Reasons to be cautious - arbitration clauses in consumer contracts
25 November 2022
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25 November 2022
A recent English Court of Appeal decision1 has highlighted the issues that can arise when organisations include an arbitration agreement in their standard terms and conditions. If the contracting party is a UK based consumer, they may be able to rely on UK consumer rights and insist that the English courts determine any dispute. An organisation bringing a claim could therefore find itself fighting on two fronts: in arbitration and in the English courts. And any proceedings could be brought against it in the English courts, rather than the contractually chosen forum. The decision also highlights that the concept of "consumer" and who falls into that category may be wider than organisations think – particularly pertinent in the digital assets space, where dealings with sophisticated high net worth individuals are not uncommon.
UK domiciled high net worth individual Amir Soleymani took part in an auction held on Delaware based Nifty Gateway LLC's online platform. He placed a successful bid of US$650,000 for a blockchain based NFT associated with the artwork "Abundance". A dispute then arose with regard to the nature of the auction and Mr Soleymani withdrew without payment.
Nifty sought to recover the US$650,000 and commenced New York seated arbitration proceedings, as per their online terms of use. Those terms also included a New York governing law provision. Mr Soleymani unsuccessfully challenged the jurisdiction of the arbitrator in the arbitration proceedings. He also brought proceedings in the English courts, where, in effect, he sought to rely on his rights as a UK domiciled consumer under the Consumer Rights Act 2015 (CRA 2015) to argue that the arbitration and governing law clauses were unfair and therefore invalid and not binding on him.
In response, Nifty challenged the jurisdiction of the English courts and applied for an order to stay the proceedings in the English courts pursuant to section 9(4) of the Arbitration Act 1996 (AA 1996) on the basis that Mr Soleymani was a party to a valid arbitration agreement.
Mr Soleymani first had to overcome a jurisdictional hurdle with regard to his claim that the arbitration agreement was invalid. He failed. The Court of Appeal agreed with the Commercial Court 2 that his claim fell squarely within the arbitration exception that had been exported post Brexit into the Civil Jurisdiction and Judgments Act 1982 (as amended by EU Exit Regulations). In short, Mr Soleymani was not allowed to "dress up" his arbitration claim as a claim to enforce substantive consumer rights.
However, Popplewell LJ did note that as from 1 October 2022, this barrier to jurisdiction fell away. Amendments to the jurisdictional gateways in the English Civil Procedure Rules, which came into effect on that date, meant that UK consumers buying goods or services online within the UK could go to the English courts to determine whether an arbitration agreement included in the online terms of use of a foreign counterparty was invalid. We set out the relevant jurisdictional gateways at the end of this briefing.
Mr Soleymani still had two other arguments under appeal:
The Court of Appeal approved the Commercial Court's decision on these claims and confirmed that the English courts did have jurisdiction over such claims in principle. However, the Court of Appeal did overturn the Commercial Court's decision on whether there should be a stay of the English court proceedings under section 9(4) of the AA 1996, pending the resolution of the New York arbitration.
This part of the decision is important, as it illustrates the pro-consumer approach of the English courts. Section 9(4) of the AA requires an English court to grant a stay of the proceedings where the claimant is a party to an arbitration agreement, unless the court is satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed. In the case of Mr Soleymani:
On this basis, the Court of Appeal concluded that the English courts, rather than the arbitral tribunal in New York, were the appropriate forum to determine whether the arbitration clause in Nifty's terms of use was invalid. Only if the English courts found that there was a valid arbitration agreement for the purposes of UK consumer rights law, should there be a stay of any English proceedings in favour of the New York arbitration.
This decision will be of interest to any organisation that deals with UK domiciled consumers on standard terms of use which incorporate an arbitration agreement. In particular:
In short, while it is open to organisations to include an arbitration agreement in their standard terms, they should not expect to be always able to enforce it in the English courts in disputes with UK domiciled consumers.
ANNEX: JURISDICTIONAL GATEWAYS IN PRACTICE DIRECTION 6B AS FROM 1 OCTOBER 2022 | |
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Para 3.1(6)(a) | Claim in respect of a contract concluded by the acceptance of an offer where the offer was received within the UK. |
Para 3.1(4A) | Claim which arises out of the same or closely connected facts as a claim which may be served on the foreign counterparty without the permission of the court (CPR r 6.33). |
Para 3.1(8) | Claim for a declaration that no contract exists where, if the contract was found to exist, it would fall within the scope of para 3.1(6) (including para 3.1(6)(a) above). |
Authors: Tom Cummins and Jonas Weissenmayer
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.
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