Amateur investor brings claim for losses on cryptoasset exchange
The dispute arose between Maxim Chechetkin (a lawyer and British citizen), and a group of companies operating the Kraken cryptoasset exchange (“the Payward group”). When signing up for a Kraken exchange account, Mr Chechetkin agreed to terms and conditions governed by Californian law, which provided for any disputes to be referred to arbitration under the Judicial Arbitration and Mediation Service (“JAMS”) Rules and seated in San Francisco. Similar dispute resolution provisions are routinely used for online businesses based in California.
After incurring trading losses of £608,354, Mr Chechetkin initiated proceedings in the English High Court against Payward Ltd (“the FSMA Proceedings”). He argued that Payward Ltd had breached the Financial Services and Markets Act 2000 (“FSMA”) by failing to obtain the necessary FCA authorisation to operate the exchange. He further claimed that the arbitration clause was unenforceable.
The Payward group initially applied for an injunction in the English courts against the FSMA Proceedings, which was rejected. They then brought arbitration proceedings in San Francisco, applying Californian law. The arbitrator issued an award in favour of the Payward group, holding (among other things) that Mr Chechetkin was barred from bringing any claims against the Payward group in the UK.
The Payward group then sought to enforce the JAMS arbitration award in the High Court and suspend the FSMA Proceedings.
Court refuses to enforce award on public policy grounds
Mr Chechetkin challenged enforcement of the award. His principal argument was that enforcement would be contrary to public policy, under s. 103(3) of the Arbitration Act 1996 (“the Act”), because it would breach two English statutes: the Consumer Rights Act 2015 (“CRA”) and the FSMA.
CRA
Having found that Mr Chechetkin was a “consumer” under the CRA (as a lawyer by profession, he had not opened his account in the course of a trade, business, craft or profession and had “no material knowledge, experiences or sophistication” of cryptocurrency), the court determined that the CRA was an expression of UK public policy. This was because, among other things:
- The CRA is the UK’s enactment of the EU Directive on unfair terms in consumer contracts (“the EU Directive”), which the Court of Justice of the EU has determined to be public policy;
- s. 71 of the CRA obliges the court to consider the fairness of consumer contract terms even if not raised by either party; and
- s. 74(1) of the CRA provides (as a direct enactment of the EU Directive) that even if a consumer contract applies a law outside the UK, the CRA will still apply where the contract has a close connection with the UK.
The court then concluded that enforcement of the award would be contrary to public policy under the CRA, because:
- The Payward group was essentially asking the court to not consider the fairness of the arbitration clause under the CRA. This contravened s. 71 of the CRA.
- The arbitrator should have applied the CRA to the contract between Mr Chechetkin and the Payward group, given the close connection with the UK under s. 74 of the CRA. However, the arbitrator had looked solely at Californian law, taking no account of the CRA or any element of English law.
- Under s. 62 of the CRA, the court considered that the arbitration clause was unfair because a reasonable consumer would not have agreed to such terms. In particular, the court found that a reasonable UK consumer would not have agreed to arbitration in California under Californian law. This is because: there is no right to appeal based on an error of law, the consumer has to hire US counsel and the Californian arbitrator would likely have no experience in dealing with the English law issues raised in the present case.
FSMA
The court held that the FSMA was also an expression of public policy, as it advanced objectives expressly identified by Parliament as matters of public policy, including consumer protection and the functioning of relevant markets.
Enforcement would be contrary to public policy under the FSMA because, among other things:
- Enforcement of the award would halt the FSMA Proceedings, denying Mr Chechetkin any opportunity to have his FSMA claim properly heard and decided.
- Investigation and prosecution of offences is less likely to occur if such claims are pursued in confidential arbitration proceedings in a foreign jurisdiction (e.g. California), rather than in the UK.
No issue estoppel
The court also rejected Payward’s argument that Mr Chechetkin should have brought his FSMA claim in the JAMS arbitration, and was now estopped from doing so in subsequent proceedings. The judge was not bound by the arbitrator’s decision on its own jurisdiction (applying Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46). A JAMS arbitration in California would not be a suitable forum for a claim under the FSMA. The court also noted that in any event it would not be obliged to enforce an award contrary to English public policy based on an arbitrator’s decision to the contrary.
As a result, the Payward group’s bid to enforce the award and suspend the FSMA Proceedings failed, and Mr Chechetkin’s claim against Payward Ltd was allowed to continue.
Comment
Although the English courts rarely refuse to enforce foreign arbitration awards on grounds of public policy, this judgment demonstrates that they may do so where important UK consumer rights are at stake. Together with the recent decisions of Soleymani v Nifty Gateway and Eternity Sky v Mrs Zhang, this may be indicative of a broader trend towards consumer rights arguments being raised to seek to resist foreign arbitration proceedings or enforcement.
These decisions may have particular importance given that it is increasingly common for certain businesses (for instance cryptocurrency or gaming platforms) to have terms and conditions with consumers providing for arbitration seated in foreign (for the consumers) jurisdiction and under foreign law.
In Payward v Chechetkin, the English courts have made clear that in relation to such clauses, the courts will assess what a “reasonable consumer in the position of this consumer [would] have agreed [to]”. Accordingly, any consumer-facing arbitration clause should be drafted with reference to applicable laws in the jurisdiction(s) of the consumer(s), to avoid the risk of an unenforceable award and costly and protracted satellite litigation.
Judgment: Payward, Inc.; Payward Ventures, Inc. and Payward Limited v Maxim Chechetkin [2023] EWHC 1780 (Comm)
