Kraken Customer Crypto case: English Courts refuse to enforce arbitration award on public policy grounds
Speed Read
The English Commercial Court (the Court) has refused an application under section 101 of the Arbitration Act 1996 to enforce a JAMS[1] arbitration award issued by a tribunal seated in California. This was on the basis that enforcement would be contrary to UK public policy.[2] The arbitration award in question was in favour of the Payward group, which operates the crypto asset trading platform Kraken.
This ruling follows a previous judgment of the English High Court in the case striking out Payward’s jurisdictional objection to the English proceedings.[3]This judgment was discussed at length in a previous briefing, which is available here. The striking out of Payward’s jurisdictional objection paved the way for the Court to deal substantively with Payward’s application to enforce the award in England in the most recent judgment, Payward Inc v Chechetkin [2023] EWHC 1780 (Comm) (Payward).
The Court in the most recent proceedings identified four key issues which would need to be considered before enforcing the award: (i) whether Mr Chechetkin was a consumer for the purposes of the English Consumer Rights Act 2015 (CRA) (ii) whether the English Court was bound by the determinations made by the sole arbitrator in another jurisdiction (iii) whether the CRA and Financial Services and Markets Act 2002 (FSMA) were expressions of public policy and (iv) whether enforcement would be contrary to public policy under the CRA and FSMA.
Was the Claimant a consumer under the CRA?
The Court held that Mr Chechetkin was to be considered a consumer for the purposes of the contract with the Payward group. Payward had argued that Mr Chechetkin could not properly be classed as a consumer given his background in and extensive knowledge of banking law. The Court rejected this argument and instead applied the test of whether the claimant had entered into the contract for a purpose regarded as outside his trade or profession. It was held that the trading of digital assets was clearly outside of Mr Chechetkin’s trade or profession (as a solicitor which was his sole source of income) and therefore he was considered a consumer.
Was the English Court bound by the determinations of the arbitrator in California?
The Court rejected arguments put forward by Payward that Mr Chechetkin’s failure to bring his FSMA claims during arbitration meant that he should not be allowed to pursue these in the English court. The Court noted that the arbitrator had repeatedly held that only the laws of California were applicable in the arbitration, and as such it was unfair to criticise Mr Chechetkin for not raising FSMA concerns at that stage.
The Court held that a JAMS arbitration before an arbitrator with no experience of English law was not the right forum to determine the FSMA claim and further held relying on Dallah Co v Ministry of Religious Affairs of Pakistan[4] that a court in a different enforcing jurisdiction is not bound by a tribunal’s finding on its own jurisdiction.
Notwithstanding this determination, the Court further expanded on this point and said that it could not be bound by the decision of an arbitrator if that decision was inherently contrary to English public policy.
Were the CRA and FSMA expressions of UK public policy?
The Court found both pieces of legislation to be expressions of UK public policy. In coming to this determination the Court took into account the fact that both the CRA and FSMA were UK-wide statutes, rather than “mere English” statutes. This, the Court said, underlined the legislative significance of both.
The Court further noted that under section 71 of the CRA a court is required to consider the fairness of consumer contracts, even where this is not raised by the parties, which further emphasises the importance of this as public policy.
Would enforcement of the arbitration award be contrary to public policy?
The Court ultimately held that the enforcement of the arbitration award would be wholly contrary to UK public policy. The Court said that if it allowed the enforcement of the award it would have to ignore its obligation to determine whether or not clause 23 of the Payward Terms was fair, this obligation being born out of Mr Chechetkin’s request but also out of section 71 of the CRA as outlined above.
Section 74 of the CRA sets out that once a close connection to the UK is established, the CRA applies to the parties in question. The Court held that the contract had a close connection with the UK because Mr Chechetkin was domiciled in the UK, Payward was incorporated in the UK and payments were made for services in Sterling from and to English bank accounts. The fact that the arbitrator had dealt with the issues involved in the case under Californian law made the award, “in itself, contrary to UK public policy”.
The Court found that enforcement would also be contrary to public policy pursuant to section 62 of the CRA. This section applies the reasonable consumer test in judging the fairness of contractual terms. The Court found that the existence of an arbitration clause was not inherently unfair, and that a reasonable consumer may well agree to arbitrate any disputes in the UK, but that it was not reasonable to expect a consumer to agree to arbitration in California under the JAMS rules and subject to the US Federal Arbitration Act. This was due to the fact that a UK consumer would face a number of significant disadvantages in agreeing to arbitration in the US including that he would have to instruct US counsel which would be expensive and inconvenient, there would be no appeal on an error of English law, that the US Federal courts were not suitable for supervising English law and UK statutes.
The Court also held that the stifling of Mr Chechetkin’s claim under the FSMA would also be contrary to public policy considerations underlying the FSMA itself. The Court noted that the ability of the FCA to advance its statutory objectives is likely to be enhanced if claims like those advanced by Mr Chechetkin are pursued in the UK, rather than oversees.
Possible Irish Implications
This case is very significant given the very limited circumstances in which an English Court will refuse to enforce a New York Convention award. Although English judgments are not binding on Irish Courts, Irish Judges often find these authorities persuasive. There is a risk that, when faced with a similar situation to that of Mr Chechetkin, an Irish court may find that a particular arbitration clause in standard terms and conditions is contrary to Irish public policy for consumers by finding that it breaches a provision of the Irish Consumer Rights Act 2022 (Irish CRA).
Under section 31 of the Arbitration Act 2010, consumers are not bound by arbitration agreements where the clause has not been individually negotiated and the amount in dispute does not exceed €5,000. In addition, under clause 21(3)(6) an arbitration clause with a consumer that provides that each party must bear their own costs is an unfair terms for the purposes of the European Communities (Unfair Terms in Consumer Contracts) Regulations 1995 and 2000. As discussed in our earlier piece, the Irish CRA introduces a number of changes to Irish consumer law, strengthening and clarifying consumer rights in Ireland. These changes include the introduction of what are called 'greylist terms[5]' and 'blacklist terms[6]'. Broadly, these are terms that will be deemed under the Irish CRA to be 'unfair', or 'non-binding' on consumers depending on the circumstances. In particular, 'blacklist terms' are terms which are always considered unfair to consumers. One example of a blacklist term is, "a term that grants exclusive jurisdiction for contract disputes to a court where the business is based even though the consumer does not live there."[7]
There is a real risk that an Irish court could follow the approach taken in Payward and find a foreign arbitration clause to be unfair (or ‘blacklisted’) and thus non-binding, undermining the presumption of ease of enforcement of arbitral awards under the New York Convention.
It is important to note that the Court in Payward did not undertake a qualitative comparison of the protection afforded to consumers by the laws of California with that afforded under the laws of the UK. The Court stated that the important point was that the UK Parliament had decided that the protection of consumers domiciled in the UK should be governed by the CRA, not by foreign laws and standards. It is also likely that an Irish Court would consider that it was better placed than an arbitral tribunal in California or elsewhere to determine issues of Irish law pertaining to consumers and that it is important for those issues to be ventilated in the Irish Courts.
Although arbitration will still likely be the most attractive option for internet service providers such as crypto currency exchanges to include in their terms and conditions, they need to be aware of potential difficulties with enforcing arbitral awards against consumers down the line.
With thanks to David Bourke for his assistance with this article.
For more information, please contact Dario Dagostino, Partner, Sarah Murphy, Partner Paula Gibbs, Senior Associate, Aisling Ennis, Associate or your usual A&L Goodbody Disputes & Investigations team contact.
Date published: 25 July 2023
[1]Judicial Arbitration and Mediation Service Rules
[2]Payward Inc v Chechetkin [2023] EWHC 1780 (Comm).
[3] Chechetkin v Payward Ltd and ors 2022] EWHC 3057 (Ch)
[4]Dallah Co v Ministry of Religious Affairs of Pakistan [2011] AC 763
[5] Section 133 of the Consumer Rights Act 2022
[6] Section 132 of the Consumer Rights Act 2022
[7]https://www.ccpc.ie/business/help-for-business/guidelines-for-business/unfair-terms-contracts/