English Commercial Court Refuses Recognition and Enforcement of California-Seated Arbitration Award on Grounds of Public Policy

At a Glance

• A UK-domiciled consumer lost about £613,000 in his cryptocurrency trading account, which was governed by terms of service that referred disputes to JAMS arbitration, with the merits to be decided pursuant to California law and the U.S. Federal Arbitration Act. The arbitrator held the cryptocurrency trading platform was not liable.
• The English Commercial Court held that enforcement of the JAMS award would be contrary to UK public policy, which meant that recognition and enforcement “may be refused”. The court found no “fresh circumstances”, and enforcement was refused.

In Payward Inc, Payward Ventures Inc and Payward Ltd v Chechetkin [2023] EWHC 1780 (Comm), the English Commercial Court refused to enforce a California-seated arbitration award, on the basis that enforcement would contravene UK public policy as embodied in the Consumer Rights Act 2015 (CRA 2015) and the Financial Services and Markets Act 2000 (FSMA).

Background

Kraken is a cryptocurrency trading platform operated in the UK by Payward Ltd. Mr Chechetkin (a UK-domiciled lawyer) deposited a total of £613,000 into his account and lost around £608,000. The account was governed by the Payward Terms of Service, which referred disputes to California-seated Judicial Arbitration and Mediation Services (JAMS) arbitration, with the merits to be decided pursuant to California law and the U.S. Federal Arbitration Act.

In February 2022, Mr Chechetkin issued proceedings in England alleging that Payward Ltd had breached part of FSMA because it lacked the necessary authorisation to carry out its business activities. He argued that this rendered his contract with Payward Ltd unenforceable and entitled him to recover the deposited £613,000.

In parallel, Payward Ltd, Payward Inc and Payward Ventures Inc (Payward Group) commenced arbitration under JAMS, in which the California-seated sole arbitrator determined that the Payward Group was not liable to repay the £613,000 to Mr Chechetkin (Award).

The Payward Group then issued a claim in the English Commercial Court seeking to enforce the Award pursuant to section 101 of the Arbitration Act 1996 (AA 1996).

Findings

The Commercial Court made five main findings.

1. Mr Chechetkin was a “consumer” for the purposes of the CRA 2015.

Mr Chechetkin was a lawyer acting on his own behalf with no intention to resell cryptocurrencies as a business. He did not work in crypto or fintech and had indicated that he had no experience of cryptocurrency trading when he opened his Kraken account.

2. The Commercial Court was not bound by the decisions of the JAMS arbitrator.

The Commercial Court was not bound by the decisions of the JAMS arbitrator and should not necessarily be obliged to enforce an award that is contrary to UK public policy merely because the arbitrator’s decision had indicated otherwise.

3. The CRA 2015 and FSMA are expressions of UK public policy.

The CRA 2015 was in part the UK implementation of EU Directive 93/13 on unfair terms in consumer contracts, which had been established as public policy pursuant to several decisions of the Court of Justice of the European Union and which bound the English courts.

FSMA is an expression of UK public policy because it has regulatory objectives that have been identified by UK Parliament as such.

4. Enforcement of the arbitral award would be contrary to public policy under the CRA 2015 and FSMA.

The CRA 2015 applies where a consumer contract has a close connection with the UK and requires the court to consider whether a term is fair even if none of the parties have raised it as an issue. The Payward terms were found to have a close connection with the UK because: both Mr Chechetkin and Payward Ltd were domiciled in England, and the services were paid for in sterling using English bank accounts.

In addition, the Commercial Court held that a reasonable consumer would not have agreed to California-seated arbitration, under JAMS and subject to the U.S. Federal Arbitration Act, as this brought with it significant disadvantages regarding the application of English law (including the CRA 2015 and FSMA). Nevertheless, the arbitrator took no account of English law, meaning that enforcement would be contrary to UK public policy.

The Commercial Court also found that enforcement would stifle Mr Chechetkin’s claim under FSMA in circumstances where he had at least a prima facie claim. This would be contrary to public policy since contracts concluded in contravention of the general prohibition in section 19 of FSMA should be unenforceable and the customer should be entitled to recover his money.

5. Discretion under section 103 of the AA 1996

The Commercial Court held that enforcement of the Award would be contrary to UK public policy for the purposes of section 103(3) of the AA 1996, which meant that recognition and enforcement “may be refused”. The court did not have open discretion, but it could consider any other circumstances which might affect the prima facie right to have enforcement or recognition refused on the grounds of public policy. No “fresh circumstances” were found, and enforcement was refused.

Conclusion

It is rare for a New York Convention award not to be enforced for public policy reasons. This case helps to clarify some of the factors that will be considered by the English courts in a consumer context. Companies should be alert to the potential domicile and status of their customers and tailor their dispute resolution clauses accordingly.