THE AUTHORS:
Laura Azaria, Counsel at LALIVE
Roopa Mathews, Associate at LALIVE
Raphael Schmid, Trainee Court Clerk at the District Court of Schwyz
Introduction
The English Court of Appeal recently handed down its first judgment involving non-fungible tokens (“NFTs”) in Amir Soleymani v Nifty Gateway (The Competition and Markets Authority intervening). The case raises a number of interesting questions on the interplay between consumer protection and the arbitration of NFT disputes.
The Facts
The dispute involved Mr Amir Soleymani, a self-described entrepreneur and collector of NFTs, and Nifty Gateway LLC (“Nifty Gateway”), one of the largest online marketplaces for NFTs.
Mr Soleymani took part in an auction held on Nifty Gateway’s online platform between 30 April and 2 May 2021. He placed a bid of USD 650,000 for a blockchain-based NFT associated with an artwork by the artist known as Beeple.
The auction in question was a “ranked” auction in which the 100 highest bidders were successful and received a numbered edition of the artwork corresponding to the position of their respective bids. Mr Soleymani’s bid came in third. This meant that Mr Soleymani was awarded a third edition of the NFT, rather than the first edition.
Mr Soleymani claimed that he was unaware that the auction was a ranked auction and that it made little sense commercially for a bidder to participate in this type of auction because subsequent editions of NFTs carry a significantly lower value than first editions.
Prior to the auction giving rise to the dispute, Mr Soleymani had purchased approximately one hundred NFTs on Nifty Gateway’s platform with a combined value of over USD 2.5 million and had participated in approximately 24 auctions. All of these auctions were “conventional” auctions in which the highest bid was the only successful bid.
Mr Soleymani therefore withdrew his cryptocurrency from his account held on the website to avoid paying the USD 650,000 he had bid for the NFT.
In response, Nifty Gateway commenced an arbitration against Mr Soleymani for breach of contract and payment of the bid amount.
Nifty Gateway’s terms of use, set out on the website, contain a New York governing law provision and an arbitration clause providing for arbitration seated in New York under the auspices of JAMS, a US provider of alternative dispute resolution services including arbitration.
Mr Soleymani challenged the jurisdiction of the arbitrator and brought proceedings in England against Nifty Gateway, seeking (among other things) a declaration that the arbitration clause in Nifty Gateway’s standard terms was unfair and therefore not binding on him (the “Arbitration Claim”). Mr Soleymani argued that he was a consumer within the meaning of the Consumer Rights Act 2015 and the Civil Jurisdiction and Judgments Act 1982 (“CJJA”), as amended by the EU Exit Regulations. He also argued that the terms constituted a consumer contract under the applicable legislation.
Nifty Gateway, however, sought a declaration that the English courts had no jurisdiction to determine the validity of the arbitration clause and requested a stay of the court proceedings.
At first instance, the High Court found that it did not have jurisdiction to hear the Arbitration Claim, and granted a stay of the court proceedings.
The High Court’s decision relied on the Brussels Recast Regulation (“BRR”), part of which was retained after the UK’s withdrawal from the European Union and restated by an amendment to the CJJA. Article 1(2)(d) of the BRR contained an exception whereby the BRR did not apply where the essential subject matter or the principal focus of the claim was arbitration. The High Court found that the Arbitration Claim fell within this exception because it was solely concerned with whether he was legally obligated to arbitrate the dispute as to whether he should pay the USD 650,000. Accordingly, the High Court found that it had no jurisdiction over the Arbitration Claim.
The High Court also granted a stay under Section 9 of the Arbitration Act 1996 and found that the Arbitration Claim could be heard in the New York arbitration. Among other things, the High Court’s decision was based on the principle of Kompetenz-Kompetenz and the lack of evidence to suggest any legitimate concern as to the quality of the arbitral tribunal or the arbitral process in New York or its ability to address questions of English law including matters of public policy.
Decision and Reasoning
Mr Soleymani appealed the High Court decision inter alia on the ground that the High Court erred in staying the proceedings under section 9 of the Arbitration Act 1996 without determining the fairness question or directing a trial before the English Court on the issue of whether the arbitration agreement was “null and void, inoperative, or incapable of being performed”.
The Court of Appeal allowed the appeal (though only on this ground), ordering a stay of the proceedings under section 9 of the Arbitration Act 1996, and a separate trial on the issue of the validity of the arbitration agreement.
In his judgment, Birss LJ made a number of interesting observations on the relationship between consumer rights and arbitration:
- United Kingdom (UK) consumer rights apply in online marketplaces such as Nifty Gateway because the business is directed at the UK no matter “how global, borderless or decentralised” its internet business is said to be (See, 137).
- Given the public importance of decisions vindicating consumers’ rights, issues of whether an arbitration agreement is valid is a matter that should be considered and ruled upon in public at a trial and not in a private arbitration. The private nature of arbitration is contrary to the public nature of consumer rights, which may have precedential value.
- Consumer protection rights under English law “engage principles which are the subject matter of our domestic jurisprudence, not simply some general notion of fairness” (See, 152). English courts are better placed to adjudicate these issues than an arbitrator in a New York arbitration, even if the arbitration applies English law.
- Notwithstanding the principle of Kompetenz-Kompetenz, if an arbitrability issue is likely to be put to the court in any event under enforcement, then this is a “powerful factor” in favour of a court deciding the issue at the outset (See, 143 – 146).
Presumably, the Court of Appeal was also influenced by the UK’s Competition and Markets Authority (“CMA”)’s intervention. The CMA was concerned that while UK law affords a high level of protection to consumers, the decision of the High Court could erode that protection. In particular, the CMA considered that in consumer cases the English court should itself determine the issue of arbitrability and should not leave that issue to an arbitrator, particularly one with a foreign seat.
Comments
Arbitration Clauses for NFT Marketplaces
The validity of the arbitration clause is a question that remains to be resolved by the English courts. The outcome of the pending trial is likely to be significant for the drafting of dispute resolution provisions in the terms and conditions of NFT platforms. It is common for NFT marketplaces, including some of the largest ones such as OpenSea and Rarible, to use arbitration clauses in their terms and conditions. This is likely because of the various advantages of arbitration, such as flexibility and confidentiality, which are often considered important in art disputes generally.
However, many of the largest NFT platforms are based in the US where different consumer protection laws apply. Accordingly, NFT marketplaces with a global reach may be required to reassess their dispute resolution clauses, and consider whether and how consumer protection regimes around the world may affect the arbitrability of disputes involving the platforms and their customers.
The Characterisation of NFT Collectors as “Consumers”
Soleymani v Nifty Gateway also raises the question of whether NFT collectors can be considered “consumers” in the traditional sense. Under the Consumer Rights Act 2015, which provides protections for consumers against unfair terms in consumer contracts, a consumer is defined as “an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession” (See, Section 2(3) of the Act).
The English court acknowledged that Mr Soleymani is “not a typical consumer, if he be a consumer at all, and the transaction involving the purchase of an NFT for USD 650,000 is not a typical consumer transaction” (See, para. 6). Even though Mr Soleymani bid more than the value of the average British home on an NFT, the Court went on to say that the arguments with which the court is concerned must be “tested by reference to the rights and protections afforded to consumers generally” while acknowledging that he “might turn out not to be” a consumer. (See, paras. 6 and 138).
Future cases may therefore grapple with how to characterise NFT collectors. As the purchasers of NFTs are likely to be diverse, the question of whether they are in fact consumers will have to be considered on a case-by-case basis.
The Role of the CMA
Soleymani v Nifty Gateway appears to be only the second time that the CMA has intervened in a consumer dispute. Although the CMA has authority to intervene in private proceedings in the High Court, Court of Appeal, and the Supreme Court in relation to cases which consider the application of consumer law, it has done so only once before in a High Court case involving the Unfair Trading Regulations 2008, i.e., in Warwickshire County Council v Halfords Autocentres Limited [2018] EWHC 3007 (Admin) (See, Competition and Markets Authority, “Register of consumer cases in which the CMA has intervened”).
Soleymani v Nifty Gateway may therefore set a precedent for the CMA’s intervention in other cases involving NFTs and other digital asset marketplaces.
Conclusion
The successful appeal in Soleymani v Nifty Gateway demonstrates the importance accorded to consumer rights by the English courts when considering questions of arbitrability, with the Court of Appeal determining that the English courts are better placed than an arbitrator to determine the question of arbitrability. The case also marks one of the first instances of intervention by the Competition and Markets Authority in a consumer dispute.
The Court of Appeal’s decision also highlights some of the unique questions posed by resolving NFT disputes, including the appropriateness of characterising NFT collectors as consumers. It remains to be seen whether and how NFT marketplaces will adapt their dispute resolution clauses to take account of consumer protection regimes. As several NFT platforms use arbitration clauses in their terms and conditions, the case is likely to have wider resonance.
ABOUT THE AUTHORS:
Laura Azaria is a Counsel at LALIVE in Geneva. She specializes in international commercial arbitration. She has in-depth knowledge of legal issues related to blockchain, NFT, metaverse, cryptocurrencies and Web 3.
Roopa Mathews is an Associate at LALIVE in Zurich. She specializes in international arbitration. She has an avid interest in, and knowledge of, blockchain-based technologies and the legal issues related to resolving disputes in this sector.
Raphael Schmid is a Trainee Court Clerk at the District Court of Schwyz in Switzerland. He previously worked as a Trainee in the international arbitration team at LALIVE in Zurich.
