Case of the Day: Payward v. Chechetkin

A kraken devouring a sailing ship.

The case of the day is Payward, Inc. v. Chechetkin, [2023] EWHC 1780 (Comm). Friend of Letters Blogatory Alexander Shirtcliff of Blake Morgan instructed counsel for Chechetkin, a British national living in England. Chechetkin signed up for an account with the Kraken online cryptocurrency exchange. His contract—a clickwrap contract— was with Payward Ltd. The contract contained an arbitration agreement requiring the arbitration of essentially all disputes “arising from these Terms or your use of the Services” in California under the JAMS Rules. I am not going to quote that JAMS Rules at length, but they are typical insofar as they give the arbitrator the power to rule on challenges to arbitrability. They also contain the following provision that applies in consumer cases:

Remedies that would otherwise be available to the consumer under applicable federal, state or local laws must remain available under the arbitration clause, unless the consumer retains the right to pursue the unavailable remedies in court.

The arbitration agreement also provided:

Any dispute between the parties will be governed by these Terms and the laws of the State of California and applicable United State law, without giving effect to any conflict of laws principles that may provide for the application of the law of another jurisdiction.

Chechetkin brought an action in the English High Court alleging that Payward had violated the Financial Services and Markets Act 2000. It’s not totally clear to me what remedy he sought; the decision explains that he he had suffered trading losses of more than £600,000 in the relevant period. Payward challenged the jurisdiction of the English court on the grounds that the parties had agreed to arbitrate disputes, though it did not immediately seek to stay the English case under Section 9 of the Arbitration Act. Payward then initiated an arbitration in California, and it then sought an injunction in the English case forbidding Chechetkin from prosecuting that action further until the arbitration was complete, or in the alternative, that their challenge to the English court’s jurisdiction should be delayed until after the arbitration.

The key question for the English court was whether Chechetkin was a consumer for purposes of the Civil Jurisdiction and Judgments Act 1982. If so, then the agreement to arbitrate is unenforceable under English law (because it was entered into before the dispute arose).

The judge found that Chechetkin was a consumer, and he therefore rejected Payward’s jurisdictional challenge and its motion for an injunction. If I understand right, the English statute’s rule is a mandatory rule that cannot be contracted around (except when parties enter into an arbitration agreement after the dispute arises), and so the judge did not need to consider whether English law or US law governed.

Meanwhile, in the arbitration, Chechetkin asserted that the claims were not arbitrable and also disputed that the matter was governed only by California and US law, though at least at first his lawyers did not give detailed arguments. Following the preliminary hearing, the arbitrator issued a prehearing order stating that “The merits are to be decided pursuant to California law and the [Federal Arbitration Act].” The parties moved to dismiss the arbitration on grounds of arbitrability, raising, apparently for the first time, his argument that the agreement to arbitrate was unenforceable under English law. The arbitrator, without giving detailed reasons, issued a partial final award deciding that the clickwrap agreement was not unconscionable and that therefore Checketkin was bound to it, including to its choice of law provision. The arbitrator reiterated that the decision on the applicable law was final.

Eventually the arbitrator issued a final award in Payward’s favor. The award found that Checketkin had breached the contract by bringing claims in the English court, and it reiterated that the agreement to arbitrate was enforceable under California law. It enjoined Checktekin from pursuing the English action further. That last bit brings us to today’s case, as Payward sought recognition and enforcement of the arbitral award in the English court.

To set the scene, under Article V(2)(b) of the New York Convention, an award need not be recognized if recognition or enforcement would be contrary to the public policy of the court being asked to recognize it. There are a handful of other exceptions to the obligation to recognize and enforce awards. Notably, error is not one of them. So the English court could not refuse to recognize the award on the grounds, say, that the arbitrator, by failing to find that English law governed the validity of the agreement to arbitrate, had made a mistake, even an egregious mistake. By the same token, even if the arbitrator was right to say that the agreement to arbitrate was governed by the law of California and the United States, that doesn’t mean the English court had to recognize the award, if recognition would be contrary to English public policy.

Payward had a reasonable argument to make. The arbitrator has the power to decide questions of arbitrability. Therefore, if Checktekin wanted to seek a ruling from anyone that the agreement to arbitrate was unenforceable on public policy grounds, he should have sought it from the arbitrator, not the judge; yet Checktekin did not bring a counterclaim in the arbitration. The trouble, as the judge pointed out, is that the arbitrator had already made it abundantly clear that in her view only California and US law had any relevance to the case. Payward pointed out that under the JAMS rules quoted above, any remedy available in court had to be available in the arbitration, and it argued that even though the arbitrator apparently did not take that view, her error did not mean that the JAMS rules were unfair or that the award should not be entitled to recognition. First, we can question whether a reference to “federal, state, or local” laws is meant to refer also to foreign law; the judge, probably correctly, observed that “local” is probably meant in the usual US sense of the word, and not in the private international law sense of the word. But the judge found that the arbitrator had made it so clear that English law had no application that Checktekin really had no opportunity to bring his claim under English law in the arbitration. Moreover, the judge held that under Dallah v. Ministry of Religious Affairs, [2011] 1 AC 763, “a tribunal’s decision on its own jurisdiction does not bind the courts of a different (non-supervisory) country when they are asked to enforce the award.” Next, judge held that even leaving Dallah aside, English law did not require the judge to enforce an award that he thought contrary to English public policy, at least where the arbitrator did not engage with the question of English law at all. (This is basically the point I made in the prior paragraph). The judge then went on to hold that the award was contrary to public policy and was not entitled to recognition (I am not going to cover that issue, which is really one for the English lawyers).

This is an important case for US arbitrators, especially arbitrators who, like me, are appointed in cross-border consumer cryptocurrency disputes. It’s a good idea to have a discussion with counsel at the first preliminary hearing about the applicable law. Here, it seems that that happened to some degree, and that Checktekin only raised his arguments about the enforceability of the agreement to arbitrate under English law later. We don’t know exactly what happened in the arbitration, but it’s possible that the arbitrator could have done more to draw out the parties’ positions at the initial preliminary hearing if the parties didn’t squarely present the issue then, or that the arbitrator could have been more open to reconsidering the view she had taken on the applicable law in the first prehearing order once the issue became clear, and perhaps more open to the possibility that a mandatory rule of law could in some circumstances override the parties’ choice of law. If the arbitrator had been open to hearing the English law arguments and had decided them, rightly or wrongly, then the case for recognition in England could only have been strengthened. That’s not to say that the arbitrator must always decide cases in light of the public policy of a jurisdiction where enforcement might later be sought. But here, it was abundantly clear that there was a very close relationship between the arbitration and the English proceedings, and so it would have been wise to give more attention to the English law issue. The case is a good reminder to arbitrators to be on the lookout for latent conflict of laws issues that might affect the enforceability of the eventual award in the relevant jurisdictions.

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