Jan 12
Dispute over validity of arbitration in NFT dispute
by Raffaella Aghemo
A recent case involving the phenomenon of the moment — non-fungible tokens, also known as NFTs — will provoke much discussion.
A British citizen by the name of Soleymani, with a very substantial net worth, participated in a number of online auctions of non-fungible tokens linked to works of art hosted by Nifty Gateway, a Delaware company, having previously purchased others for a total value of well over $2.5 million! But while the previous auctions were ‘conventional’ auctions, i.e. with only one NFT up for grabs, which had to be awarded to the highest bidder, this one I am talking about was different in that it was a ‘ranked’ auction, meaning that there were 100 NFTs associated with the same artwork for sale, and of the first 100 bids, each received an NFT, as if it were a limited edition print!
However, Mr. Soleymani, who had bid USD 650,000 for an NFT of Beeple’s digital artwork ‘Abundance’, winning third place, in this case, claimed that he had bid on the basis that the auction was a conventional (and unclassified) auction and therefore refused to pay this sum.
At this point, Nifty Gateway opened a claim for payment in arbitration in NY, as stated in the platform’s ToS, which Soleymani had accepted by joining the platform illo tempore.
Instead, English challenged the arbitration and instituted proceedings in England demanding a declaration that:
1) the arbitration agreement was unfair and therefore not binding,
2) the applicable law clause was unfair and non-binding, and
3) the agreement was illegal ab initio as it was contrary to the English Gambling Act 2005.
Nifty did not sit idly by and, in turn, brought an action to challenge the jurisdiction of the English courts and sought:
(a) a declaration of lack of jurisdiction of the court and
(b) a stay of the tribunal under Section 9 of the Arbitration Act 1996.
However, while at first instance the English High Court upheld the declarations sought by Nifty and stayed the English Court’s proceedings on the consumer rights claims in favour of the New York arbitration, against whose decisions Mr. Soleymani appealed, the Court of Appeal upheld the appeal to lift the stay of proceedings and opened a trial on the question of whether the arbitration agreement was void, inoperative or incapable of being enforced under the Gambling Act.
In the Court of Appeal’s view, decisions affecting consumer rights are of public importance and therefore should be heard in a public court rather than an arbitration tribunal. In addition, any company that directs its business to private individuals in England and Wales, regardless of where that business is located and its status as a ‘decentralised’ company, must ensure that its contractual terms meet the fairness requirements of the English Consumer Protection Act.
All Rights Reserved
Raffaella Aghemo, Lawyer
