A Nifty move in the name of consumer rights protection

NFTs are again hitting headlines as the court makes a Nifty move in the name of consumer rights protection.

The Consumer Arbitration Conundrum: international arbitration v consumer protection

Arbitration clauses are clauses in which parties decide to resolve their disputes via a neutral third party called an arbitrator. They are common in commercial agreements, but different countries have diverging views on their acceptance.

In the United Kingdom, Part 2 of the Consumer Rights Act (CRA) provides protections for consumers against unfair terms in consumer contracts. This protection applies to arbitration clauses which are clauses which may be regarded as unfair and thus invalid because they have the effect of excluding or hindering the consumer’s right to initiate legal proceedings in court. If an arbitration clause is included in a contract, consumers may be prevented from going to court (which they often do not realise) and left to take their complaints to a privatised forum, the arbitral tribunal. Indeed, the hearing, documents generated and disclosed during the arbitration and the award are confidential. By contract, non-parties to litigation may generally access all statements of case and other documents lodged at court. A clause which requires the consumer to take disputes exclusively to arbitration not covered by legal provisions, may, therefore, be regarded as unfair.

On the other side of the Atlantic, the situation is different. Mandatory arbitration clauses in consumer contracts are banned under New York law but are permitted under permitted under US Federal Law. As such, in the United States, consumer arbitration is not uncommon, and Federal courts have ordered consumers to arbitrate claims because of arbitration agreements in website T&Cs.

Soleymani v Nifty Gateway LLC

The Court of Appeal has recently considered the interplay between the legal frameworks for consumer protection and for international arbitration in the case of Soleymani v Nifty Gateway LLC.

Mr S participated in a ranked online NFT auction on Nifty Gateway’s platform placing a bid for an NFT associated with the artwork “Abundance” by the artist Beeple. A dispute arose in relation to the auction and Nifty issued arbitral proceedings in New York relying on Clause 17 of its Terms and Conditions headed “Disputes”: “(…) You agree that any such arbitration shall be settled solely and exclusively by binding arbitration held in New York, New York (…). Any disputes were to be “subject to the “internal laws of the State of New York”.

In parallel to the New York arbitration, Mr S issued his own proceedings in the English Courts to protect his rights as an English consumer. His claim sought, among other things, a declaration that the arbitration clause and governing law clause were unfair and not binding upon him as contrary to English Consumer Law. A Judge would have to decide whether this was a consumer contract, which depended on whether Nifty was directing its activities at the UK, and whether the arbitration clause was unfair within the meaning of the Consumer Rights Act (“CRA”).

Nifty contested the claim and sought, among other things, an order staying the English court proceedings under the English Arbitration Act 1996 (“AA 1996”). The Judge granted a stay, on the grounds that the validity of the arbitration clause, including the question of fairness, was more properly dealt with by an arbitral tribunal. This was an important decision, as it is thought to be the first decision in the English courts which relates to NFTs. Whilst the high court accepted it had jurisdiction to hear the claim, it found that the arbitrator in New York should consider whether the arbitration clause should be upheld.

However, Mr S was granted permission to appeal the decision on grounds that the English court had jurisdiction to declare the arbitration clause unfair and had erred in staying the proceedings. The Court of Appeal subsequently lifted the stay and directed that there be a trial of whether the arbitration clause was “null and void, inoperative or incapable of being performed” under s. 9(4) of the AA 1996.

In reaching its decision, the Court of Appeal noted that rulings affecting consumer rights have “implications for consumers in general” in the United Kingdom and, therefore, should be ruled upon in a “public court”. Consumer protection rights under English law involve domestic concepts which an English court is far better placed to adjudicate upon than a foreign (in this case, New York) arbitrator.

What next?

This development is important for cryptocurrency exchanges that include arbitration clauses in their terms of services. It is not uncommon for internet businesses, such as crypto asset exchanges, to include arbitration, governing law, or foreign choice of court agreements in their online standard terms and conditions. As the court noted, “no matter how global, borderless or decentralised a trader would say its internet business is”, English courts could now be called upon to determine the validity of arbitration clauses in consumer contracts.

At this stage, however, we see no real need to worry. The real concern lies with how readily courts will actually be prepared to invalidate arbitration clauses. With an English High Court trial to determine the merits of Mr S’s consumer rights claims next in line, we won’t have to wait too long to find out. The court’s decision will provide a welcomed insight into how they will deal with cases involving NFTs (and other similar digital assets) moving forward. This only reinforces the attractiveness of England and Wales to hear consumer rights claims.

With NFTs remaining relatively new, this case has left open a host of open questions, which will no doubt be refined in the cases that follow.

NFTs are slowing infiltrating all corners of our legal system. As such, we can only expect they will be regularly hitting the legal headlines.