants).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.