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Landmark NFT decision on consumer rights overturned on appeal

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United Kingdom

Last week the Court of Appeal overturned a judgment which limited certain consumer rights of UK collectors of NFTs who acquired them from online auctions based overseas. The Court lifted the stay of proceedings which had prevented Mr Soleymani from seeking relief in England based on UK consumer laws and directed a trial of certain issues of fact.

The judgment at first instance was handed down in March this year which was in favour of Nifty Gateway (Nifty), a digital art online auction platform, which provided bidders with online terms that included a New York governing law clause and a dispute resolution clause which confined the parties to arbitration in New York, administered by JAMS.
 
Mr Soleymani, a wealthy collector of NFTs who had bid at over 20 NFT auctions is based in the UK. The dispute arose when he bid $650,000 at an auction for an NFT by Beeple. His bid was unsuccessful so he did not win the first edition but his bid was ranked third so (to his surprise) he succeeded in winning a lower grade version of the NFT for the sum bid. Mr Soleymani was unaware the auction was ranked in this way and thought it was unfair and misleading as he would never have bid $650,000 for the lower grade version, which was less valuable. He withdrew all of his cryptocurrency from his Nifty account so as to avoid having to pay the $650,000. Nifty promptly issued an arbitration claim seeking the recovery of the $650,000.  
 
Mr Soleymani issued a motion in the arbitration proceedings and issued a separate claim in the High Court in London the same day. The grounds of the motion were that (1) there was no valid agreement to arbitrate; (2) the dispute was pending before the English High Court; (3) the arbitration clause contained terms which are contrary to English consumer rights.
 
The arbitrator denied Mr Soleymani's request for a stay and Mr Soleymani duly issued a further motion to dismiss the arbitration on the grounds that (1) Nifty lacks legal capacity to bring an action in New York; (2) the tribunal had no personal jurisdiction over Mr Soleymani in respect of the claim; (3) Nifty's claim was barred under the doctrine of payment and release; and (4) Nifty had failed to state a claim for breach of contract. It was unclear whether the arbitration would consider any UK consumer laws given the New York governing law clause.
 
The claim in the High Court sought the following orders:

1. a declaration that the arbitration clause is unfair and not binding upon him ("the Arbitration Claim"); that he was a consumer within the meaning of s. 2(3) Consumer Rights Act 2015 (CRA) and 15E(1) Civil Jurisdiction and Judgments Act 1982 (CJJA), and had entered into a consumer contract within the meaning of s. 15E(1); the online terms needed to be assessed for fairness under s. 62(4) CRA because the contractual relationship had a close connection with the UK within the meaning of s. 74(1) CRA, as Nifty knew that Mr Soleymani was habitually resident in the UK and Nifty solicits business or otherwise directs its activities to the UK; and that the arbitration clause, either alone or in conjunction with the governing law clause, was unfair in that contrary to the requirement of good faith it caused a significant imbalance in the parties' rights and obligations to his detriment;
2. a declaration that the governing law clause is unfair and not binding on him ("the Governing Law Claim"); the same statutory protection rights are relied on as for the Arbitration Claim; and
3. that the contract resulting from his bid, if it was a binding contract, was illegal ab initio as contrary to the Gambling Act 2005 ("the Gambling Act Claim").
Mr Soleymani sought to establish jurisdiction in relation to all three claims under section 15B of the CJJA.

Nifty responded to the English claim by issuing an application which sought the following orders:

  1. a declaration that the court has no jurisdiction or will not exercise its jurisdiction in relation to the Arbitration Claim; and/or
  2. a stay of the proceedings under CPR Part 3.1(2)(f) and/or section 9 Arbitration Act. 

Judgment in relation to Nifty's application was handed down in March 2022 and the Court determined that there was no jurisdiction for the Arbitration Claim and ordered a stay of the residual claims concerning the Governing Law Clause and the Gambling Act.
 
Mr Soleymani appealed on three grounds and succeeded on the third ground, on which the Competition and Markets Authority (CMA) also provided the Court of Appeal with written submissions.
 
The three grounds of appeal were as follows:

1. The Court had jurisdiction under s. 15B CJJA because the exception for arbitration under Article 1(2)(d) of the Recast Regulation did not apply to the Arbitration Claim. Since he was invoking the jurisdiction of the English Court as a consumer under a consumer contract his claim fell within Articles 17 to 19 of the Recast Regulation. It was his English law consumer protection rights which were the "nature of the rights to be protected", the "principal focus" or "essential subject matter" of the claim.
2. Having correctly determined that the Court had jurisdiction over the Governing Law Claim and the Gambling Act Claim under section 15B of the CJJA, and there being no dispute that the arbitration agreement did not meet the requirements of section 15B(6), the Judge erred in concluding that section 15D(1) of the CJJA did not apply to those claims.
3. The Judge erred in staying the proceedings under section 9 of the Arbitration Act without determining the fairness question or directing a trial before the English Court of the issues raised by that objection.

The Court of Appeal confirmed that in relation to the third ground:

  • By s15E(1) a "consumer" is a person who "concludes a contract for a purpose which can be regarded as being outside the person's trade or profession". Mr Soleymani has a properly arguable case that he is a consumer. Nifty accepted that Mr Soleymani was a consumer for the purposes of CPR Part 11 but did not accept that he was a consumer for the purposes of the CRA and CJJA.
  • The relevant aspect of the definition of "consumer contract" in s15E(1) is that the person with whom the consumer contracts directs their commercial or professional activities to the United Kingdom.

The CMA asked the Court to consider the manner and forum in which a UK consumer can challenge the fairness of a compulsory clause in an online consumer contract which:

  1. waives their right of access to the UK courts; and
  2. requires any dispute to be arbitrated abroad in accordance with foreign law. 

The CMA was concerned that while UK law affords a high level of protection to consumers, the first instance decision could erode that protection in that:

  1. in a consumer context compulsory clauses, particularly those which specify a foreign seat, are generally unfair and not binding.
  2. 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 (s71 CRA). 

The CMA submitted that in applying s9 of the Arbitration Act in relation to arbitration clauses in consumer contracts, the court has a positive and non-delegable duty to consider, investigate and determine the fairness of such clauses and that the consumer should not bear the burden of proving the unfairness of the term.
 
The Court of Appeal confirmed that:

  • This was a case about commerce on the internet in which a trader traded via a website which is arguably directed to the UK (directed and targeted mean the same thing). 
  • the auction contract is a consumer contract under the CRA. 

It noted the importance of arbitration in commerce but that in the context of consumer rights it was not appropriate:

In a commercial context arbitration, both international and domestic, is a hugely valuable way of resolving disputes. However one of the recognised characteristics of arbitration, which often has important value in a commercial context, is that it is private. Transposed into a consumer context, the privacy of arbitration is not such an advantage from a public policy standpoint. Part of the purpose of s71 itself is so that decisions on consumer rights are made in public. They may have precedential value. The decisions are not only for the benefit of the individual consumer in the instant case but for the benefit of the consumers as a class ... This publicity feature is a further reason why the principle articulated in the previous paragraphs should apply in the consumer context. Decisions about consumers' rights should normally be made in public, in a court.

The Court noted that:

  • Mr Soleymani was an unusual consumer in that he bid much more than the value of the average British home on an NFT but it was still arguable that he was a consumer.
  • The fairness provisions in Part 2 of the CRA apply despite a choice of foreign law clause, as long as the consumer contract has a close connection with the UK (s74 CRA).
  • Arbitration clauses are expressly identified as being clauses which may be regarded as unfair because they have the object or effect of excluding or hindering the consumer's right to take legal action or exercise a legal remedy (paragraph 20 of Part 1 Schedule 2 of the CRA and s89-91 of the Arbitration Act). Consumer claims under £5,000, arbitration clauses are automatically unfair and foreign law clauses automatically disapplied. Consumer claims above £5,000 with a close connection provision so that s74 applies are subject to the fairness provisions of the CRA irrespective of a choice of foreign law clause.

The Court also noted that there were at least two factors which weighed in favour of granting a stay of the s9(4) issues.

  • the existence of some overlap between the issues relating to fairness which will arise under New York law (and under the JAMS Consumer Policy) as compared to the issues under UK law
  • the likelihood that there will be no enforcement of any arbitral award in the UK because Mr Soleymani has assets outside the jurisdiction.

However, the Court held that "..these were not at all sufficient…to overcome the powerful factor in favour of refusing a stay arising from the fact that the challenge to the arbitration agreement under s9(4) is based on a vindication of a claimant's arguable consumer rights."

The Court determined that the issue as to whether Mr Soleymani was a "consumer" and actually needed the consumer protections were the strongest reason for allowing a stay but that there were three reasons why that should not be the case and why the claim should proceed to trial. They were as follows:

  • The claim has implications for UK consumers generally and it is important that they are considered and ruled upon in public in a court. Therefore the s.9(4) issues should be decided at a trial and not left to be decided in the arbitral tribunal.
  • Consumer protection rights under UK law involve domestic concepts which an English court is better placed to adjudicate upon than a New York arbitrator.
  • To order a stay would prejudge the issue…as to whether the arbitration agreement does in fact operate unfairly on Mr Soleymani. If the invalidity argument is good, the very reasons which make it good, namely that it places an unfair burden on Mr Soleymani, weigh against allowing the tribunal to decide the issue under its Kompetenz-Kompetenz jurisdiction. 
Soleymani v Nifty Gateway LLC [2022] EWCA Civ 1297 (06 October 2022)
 

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Areas of Expertise

Dispute Resolution

Related Work Areas

Art law