High Court Refuses To Enforce Arbitration Award Relating To Crypto Consumer Contract – Arbitration & Dispute Resolution

In Payward, Inc. and
Others v. Chechetkin,¹ the High Court of
England and Wales refused the claimants’ claim for the
enforcement of a US arbitration award against a UK-based consumer.
The court ruled that enforcement of the award would be contrary to
public policy as it contravened key provisions of the Consumer
Rights Act 2015 (CRA) and the Financial Services and Markets Act
2000 (FSMA).

Background

Maxim Chechetkin brought a claim in the English courts against
Payward – which operates Kraken, a cryptocurrency exchange – for
losses of more than £600,000 he incurred whilst trading on
its exchange. His case was that Payward’s activities in the UK
amounted to dealing in or arranging deals in investments, which
constituted regulated activities that Payward was not authorised to
carry on. Section 26 of the FSMA provides that agreements made by a
person carrying on an authorised activity without authority to do
so are unenforceable.

Payward’s terms of service included an arbitration clause
requiring disputes to be arbitrated in California under JAMS rules.
In accordance with this provision, Payward brought arbitral
proceedings in California in respect of the dispute. A final award
was issued by the arbitrator denying Chechetkin’s claim for the
repayment of his losses and enjoining Chechetkin from bringing a
claim against Payward in court (either in the UK or another
jurisdiction).

As reported in this 11 July 2023 On the
Record blog post, Payward then unsuccessfully applied for a
declaration that the English courts had no jurisdiction over
Chechetkin’s claim, on the basis that parallel arbitration
proceedings had taken place in California in which an award had
been issued in Payward’s favour. Following that failed
application, Payward brought a claim for enforcement of the
arbitration award under section 101 of the Arbitration Act.

Chechetkin argued that enforcement of the award should be
refused in accordance with section 103(3) of the Arbitration Act on
the grounds that it would be contrary to public policy. He argued
that the CRA has the effect that the imposition of arbitration in
California was unfair on him as a consumer and stifled his claim
under the FSMA, contrary to public policy.

The High Court’s decision

The court refused to enforce the arbitration award, finding that
enforcement would indeed be contrary to public policy, as the award
contravened provisions of the CRA and FSMA. The court came to this
conclusion as follows:

Chechetkin was a consumer under the Consumer Rights Act.

This finding was in line with the High Court’s previous decision on
its jurisdiction. Section 2(3) of the CRA defines a consumer as an
individual acting for purposes that are ‘wholly or mainly
outside that individual’s trade, business, craft or
profession’. The relevant time to meet this definition is at
the time that the contract is concluded. In this case, that was
when Chechetkin opened his account with Kraken. As Chechetkin is a
lawyer, his trading on Kraken was clearly outside his trade,
business, craft or profession. He was, therefore, a consumer under
the CRA.

Chechetkin could not have brought his claim under the FSMA in
the arbitration.

Payward argued that Chechetkin should not be allowed to pursue
his claim under the FSMA in the English courts, as it had already
been determined against him in the arbitration, and Chechetkin was
therefore estopped from pursuing a claim in the English courts when
it could and should have been pursued in the arbitration.

The court rejected Payward’s arguments, finding that:

• As the arbitrator had repeatedly made it clear that she was
  against the application of any law other than the law of
  California, there was no scope for Chechetkin to bring the FSMA
  claim in the arbitration.




• An English court is not bound by a tribunal’s decision on
  its own jurisdiction. The arbitrator’s finding in this respect
  was therefore irrelevant.




• A US arbitrator with no experience of English law is, in any
  event, not the appropriate tribunal for this kind of claim.

The CRA and FSMA are expressions of UK public policy.

The court noted the definition of public policy in Alexander Brothers Limited (Hong Kong SAR) v.
Alstom Transport SA² with approval:
‘”Public policy” as referred to in section 103(3) of
the Arbitration Act means the public policy of England and Wales
… in maintaining the fair and orderly administration of
justice’.

In respect of the CRA:

• The act is, in part, the enactment in the UK of the European
  Union Directive 1993/13 on unfair terms in consumer contracts. It
  has been authoritatively established by the Court of Justice of the
  European Union that this directive represents public policy.




• The fact that the CRA is UK (as opposed to English) statute
  ‘arguably’ underlines its general significance in policy
  terms.




• The fact that the CRA obliges the court to consider the
  fairness of consumer contract terms even if the issue is not raised
  by parties to the litigation reinforces its importance as public
  policy.

In respect of the FSMA:

• The act sets out the Financial Conduct Authority’s duties,
  which include the advancement of ‘the consumer protection
  objective’, ‘the integrity objective’ and ‘the
  competition objective’, all of which have been expressly
  identified by Parliament as matters of public policy.




• Again, the FSMA is UK statute, and thus is an expression of UK
  national policy.

Enforcement of the award would be contrary to public
policy.

Section 71 of the CRA obliges the court to consider the fairness
of the contract. To enforce the award would ignore this obligation
in light of the following:

• Section 74 of the CRA requires that, where a consumer contract
  has a close connection to the UK, consumer rights issues under the
  scope of the statute should be dealt with under the UK statute
  rather than foreign law. The contract between the parties in this
  case had a close connection with the UK, but the arbitrator did not
  apply the UK statute (i.e., the FSMA).




• Section 62(4) of the CRA provides that if a contract causes a
  significant imbalance to the parties’ rights and obligations,
  to the detriment of the consumer, then that term is unfair.
  Applying an objective test (as required), the jurisdiction clause
  caused a significant disadvantage to UK consumers:




• The US federal courts and US arbitrators are not competent to
  determine or supervise disputes concerned with English law and UK
  statute.




• The right to appeal on the basis of an error of English law is
  lost.




• The UK-based consumer would be required to retain US lawyers,
  which would be expensive and inconvenient.

It would be inconsistent with the fair and orderly
administration of justice – as well as fundamental conceptions of
justice – if consumer protections could be outflanked merely by the
choice of a different system of law.

Enforcing the award would stifle Chechetkin’s claim under
the FSMA. That made it both contrary to the essential public policy
considerations underlying the FSMA and unfair under the CRA. The
court also noted that enforcement would be contrary to the FSMA,
because obliging consumers with grievances to engage in
confidential arbitration proceedings in California would reduce the
likelihood of offences under the act being investigated and
prosecuted.

Takeaways

Arbitration agreements can be attractive to tech companies
operating globally given international enforcement advantages and
confidentiality, amongst other reasons. But careful thought must be
given to the relevant governing law and seat of the arbitration,
particularly where such companies enter into contracts containing
arbitration clauses with consumers in England and Wales.

We note that the judge did not rule out arbitration in all
cases, stating that ‘the mere fact that a consumer contract
provides for disputes to be resolved in arbitration does not make
it unfair’, so unfairness will depend on each particular set of
facts. However, based on the recent body of English case law on the
non enforceability of consumer arbitration – including in this case
– it is becoming increasingly difficult to persuade the English
courts to defer to foreign arbitrators in relation to consumer
claims. Therefore, as a rule of thumb, companies will be better off
not incorporating arbitration clauses into consumer contracts with
English citizens or residents.

Footnotes

1 [2023] EWHC 1780 (Comm).

2 [2020] EWHC 1584 (Comm).

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