The Kraken defeated: time for crypto asset exchanges to replace US arbitration clauses in UK consumer contracts?

A British citizen, resident in England, has successfully argued before the English Commercial Court that an arbitration award in favour of the operator of US cryptoasset exchange, Kraken, should not be enforced in the UK on the grounds that it would be contrary to the public policy underlying consumer rights law and financial services regulation.

Similar compulsory arbitration clauses are commonly found in the terms of service of other cryptoasset exchanges and US-headquartered tech services. They are widely used in the US, where resolution of consumer disputes by way of arbitration has been the norm for many years.

Businesses that have agreements with consumers which submit to foreign arbitration may need to reflect on whether those provisions need revising given that they may not result in an enforceable award. 

The dispute surrounding negative trading positions on Kraken

The case was brought by the Payward group, seeking to enforce an arbitration award made in San Francisco, California against Mr. Chechetkin, a British citizen resident in England who contracted with Payward’s UK incorporated business, and been a user of Kraken since 2017. In March 2020, Mr. Chechetkin’s trading positions on Kraken turned negative, eventually resulting in an alleged loss of £608,534.

Mr. Chechetkin threatened to bring a claim in England, alleging that the Payward group was carrying out a regulated activity (dealing in or arranging deals in investments) without authorisation to do so and he was, therefore, entitled to reclaim the £608,534 lost as a result of his trades on Kraken. In response, the Payward group issued a demand for arbitration on the basis that the Payward Terms of Service accepted by Mr. Chechetkin included a clause which required any dispute to be resolved by way of arbitration in San Francisco, California.

The arbitrator found in favour of the Payward group, ruling that the arbitration clause was enforceable under California law and that Mr. Chechetkin was prohibited from issuing a claim against the Payward group in court, whether in the UK or otherwise. The arbitrator refused to engage with the question of whether the Payward group had acted in breach of English consumer and financial services legislation on the basis that it was irrelevant and only California law was applicable to the proceedings. 

Mr Chechetkin then pursued the threatened claim in proceedings before the English Commercial Court. In response the Payward group sought to enforce the California arbitrator’s ruling under the Arbitration Act 1996. The English court therefore had to decide whether the Californian arbitral award should be recognised and enforced. 

Enforcement is contrary to public policy

Whether the award was enforceable turned on whether it would be contrary to public policy by contravening consumer protection policies enacted in the Consumer Rights Act 2015 (CRA) and Financial Service and Markets Act 2000 (FSMA).

Mr Justice Bright agreed that both the CRA and FSMA were expressions of public policy, and that enforcement of the arbitral award would be contrary to public policy, entitling the Court to refuse recognition and enforcement of the award.

In relation to the CRA, the judge held that the “critical threshold issue” was the meaning of “consumer”, which is defined as “an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession”: s.2(3) CRA 2015. On the evidence the judge had “no doubt” that Mr. Chechetkin was a consumer for the purposes of the CRA: he had not opened his Kraken account in the course of a trade, business, craft or profession and he did not have material knowledge, experience or sophistication in relation to cryptocurrency at the time of opening his account.

The judge stated that enforcement of the arbitral award would be contrary to public policy as expressed in the CRA 2015 because:

  • enforcement would not enable the Court to consider the fairness of the arbitration clause, as it was bound to do under s.71 CRA ;
  • the arbitration clause should be dealt with under UK statute rather than foreign law given the contract’s close connection with the UK per s.74 CRA ; and
  • the arbitration clause was unfair because it imposed significant disadvantages on the consumer by requiring arbitration in California, including the need to instruct US counsel (s.62 CRA).

The judge also considered the arbitration clause to be contrary to the public policy considerations underlying FSMA, particularly because s.26 of FSMA provides that a contract concerning the carrying out of a regulated activity without authorisation to do so is unenforceable and the customer should be entitled to recover their money. He added that “the FCA’s ability to advance its statutory objectives is likely to be enhanced if claims like those advanced by Mr Chechetkin are pursued in this country”.

The judge concluded that the arbitral award shall not be recognised or enforced by the Court. Mr Chechetkin was not, therefore, prohibited from continuing his claim in the English Commercial Court for his loss of £608,534.

Issue estoppel submission dismissed

The Payward group also submitted that Mr Chechetkin was estopped from pursuing the Commercial Court proceedings by reason of the Henderson v Henderson (1843) Hare 100 principle of ‘issue estoppel’, where a party is precluded from raising matters in subsequent proceedings which could and should have been raised in earlier proceedings but were not. Payward argued that it would be an abuse of process for Mr Chechetkin to pursue the FSMA claim in England, when it could and should have been pursued in the US arbitration by way of a counterclaim. 

The judge held that this was “unrealistic” in circumstances where Mr Chechetkin was never afforded the opportunity to make submissions on FSMA, given the arbitrator’s firmly held and repeated views that English law was irrelevant. Citing Dallah Co v Ministry of Religious Affairs of Pakistan [2011] AC 763, the judge explained that the Court was not bound by a tribunal’s decision on its own jurisdiction.

In any event, Bright J determined that the Court was not bound by the award as the arbitrator had not made any relevant factual findings, nor decided any question of law, that were relevant to the question of whether the award was consistent with English public policy. In circumstances where the arbitrator simply declined to consider English law at all, the Court must form its own view.

Further, Bright J suggested that the English Courts are the correct forum for a claim under FSMA in any event. The Payward group’s issue estoppel submission was, therefore, dismissed.

Replace blanket US-style arbitration clauses with tailored set of terms?

There are numerous examples of cryptoasset and other tech companies including US-style arbitration clauses in their terms and conditions. The Commercial Court’s judgment indicates that the English courts will be willing to declare awards resulting from these arbitral proceedings unenforceable in the UK where the issue arising between the business and a UK consumer concerns English public policy, such as consumer protection. 

In short, what might work in a US, domestic, context cannot be assumed to be wholly effective when dealing with consumers in other jurisdictions given the potentially mandatory/public policy nature of consumer protection. The case therefore indicates that those businesses with UK consumer customers (and consumer customers in any other jurisdiction which take a similar approach) may wish to consider whether they will need to replace blanket US-style terms of service which are stated to apply in all jurisdictions, with a tailored set of terms for individual jurisdictions which will provide the greatest protection for the exchanges.

Those who don’t change their terms of service may, from a UK perspective, be left with unenforceable awards and may face an increase in unexpected litigation in the UK courts.