Reasons to be cautious - arbitration clauses in consumer contracts

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.

Background

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.

The Court of Appeal decision

Jurisdiction 

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.

The governing law and illegality claims

Mr Soleymani still had two other arguments under appeal:

1. the arbitration and governing law clauses were unfair and not binding on him under the provisions of the CRA 2015; and
2. any contract allegedly entered into with Nifty was illegal and void ab initio under the provisions of the Gambling Act 2005.

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: 

1. The Court of Appeal considered that it was arguable that there was a consumer contract with a close connection to the UK and that Mr Soleymani, although a sophisticated high net worth individual, was a consumer for the purposes of the CRA 2015 seeking to enforce his domestic consumer rights.
2. The vindication of domestic consumer rights was a powerful factor mitigating in favour of refusing to grant a stay of proceedings, as decisions in relation to consumer rights should be decided in a public forum, not least in view of their precedent value.
3. English consumer protection rights involved domestic legal concepts, not just some general notion of fairness, which the English courts were better placed to determine than a foreign arbitrator.
4. Staying the proceedings in England would prejudge the issue of whether the arbitration agreement operated unfairly on 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.

Key takeaways

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:

1. The revisions to the English Civil Procedure Rules mean that in cases such as this, consumers will no longer have to overcome the jurisdictional hurdle Mr Soleymani faced. As such, non-UK domiciled organisations may well find themselves being sued by UK domiciled consumers in the English courts (despite their standard terms envisaging arbitration elsewhere) – and where they commence arbitration proceedings against the consumer, they could face parallel proceedings before the English courts. In Nifty's case, Mr Soleymani indicated that he would be amending his pleadings in the English proceedings to include a claim for any loss suffered as a result of the arbitration. In other words, if the arbitrator in New York awarded repayment of the US$650,000, he would seek to claim that back in the English courts (plus, presumably, any legal costs incurred in the arbitration).
2. The definition of "consumer" is broader than organisations may think. Mr Soleymani was a sophisticated high net worth individual, but the Court of Appeal thought he was arguably a consumer under the CRA 2015. Further, Nifty accepted that he was a consumer for the purposes of deciding the applications in this case (although it reserved its position on this issue for the substantive merits of the claim). The arbitral tribunal in New York also treated Mr Soleymani as a consumer in its preliminary assessment.
3. The AA 1996 already recognises and incorporates the provisions on unfair terms in consumer contracts in the CRA 2015 in relation to a term which constitutes an arbitration agreement. Compulsory arbitration clauses relating to claims of £5,000 or less are automatically regarded as unfair. For claims over £5,000, such clauses are subject to the fairness test under the CRA 2015.

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. 

Authors: Tom Cummins and Jonas Weissenmayer

1. Soleymani v Nifty Gateway LLC [2022] EWCA Civ 1297.
2. Soleymani v Nifty Gateway LLC [2022] EWHC 773 (Comm).