Court of Appeal decision: Soleymani v Nifty Gateway

On 6 October 2022, the Court of Appeal overturned a High Court decision to stay English court proceedings, holding that the question of whether a US arbitration clause in a technology company’s standard Terms of Business is valid should be allowed to proceed to a full trial. The Court of Appeal decision, which was based on consumer rights principles, has important lessons for international technology companies with arbitration clauses in their consumer-facing standard contracts.

Background

The claimant individual, Mr Soleymani, was a collector of non-fungible tokens (NFTs). The defendant was Nifty Gateway LLC, a New York-based, Delaware registered operator of an online platform on which digital assets, including NFTs, can be bought, sold and held.

At an online auction operated by the defendant in April 2021, Mr Soleymani placed several bids for a blockchain-based NFT associated with an artwork titled “Abundance” produced by the digital artist Mike Winkelmann (known as “Beeple”). Mr Soleymani’s highest bid was for $650,000, which resulted in him placing third in the auction.

Mr Soleymani says he was unaware that this auction was operated by the defendant as a “ranked auction”, meaning the top 100 bidders would all win different “editions” of the artwork (with the highest bid winning the first edition, the second-highest winning the second edition, etc.). This was also the first such auction that Nifty Gateway had run, and there was no requirement for participants to read the rules of the ranked auction before participating. There followed a dispute as to whether Mr Soleymani had been properly notified of the terms of the auction and whether he was liable to the defendant for his $650,000 bid.

Pursuant to the arbitration and governing law clauses contained in Nifty Gateway’s standard terms, which Mr Soleymani was able to accept online without viewing, Nifty Gateway initiated JAMS arbitration proceedings in New York seeking payment of the $650,000 bid from Mr Soleymani.

Mr Soleymani argued, in New York, that the arbitration should be dismissed because he was a consumer and Nifty Gateway’s standard terms had not been brought to his attention. This motion was dismissed by the New York arbitrator, although Mr Soleymani was recognised as a consumer under the JAMS arbitration rules.

Mr Soleymani issued concurrent proceedings in the English courts seeking a declaration that each of the arbitration and governing law clauses in Nifty Gateway’s standard terms were unfair and so not binding on Mr Soleymani as they were contrary to English consumer rights protections, and that any contract arising from the bid was void under the Gambling Act 2005. Nifty Gateway claimed that the English court had no jurisdiction to determine the validity of the arbitration clause and sought a stay of the English proceedings.

The High Court decision

In what is widely thought to have been the first English decision relating to NFTs, the High Court accepted jurisdiction to hear the non-arbitration aspects of the claim regarding the governing law clause and the Gambling Act claim, but granted a stay of the proceedings under s. 9 of the Arbitration Act 1996 in favour of the New York arbitration. In the judge’s view, issues going to the validity and the enforceability of the arbitration agreement were to be considered by the New York arbitrator.

The Court of Appeal decision

Mr Soleymani was granted permission to appeal the High Court decision on three grounds:

• The court had jurisdiction under section 15B of the Civil Jurisdiction and Judgments Act 1982 (CJJA) to make a declaration that the arbitration clause was unfair and not binding because the exception for arbitration under Article 1(2)(d) of the Brussels Recast Regulation did not apply to the claim (Ground 1).
• Having found that the Court had jurisdiction over the governing law and gambling claims, the judge erred by failing to declare the governing law clause was not binding (Ground 2).
• The judge erred in staying the proceedings under s.9 of the Arbitration Act without determining the question of fairness or directing a trial before an English court on the issues (Ground 3).

Mr Soleymani’s appeal was dismissed in relation to Grounds 1 and 2 because, in short, when the CJJA was amended to incorporate parts of the Brussels Recast Regulation into English law, it incorporated the existing hierarchy of that regulation. In particular, the exclusion of arbitration proceedings from the scope of the regulation took precedence over the parts of the regulation providing jurisdiction for consumer and employment law disputes. The Court of Appeal noted, however, that the October 2022 expansions of the jurisdictional gateways in Part 6B of the CPR were likely to mean that a consumer would likely be able to bring such a claim in future.

However, the Court of Appeal allowed Mr Soleymani’s appeal under Ground 3. The Court found that Mr Soleymani should be allowed to proceed to a full trial in the English Courts on the issue of whether the arbitration agreement was null and void, inoperative or incapable of being performed. The Court found that the consumer context of the dispute was a “powerful factor” in favour of having the English Courts decide the issue rather than leaving it to the arbitrator.

Comment

Arbitration is often desirable for technology companies in light of the enhanced international enforcement options under the New York Convention, its flexibility and its confidentiality.

However, this decision sounds a note of caution for those companies considering arbitration in consumer-facing terms of service. Although the validity of the arbitration clause has yet to be decided, Nifty Gateway now faces a trial on whether it is entitled to rely on the arbitration clause to prevent Mr Soleymani from pursuing his claims in the English Courts. This is so, even in light of the relatively high value of the transaction. Companies that use arbitration clauses in their consumer-facing terms of service will therefore want to follow the progress of the case closely.

This case is also the first post-Brexit decision in this area and, as such, provides an insight into how the English Courts are likely to apply the parts of the Brussels Recast Regulation that have now been incorporated into English law.

The judgment is available here.