English Court refuses to enforce arbitral award on public policy grounds linked to English consumer protection

The English Commercial Court has refused to enforce an arbitral award made in a JAMS arbitration seated in California on the basis that it would be contrary to UK public policy under section 103(3) of the Arbitration Act 1996 (the "Act"), as enforcement of the award would breach English consumer protection legislation and financial regulation (each of which have the status of UK public policy). Payward Inc v. Chechetkin¹ is a rare example of the English courts refusing to enforce a foreign award on public policy grounds, and may become a leading case on the interaction between consumer protection mechanisms and standard form dispute resolution provisions. The decision may have particularly significant ramifications for international business to consumer ("B2C") companies.

In this Legal Update, we summarise the case background and the English court's decision, and highlight the­­ key takeaways, including considerations for B2C operators utilising standard form contracts with consumers.

Background: parallel English Litigation and US Arbitration

Mr Chechetkin, a UK-based lawyer, traded cryptocurrency on "Kraken", a trading platform managed by Payward, and incurred losses of c. £600,000.

Mr Chechetkin is attempting to recover his losses by suing Payward in the English courts, on the basis that Payward engaged in regulated activity (for the purposes of the UK Financial Services and Markets Act 2000 ("FSMA") without the requisite authorisation, in breach of FSMA (the "FSMA Litigation").

To this point, the key obstacle that Mr Chechetkin's claim has faced is that Payward's terms of service ("Terms"), to which he agreed, provided, at "Clause 23":

• for arbitration in San Francisco, California, conducted by a single arbitrator under the JAMS Rules; and
• that "the state or federal courts in San Francisco, California have exclusive jurisdiction over any appeals of an arbitration award and over any suit between the parties not subject to arbitration…Any dispute between the parties will be governed by these Terms and the laws of the State of California and applicable United States law, without giving effect to any conflicts of laws principles that may provide for the application of the law of another jurisdiction [bold for emphasis]".

In particular, this meant that:

1. When Mr Chechetkin threatened to bring the FSMA Litigation, Payward brought an arbitration against Mr Chechetkin in order to prevent him from doing so. In particular, in accordance with Clause 23, Payward brought a JAMS arbitration against Mr Chechetkin, conducted by a single arbitrator, undertaken in California, and subject to the laws of the State of California and applicable United States law (the "Arbitration"). This Arbitration concluded on 18 October 2022, with an "Award" that found, amongst other things, that Mr Chechetkin:
   1. breached the Terms when he threatened suit in the UK;
   2. was bound to arbitrate his disputes with Payward; and
   3. was prohibited from filing or prosecuting a claim against Payward in court, whether in the U.K. or any other jurisdiction.
2. When Mr Chechetkin brought the FSMA Litigation, Payward initiated a jurisdictional challenge in the English courts. This challenge was defeated on 25 October 2022².

Enforcement of the Award in the English Court

Payward sought to enforce its Award in the English court on the basis that it was enforceable as a New York Convention award, and was therefore to be "recognised as binding on the persons as between whom it was made" and "enforce[able] in the same manner as a judgment or order of the court", pursuant to section 101 of the Act.

Enforcement of the Award would have ended the FSMA Litigation, as it would have prohibited Mr Chechetkin from continuing his claim before the English courts.

As such, Mr Chechetkin resisted enforcement, submitting that enforcement must be refused pursuant to section 103(3) of the Act, as "it would be contrary to public policy to recognise or enforce the award". In relevant part, Mr Chechetkin argued that enforcement of the Award would be contrary to the public policy set out in FSMA and the Consumer Rights Act 2015 (the "CRA").

The English Commercial Court’s Decision

On 14 July 2023, Bright J ruled in Mr Chechetkin's favour, holding that enforcement would be contrary to public policy pursuant to section 103(3) of the Act³. To do so, he made a number of findings:

Enforcement and public policy

1. Mr Chechetkin was a UK-based consumer for the purposes of the CRA (his sole profession was as a lawyer, he did not have material knowledge or experience of cryptocurrency trading when he concluded the contract with Payward and there was no evidence of a business arrangement).
2. Public policy matters include:
   
   1. the CRA⁴;
   2. EU Directive 93/13 on unfair terms in consumer contracts (the "UTCCD"), of which the CRA is in part an enactment, pursuant to the jurisprudence of the CJEU⁵; and
   3. FSMA⁶.
3. Enforcement of the Award would be contrary to these expressions of public policy, as it would:
   
   1. prevent the English court from considering whether Clause 23 was fair, in contravention of section 71 CRA;
   2. prevent consumer rights issues falling within the scope of the CRA from being dealt with under UK statute, as opposed to foreign law, in contravention of section 74 CRA;
   3. result in the imposition of a term – Clause 23 – which was unfair as it resulted in a significant imbalance in the parties' rights and obligations, in contravention of section 62 CRA; and
   4. prevent the FSMA Litigation and hence prevent Mr Chechetkin's FSMA claims from being determined, which would be contrary to the public policy considerations underlying FSMA, and another cause of unfairness for the purpose of the CRA.
4. Going into detail, Bright J noted that:
   
   1. in the UK, issues under the CRA and FSMA are capable of settlement by arbitration, and an arbitration agreement in a consumer contract is not, in itself, guaranteed to be an unfair term. Nevertheless, on the facts, an arbitration agreement in a consumer contract must be fair to be valid; and
   2. objectively speaking, while reasonable UK consumers in Chechetkin's position may have agreed to UK arbitration subject to the Act (which provides a right to appeal in the event of an error of law), they would not have agreed to arbitration in California under the JAMS Rules and subject to the US Federal Arbitration Act. This was because:
      
      1. the English courts would have no supervisory role and, hence, there could be no appeal based on an error of English law (amongst other things);
      2. US federal courts cannot legally supervise disputes concerned with English law and UK statutes, and the Federal Arbitration Act is not an appropriate statutory framework for UK consumers;
      3. the location (California) was disadvantageous to Mr Chechetkin (as compared to the California-based Payward) and US arbitration necessitated US attorneys, adding significant expense and inconvenience; and
      4. the appointment of a US arbitrator with no experience of English law or FSMA issues was not appropriate.

   Issue estoppel and the Arbitration
   

5. There was no scope for Mr Chechetkin's FSMA claim to have been brought in the Arbitration because the arbitrator was against applying any law other than US law from the outset (and deemed English law irrelevant).
6. Issue estoppel did not bind the English court to follow the Award for the purposes of its enforcement decision. Bright J reiterated the finding in Dallah⁷ that a tribunal's jurisdictional decision does not bind courts of a different (non-supervisory) country when dealing with enforcement. Under section 103(3), a court must form its own view of an award's consistency with UK public policy (which may diverge from the arbitrator's view).

Accordingly, the court exercised its discretion to refuse recognition and enforcement of the Award under section 103(3) of the Act.

Key Takeaways

• This decision demonstrates the English court's commercial approach, protective attitude towards consumers, and desire to have FSMA and CRA claims in relation to UK consumers heard in the UK and pursuant to UK consumer law. This was both (i) a matter of public interest – the court felt that investigations and criminal prosecutions were "far less likely" to occur if consumers had to pursue them in arbitral proceedings in California rather than through the UK courts or UK-based arbitration; and (ii) in order to support the UK's Financial Conduct Authority's ("FCA") role as regulator – the court said that the FCA would be more likely to advance its statutory objectives if these claims were heard in the UK, rather than overseas.
• The use of standard form dispute resolution terms, which require consumers, wherever they may be found, to resolve disputes via arbitration in another (non-UK) jurisdiction (such as the US), subject to the law of that jurisdiction (i.e. non-UK law), remain commonplace. Many terms are also like Clause 23 in that they purport to exclude conflict of laws principles that could otherwise prevent the law of the chosen jurisdiction from applying. Therefore, this decision has broad and immediate implications, and in light of this decision, businesses and consumers may wish to review their B2C contracts to assess the validity of any similar terms.
• Importantly, the judgment sets an expectation that, if arbitration is selected, consumers should have access to a suitable arbitration forum so that their rights are fully preserved. The English court made it clear that, in this case, JAMS arbitration in California was not a suitable forum (for the above-mentioned reasons).
• The key lesson for companies offering B2C services, therefore, is that their dispute resolution provisions need to be suitably tailored to the consumers being served. In particular, arbitration clauses and governing law clauses need to specify arbitral rules, seats and venues, and governing laws, that are appropriately tailored to where their consumers are based. This may involve having various template agreements for consumers based in different locations, or using clauses whose language is adaptive⁸.

A Broader Perspective on the Case

Relationship with digital consumer protection

As Lord Simon of Glaisdale made clear, the English courts only apply the public policy exception "with extreme reserve."⁹ Therefore, this decision seems to be exceptional.

However, it is worth noting that UK and EU authorities have been working to buttress the consumer protections underlying the Payward decision for an extended period. For example:

1. the CMA made clear, as long ago as 2015, that it considered: "a requirement to refer disputes to an ADR process of any kind will be under suspicion of unfairness if its effect is to remove or limit the consumer’s right to take legal action before the courts. With a view to ensuring that it complies with the requirements of fairness, an arbitration or other ADR clause can, for example, make clear that consumers have a free choice, when the dispute arises, as to whether to go to ADR or not"¹⁰; and
2. the EU GDPR ensures that businesses cannot compel consumers globally to limit their choice of dispute forum for EU GDPR breaches to a single specified forum. Notably, Article 79 makes clear that¹¹:

1. "each data subject shall have the right to an effective judicial remedy where he or she considers that his or her rights under this Regulation have been infringed"; and
2. "[p]roceedings against a controller or a processor shall be brought before the courts of the Member State where the controller or processor has an establishment. Alternatively, such proceedings may be brought before the courts of the Member State where the data subject has his or her habitual residence, unless the controller or processor is a public authority of a Member State acting in the exercise of its public powers."

In this light, the decision in Payward is in line with the broader position that exists in relation to B2C arbitration clauses in European jurisprudence.

Could this case set a trend of consumers seeking to resist enforcement of non-UK arbitration clauses in B2C contracts on the basis of the CRA?

Within weeks of delivering his judgment in Payward, Bright J faced submissions in a further application to refuse enforcement of an arbitration clause – on the basis of the CRA, and by reference to his own judgment – in the case of Eternity Sky¹².

In Eternity Sky, a Hong Kong law, HKIAC arbitration clause in a personal guarantee was deemed to be enforceable on the principle basis that the personal guarantee did not have a "close connection with the United Kingdom", as required by section 74 of the CRA, and therefore the CRA did not need to be considered. Bright J further considered that the arbitration clause in question was, on the facts, not unfair under the CRA.

Eternity Sky affirms that escaping award enforcement by relying on the unfairness provisions of the CRA will depend on the circumstances of the individual case (and, in each case, it will require a consumer contract which has a close connection with the UK but which applies non-UK law).

Further Information

The authors and the International Arbitration and Litigation and Dispute Resolution Teams are well-placed to advise on drafting dispute resolution provisions, award enforcement, as well as technology disputes more generally.