The global market in non-fungible tokens (NFTs) has exploded in the last two years. While projections of future market size vary hugely, with big brands and household names launching NFT collections (to take a small number of examples from the sports world, FIFA, the NFL, and Major League Baseball have all launched NFT collections) it is clear that NFTs are becoming more and more available to mainstream consumers.
The use of arbitration in contracts relating to digital technology such as NFTs (as well as cryptocurrencies, blockchain, smart contracts, etc) is also on the rise.
But what happens when something goes wrong. For example, the NFT you bought isn't what you thought it was?
In Soleymani v Nifty Gateway LLC & Anr  EWCA Civ 1297, the Court of Appeal considered the English court's jurisdiction in respect of a dispute arising out of the purchase of an NFT via a foreign internet platform, providing an important insight into the complex relationship between English law consumer rights and arbitration provisions.
Prior to the UK's withdrawal from the EU, jurisdiction was governed by the Recast Brussels Regulation (the Regulation), the relevant provisions of which expressly excluded arbitration and provided that a consumer could bring proceedings against the other party to a consumer contract in the consumers' home court.
Following the UK's withdrawal, the Regulation ceased to apply, but the provisions concerning consumer contracts were retained in English law in sections 15A-E Civil Jurisdiction and Judgments Act 1982 (as amended) (CJJA), provided the subject-matter and nature of the proceedings would have fallen within the scope of the Regulation.
Meanwhile, pursuant to section 9 Arbitration Act 1996, the English court will stay proceedings brought in breach of an arbitration agreement, unless satisfied that the agreement is null and void, inoperative or incapable of being performed.
Apparently unknown to Mr Soleymani, the auction was a "ranked" auction, whereby the 100 highest bidders would each receive the equivalent of numbered edition NFTs. Mr Soleymani's bid was the third highest but, after learning that he would not receive the "first edition", Mr Soleymani refused to pay. Nifty commenced arbitration in New York and in response Mr Soleymani commenced proceedings in the English courts to try to avoid being forced into a New York arbitration, arguing that as a consumer he should be sued in the English courts, since he is resident in England. Mr Soleymani sought declarations from the court that:
- The arbitration agreement was unfair and not binding upon him as it was contrary to his rights under English consumer law (the Arbitration claim);
- Similarly, the governing law clause was unfair and not binding as contrary to English consumer law (the Governing Law claim); and
- The contract resulting from his bid was illegal ab initio as contrary to the Gambling Act 2005 (the Gambling Act claim).
Although it was accepted that there was a properly arguable case Mr Soleymani was a consumer, and that the auction contract was a consumer contract under the CRA, at first instance Nifty successfully challenged the English court's jurisdiction in respect of the Arbitration claim. It also obtained a stay of the Governing Law and Gambling Act claims under section 9 Arbitration Act 1996. Mr Soleymani appealed those decisions.
In relation to the Arbitration claim, the Court of Appeal rejected arguments that the CJJA had extended the scope of the Regulation, noting that the authorities established that:
- A claim fell with the arbitration exception in the Regulation if a principal focus of the proceedings was arbitration, the essential subject matter of the claim concerned arbitration or the relief sought could be said to be integral rather than ancillary to the arbitration process;
- A claim seeking to have an arbitration agreement declared invalid or inapplicable is such a claim; and
- A claim falling within the arbitration exception falls wholly outside the scope of the Recast Regulation.
While the authorities were not specifically concerned with the relevant consumer rights, the Court did not consider that the consumer provisions in the Regulation changed this hierarchy. It was therefore clear that Mr Soleymani's Arbitration claim was excluded from the scope of the Regulation, with the result that the CJJA could not be relied on to found jurisdiction. In reaching this decision, the Court noted that the only relief claimed in the Arbitration claim was a declaration that the arbitration agreement was "unfair and not binding upon" Mr Soleymani; the grounds for the relief were that the arbitration agreement was invalid; and the relief claimed was integral, not merely incidental to the arbitration. The appeal in respect of the Arbitration claim was therefore dismissed.
However, the Court of Appeal set aside the stay granted in respect of the Governing Law and Gambling Act claims, instead directing a trial to determine whether the arbitration agreement was unfair, and thus null and void in respect of those claims. In circumstances where it was properly arguable that there was a consumer contract with a close connection to the UK, and the consumer was seeking to rely on their rights under domestic consumer law to contend that the arbitration agreement was unfair and thus null and void, the Court considered that the assessment of fairness was better undertaken by the domestic court, rather than leaving it to the arbitral tribunal.
In this case the factors in favour of a stay (the existence of some overlap of issues, the likelihood that there would be no enforcement of the arbitral award in the UK) and Mr Soleymani's arguably unusual position as a consumer were not sufficient to overcome that conclusion.
As this decision demonstrates, the interplay between consumer contracts and arbitration provisions can be complex, involving competing public policy priorities. The Court of Appeal noted that international arbitration of consumer claims is not per se outlawed or unfair. However, whilst acknowledging that, in the context of commercial disputes, arbitration is a hugely valuable way of resolving disputes, it commented that "transposed into a consumer context, the privacy of arbitration is not such an advantage from a public policy standpoint."
In the context of internet trading relating to intangible assets, the position is even more complicated, where issues relating to the applicable governing law may sometimes be unclear. However, as the Court noted, "no matter how global, borderless or decentralised a trader would say its internet business is, if the trader has directed its relevant commercial activities to this country then its dealings with consumers here are subject to our consumer law".
However, whether the English court will ultimately find that Mr Soleymani is a consumer, and the arbitration agreement is null and void on the basis of unfairness, remains a question for another day. As a result, it appears that the New York arbitration and the English proceedings will continue to run in parallel, which is likely to raise legal and practical issues for the parties going forward.