Enforcement of international arbitration award relating to consumer contract refused on grounds of public policy (English Commercial Court)

Practical Law UK Legal Update Case Report w-040-1443 (Approx. 11 pages)

Enforcement of international arbitration award relating to consumer contract refused on grounds of public policy (English Commercial Court)

by Practical Law Arbitration

Background

Enforcement of New York Convention Awards

Section 101(1) of the Arbitration Act 1996 (AA 1996) provides that:

"A New York Convention award shall be recognised as binding on the persons as between whom it was made, and may accordingly be relied on by those persons by way of defence, set-off or otherwise in any legal proceedings in England and Wales or Northern Ireland."

A New York Convention award is an arbitration award made in the territory of a state (other than the United Kingdom) which is a party to the New York Convention (section 100(1), AA 1996).

The recognition or enforcement of a New York Convention award shall not be refused, except as set out in section 103 of the AA 1996 (section 103(1), AA 1996). Section 103(3) provides that:

"Recognition or enforcement of the award may also be refused if the award is in respect of a matter which is not capable of settlement by arbitration, or if it would be contrary to public policy to recognise or enforce the award."

For further discussion, see Practice note, Enforcing arbitration awards in England and Wales.

Financial Services and Markets Act 2000

The Financial Services and Markets Act 2000 (FSMA) is the most important legislation relating to the regulation of the UK financial services industry. It contains provisions on many aspects of financial regulation, including the powers of the regulators, the authorisation of firms and the regulatory perimeter.

Part 2 of FSMA provides the basis for the regulatory perimeter for UK financial services regulation. One of its key provisions is the general prohibition, which prohibits persons from carrying on a regulated activity in the UK, or purporting to do so, unless authorised or exempt (section 19, FSMA).

A breach of the general prohibition is a criminal offence (section 23, FSMA), and contracts concluded while in breach of the general prohibition may be unenforceable (section 26, FSMA).

Schedule 2 to FSMA provides an indicative list of regulated activities to which the general prohibition applies.

For more information on FSMA, see Practice note, Financial Services and Markets Act 2000 (FSMA): overview.

Consumer Rights Act 2015

The Consumer Rights Act 2015 (CRA 2015) consolidates consumer rights in one place, enhances consumer protections for consumers and modernises the law to allow for certain digital developments. For the CRA 2015 to apply, it is necessary that someone is acting as a consumer. Section 2(3) defines a consumer as "an individual acting for purposes that are wholly or mainly outside that individual's trade, business, craft or profession".

Section 71 of the CRA 2015 requires a court to consider whether a consumer contract is fair, even if this is not raised by the parties. The CRA 2015 will apply where a consumer contract has a close connection with the UK, even where the parties have chosen a different governing law (section 74, CRA 2015).

A term in a consumer contract which is unfair will be unenforceable (section 62(1), CRA 2015), and a term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer (section 62(4)).

For an overview of the CRA 2015, see Practice note, Consumer Rights Act 2015: overview.

Facts

Mr Chechetkin's cryptocurrency trading

Mr Chechetkin was a UK-domiciled lawyer who undertook various activities trading cryptocurrencies on an electronic platform provided by a company called Payward Ltd, which is the UK subsidiary of two Delaware-incorporated companies (together, Payward).

To trade on the Payward platform, Mr Chechetkin had to set up an account. As part of that process, he provided some background information about himself, including that he was a lawyer by profession. He did not suggest that he had any experience of, or professional activities relating to, the trading of cryptocurrencies. By applying for an account, Mr Chechetkin accepted Payward's terms and conditions (Payward Terms), and his application was approved. The Payward Terms included in clause 23 an agreement to arbitrate any dispute arising (except for certain disputes relating to intellectual property). Arbitrations were to be seated in San Francisco, California, and conducted under the JAMS arbitration rules. The Payward Terms also provided that the state or federal courts of San Francisco, California, had exclusive jurisdiction over any appeals of an arbitration award and over any suit between the parties not subject to arbitration and also included a provision concerning the application of Californian law.

Mr Chechetkin then undertook extensive trading activities using his Payward account and lost substantial sums of money.

FSMA proceedings and arbitration

He began proceedings in the English courts alleging that Payward's activities in the UK were in breach of the general prohibition in section 19 of FSMA, meaning that the contract that he had entered into was unenforceable and that he was entitled to recover the sums he had lost.

Payward then began arbitration under the Payward Terms, seeking (among other things) a declaration that it had no liability to Mr Chechetkin. Early in the arbitration, the California-seated sole arbitrator conducted a remote procedural hearing, at which she rejected Mr Chechetkin's application to stay the arbitration pending the determination of his FSMA claims by the English court. She then issued a procedural order (PO1), in which she stated that the arbitration was under the JAMS Arbitration Rules and was seated in California, with the merits to be decided pursuant to California law and the Federal Arbitration Act. In a second procedural order (PO2), following a hearing at which Mr Chechetkin partially articulated his argument in relation to FSMA and that clause 23 of the Payward Terms was unenforceable, the arbitrator rejected this position.

The arbitrator went on to render two awards:

A partial award (Partial Award), issued on 29 July 2022, in which she confirmed the matter was arbitrable and upheld her jurisdiction over the dispute, rejecting Mr Chechetkin's jurisdictional objections based on FSMA.
A final award (Final Award), issued on 18 October 2022, in which she concluded that Payward had no liability to Mr Chechetkin.

The Final Award also stated that:

"Pursuant to the contract, [Mr Chechetkin] is bound to arbitrate his disputes with Payward. He is enjoined from filing or prosecuting a claim against Payward in court whether in the UK or other jurisdiction".

Payward issued an arbitration claim in the English court seeking recognition and enforcement of the Final Award under section 101 of the AA 1996 (Enforcement Proceedings). It argued that, where a New York Convention award concludes that the tribunal has jurisdiction in relation to a dispute, the mandatory requirement of recognition under section 101 of the AA 1996 deprives the English court of any jurisdiction in relation to a dispute which is the subject matter of the award.

CPR Part 11 application

While the arbitration was still ongoing, Payward applied under CPR 11 (Part 11 Application), in June 2022, for a declaration that the English court lacked jurisdiction over Mr Chechetkin's FSMA claims by reason of clause 23 of the Payward Terms. Before the Part 11 Application was heard, the Final Award was rendered and Payward began the Enforcement Proceedings.

Miles J rejected the Part 11 Application, finding that:

Mr Chechetkin was clearly contracting with Payward as a consumer, meaning that the English court had jurisdiction over his FSMA claims.
Neither the arbitration agreement in clause 23 of the Payward Terms nor the Final Award meant that the court lacked jurisdiction.
The effect of a New York Convention award is that, once recognised, the parties may rely on it so that, for example, a declaration of non-liability in a binding award might amount to a defence or give rise to an issue estoppel in a claim brought in the English courts. This arises from the express terms of section 101(1) of the AA 1996, but that section does not operate to deprive the court of jurisdiction, whether expressly or implicitly.

See Chechetkin v Payward Ltd and others [2022] EWHC 3057 (Ch), discussed in Legal update, Arbitration award does not deprive the English court of jurisdiction over proceedings relating to the same subject matter (English Chancery Division).

Therefore, Payward continued with the Enforcement Proceedings, arguing that the Final Award (and, in particular, the part of it enjoining Mr Chechetkin from filing or prosecuting a claim against Payward in court, whether in the UK or other jurisdiction) should be enforced. Payward's primary position was that the English court generally seeks to give effect to New York Convention awards, as required by sections 101 to 103 of the AA 1996.

Mr Chechetkin opposed the Enforcement Proceedings under section 103(3), principally on the basis that enforcing the Final Award would be contrary to English public policy, as embodied in the CRA 2015 and FSMA.

Decision

Bright J dismissed the application to enforce the Final Award, holding that Mr Chechetkin was acting as a consumer when he contracted with Payward and to enforce the Final Award would be contrary to public policy.

Mr Chechetkin was a consumer

Bright J first determined that Mr Chechetkin was a consumer within the meaning of section 2(3) of the CRA 2015. When he applied for his account with Payward, Mr Chechetkin was employed as a lawyer and stated as much, as well as indicating that he had no experience of cryptocurrency trading. Bright J had no hesitation in concluding that he was a consumer. While accepting that Mr Chechetkin was trading to try to make money, this was not done in the course of a trade, business, craft or profession.

In relation to Payward's argument that Mr Chechetkin's trading was knowledgeable, experienced and sophisticated, as demonstrated by the fact that he accessed his account regularly and invested relatively large sums of money, Bright J noted that, even if that were correct, it did not mean that the transactions were entered into wholly or mainly for purposes within his trade, business, craft or profession.

Arbitrator's decision on jurisdiction not binding in enforcement

Bright J rejected Payward's argument that Mr Chechetkin failed to bring his FSMA claims in the arbitration and, therefore, he should not be permitted to pursue them in the English courts. The judge held that the arbitrator repeatedly held that only the laws of California were applicable in the arbitration (see PO1 and PO2), meaning that it was unrealistic to criticise Mr Chechetkin for not bringing a counterclaim based on FSMA in the arbitration.

Moreover, when applying section 103 of the AA 1996, a tribunal's finding on its own jurisdiction does not bind the courts of a different (non-supervisory) country when they are asked to enforce the award (see Dallah Co v Ministry of Religious Affairs of Pakistan [2010] UKSC 46). The arbitrator's finding in the Final Award that clause 23 of the Payward Terms was enforceable and that she had jurisdiction was entwined with her determination that only Californian law applied. Mr Chechetkin's argument was that, under the CRA 2015, that process was unfair to him. Therefore, the arbitrator's refusal to take English law into account was critical to her finding that she had jurisdiction. Applying Dallah, Bright J concluded that the arbitrator's decision that she had jurisdiction was not binding on him.

The judge went on to indicate that, in any event, he did not think he would necessarily be obliged to enforce an award that he considered contrary to English public policy merely because the arbitrator's decision was said to mean that the award was not contrary to public policy. Where (as in Alexander Bros Ltd (Hong Kong SAR) v Alstom Transport SA [2020] EWHC 1584 (Comm)) the arbitrator has made a factual determination on the evidence before them, a court should not generally reopen that finding on an application for enforcement. However, that was not the position in relation to the Final Award. The arbitrator made no relevant factual findings, nor did she purport to decide any relevant legal points. She simply declined to apply English law on the basis of the Payward Terms.

In his judgment, Bright J set out the terms of PO2 and the Partial Award in full. He did this because, among other things:

Their relative brevity suggested that the procedure under JAMS Arbitration Rules prizes speed and decisiveness, perhaps at the expense of analytical detail or lengthy reasons.
It demonstrated that PO1 had stated in terms that it was final and binding, including its determination that Californian law was applicable.
Together, they demonstrated that the arbitrator gave no real consideration to Mr Chechetkin's arguments in relation to FSMA, its impact on her jurisdiction and the applicability of English law, and decided that clause 23 of the Payward Terms was valid and enforceable essentially because it had been sufficiently brought to Mr Chechetkin's attention.

Against that backdrop, Bright J held that it was plain that, contrary to Payward's submissions, JAMS arbitration in California before an arbitrator with no experience of English law was not the right forum to determine the FSMA claim. There was simply no basis to suggest that that claim could or should have been brought in the arbitration, and Bright J therefore held he was not bound by any of the arbitrator's determinations in applying section 103 of the AA 1996.

CRA 2015 and FSMA constitute UK public policy

Bright J noted that the "classic formulation" of what is seen as contrary to public policy in England and Wales is that which is "contrary to the fundamental conceptions of morality and justice" of the forum (IPCO (Nigeria) Ltd v Nigerian National Petroleum Corpn [2005] EWHC 726 (Comm)). He went on to consider whether either the CRA 2015 or FSMA constituted public policy.

CRA 2015 is an expression of UK public policy

Bright J held that the CRA 2015 amounted to an expression of UK public policy for several reasons, including that:

The CRA 2015 partly revisited the Unfair Contract Terms Act 1977 and partly enacted in the UK EU Directive 93/13 on unfair terms in consumer contracts, with the latter unquestionably representing public policy, as judgments of the CJEU established.
The CRA 2015 is a UK, rather than "a mere English" statute, underlining its significance in policy terms. Further, a court is required, by section 71 of the CRA 2015, to consider the fairness of consumer contracts, even where this is not raised by the parties, which emphasises the importance of this as a public policy.
Section 74 means that the CRA 2015 applies where the consumer has a close connection to the UK, even where another law has been chosen to apply to the relevant consumer contract.

Bright J held that he was obliged by authority to treat section 74 of the CRA 2015 as an expression of public policy but that, even if that were not the case, he considered that it would:

"… not be consistent with the fair and orderly administration of justice, and fundamental conceptions of justice, if consumer protections such as are enacted in the [CRA 2015] could be outflanked merely by the choice of a different system of law."

FSMA is an expression of UK public policy

Similarly, Bright J considered FSMA to be an expression of UK public policy, noting that it was again a UK-wide statute and that the duties of the regulator appointed under FSMA expressly include the duty to advance both the strategic objective of ensuring that the relevant markets function well and a number of operational objectives, namely, "the consumer protection objective", "the integrity objective" and "the competition objective". All of these are "unquestionably, a matter that has been expressly identified by Parliament as a matter of public policy".

Bright J further held that, given their association with the overall regulatory objectives of FSMA, the general prohibition (section 19), criminal liability for contravening the general prohibition (section 23) and the unenforceability of contracts concluded in breach of the general prohibition (section 26) all amount to public policy also.

Enforcement of Final Award contrary to public policy

Bright J held that to enforce the Final Award would effectively require him not to consider whether clause 23 of the Payward Terms was fair, even though Mr Chechetkin had asked for this to be determined, and the court was required to make that determination anyway by reason of section 71 of the CRA 2015. Further, section 74 of the CRA 2015 clearly made the statute applicable in the circumstances (including that Mr Chechetkin and Payward Ltd were both domiciled in England, the services were paid for in sterling and using English bank accounts). Despite this, the arbitrator took no account of English law in the Final Award, meaning that enforcement of it would be contrary to public policy.

In reaching that decision, the judge expressly stated that he was not engaging in a qualitative comparison between the protections available under Californian (or US federal) law and English law, nor in whether the JAMS procedures afford consumers adequate protection. The issue was simple: "the UK Parliament has decided that the protection of consumers domiciled in the UK should be governed by the Consumer Rights Act 2015, not by foreign laws or standards". That alone was sufficient to make the Final Award unenforceable. Issues that should have been addressed as a matter of English law were determined under Californian law and "that, in itself, is contrary to UK public policy".

Enforcement would also be contrary to the public policy section 62 of the CRA 2015. The fairness of a contract is to be established case by case, applying a test of whether a reasonable consumer in the position of this consumer would have agreed to it (Cavendish Square Holdings BV v Makdessi, ParkingEye Ltd v Beavis [2015] UKSC 67). The mere fact that an agreement obliges the parties to arbitrate their disputes does not make it unfair, and it may have been reasonable for a consumer in Mr Chechetkin's position to have agreed to arbitration in the UK under the AA 1996; Bright J did not consider a reasonable consumer would have agreed to arbitration in California, under the JAMS Rules and subject to the Federal Arbitration Act. This was because arbitration under that system brought with it significant disadvantages as regards the application of English law, including provisions of the CRA 2015 and FSMA on which Mr Chechetkin relies. Bright J noted that:

The English courts did not have a supervisory role over the arbitration under the AA 1996, which, among other things, meant there could be no appeal on a point of English law under section 69.
Mr Chechetkin had to retain Californian attorneys at significant cost.
The case was heard by a US arbitrator with no experience in English law and who was not receptive to any submission based on the CRA 2015 or FSMA.

In this regard, Bright J also noted the judgment of the Court of Appeal in Soleymani v Nifty Gateway LLC [2022] EWCA Civ 1297, where an application for a stay of English proceedings under section 9 of the AA 1996 was rejected. While Bright J drew a distinction between an application for a stay under section 9 and enforcement under section 101 of the AA 1996, he noted that the Court of Appeal "took it for granted" that the English court is better placed to deal with English law issues than a US arbitrator and that arbitration overseas places a significant burden on a UK consumer. The impact of these considerations could clearly be seen in this case.

Bright J then considered Mr Chechetkin's claim that enforcement of the Final Award would be contrary to the public policy of FSMA. While it was not the judge's role to consider the merits of the claim under FSMA (which was still pending), enforcing the Final Award would have stopped those proceedings in their tracks, in circumstances where Mr Chechetkin has at least a prima facie claim. Stifling that claim under FSMA would be contrary to the public policy considerations underlying that statute, most importantly (from Mr Chechetkin's point of view) that contracts contravening the general prohibition in section 19 of FSMA are unenforceable and that the customer should be entitled to recover their money (section 26, FSMA). The criminal law consequences that may follow (section 23, FSMA) were, in the judge's view, no less important from the general public's point of view, but the investigation and potential prosecution of such alleged offences was far less likely to occur if consumers with grievances were required to arbitrate in California.

Discretion under section 103 AA 1996

Finally, Bright J noted that he had found that enforcement of the Final Award would be contrary to UK public policy for the purposes of section 103(3) of the AA 1996, meaning that recognition and enforcement "may be refused". That phrase was not an open discretion and was included only to allow a court to consider any other circumstances that might affect the prima face right to have enforcement refused on grounds of public policy. There were no "fresh circumstances" here, such as another agreement or an estoppel, meaning Bright J declined enforcement.

Comment

This is a very significant decision. Cases of the English courts refusing to enforce a New York Convention award on public policy grounds are rare. The finding that an arbitrator deciding an issue under foreign law in circumstances where the UK Parliament has decided, as a matter of public policy (here expressed in the CRA 2015 and FSMA) that the issue is to be decided under English law is an important and, potentially, wide-reaching decision. This, combined with the judge's ruling that a reasonable UK consumer would not agree to arbitration in California under the JAMS Rules and subject to the US Federal Arbitration Act, means that it is key for companies to consider where their customers are domiciled and their status and tailor their disputes clauses accordingly.

Case

Payward Inc and Others v Chechetkin [2023] EWHC 1780 (Comm) (14 July 2023) (Bright J).

We are grateful to 3 Verulam Buildings for drawing this judgment to our attention.

End of Document

Also Found In

Resource ID w-040-1443

Published on 18-Jul-2023

Resource Type Legal update: case report

Jurisdictions

England
Wales