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DIFC Court Hears Ground-Breaking Cryptocurrency Claim

The Court of First Instance of the Dubai International Finance Centre (DIFC) has handed down judgment following trial of a claim arising from the misappropriation of 300 bitcoins. This is the first time that the DIFC Courts have considered a cryptocurrency case of this kind and the case touches on several of the key questions facing the courts around the world. 

(1) Gate MENA DMCC (2) Huobi MENA FZE v. (1) Tabarak Investment Capital Limited (2) Christian Thurner [2020] DIFC TCD 001, Justice Sir Richard Field, 5 October 2022.1

1. Facts

A. PARTIES2

The First Claimant (formely known as Huobi OTC DMCC) ("Huobi") is a company registered in the Dubai Mulit Commodietes Centre (DMCC) and licnesed by the DMCC to carry out "over-the-counter" (OTC) transactions in cryptocurrencies (principally, it trades Bitcoin (BTC)(C1). The Second Claimant ("Huboi MENA") is the assignee of Huobi's claim following a change in Huobi's ownership. Huobi MENA had previously been Huobi's majority shareholder. 

The First Defendant, Tabarak Investment Capital Limited (D1) is a DIFC-registered company authorised by the Dubai Financial Services Authority (DFSA), the DIFC's financial regulator, to provide a range of financial services including advising on financial products and arranging investments, credit and custody. The Seconday Defendant, Christian Thurner (D2), was employed by D1 as its director of investments. 

B. BACKGROUND

Representatives of Cl had, in early 2020, sought to carry out a trade with a group of buyers represented by an individual, a Russian national, who represented a Slovak company, which the group of buyers used to buy, sell and hold cryptocurren­cies. In the negotiated trade, Cl was to obtain and then sell 300 BTC to the buyer's representative for a price to be deter­mined shortly before the transaction was to be concluded, which would include a brokeringfee (the "Trade").3

Through its general manager, C1 had conducted negotiations about the trade with the buyer's representative and D2 for a number of months prior to a meeting on 3 February 2020 at Dl's offices in the DIFC (the "Meeting").

C1, and its representatives, were introduced to D1 and D2 in late 2019 by an intermediary as part of a search for a suitable local Dubai bank to open an account for a cryptocurrency-re- lated company. The same intermediary later introduced CTs representative to the buyer's representative. In a number of initial meetings which took place between the buyer's repre¬sentative and representatives of C1 and D1 around Dubai, and in emails between the various parties, the outline terms of the Trade were discussed, under which DI would facili¬tate the proposed Trade by acting as escrow agent for both the cryptocurrency and the purchase funds, holding the BTC until the funds were received and then remitting them to the buyer and seller respectively. As part of the mechanics of the Trade, a cryptocurrency "cold" wallet was to be used to hold the private keys in escrow.4

D1 sent C1 its Account Opening Agreement (AoA) which set out the scope of services that DI was obliged to provide, but only after due diligence and compliance requirements had been provided.5 The AoA contained an "entire agreement" clause. In due course, it was signed by CTs general manager and returned to D1. The AoA was subsequently amended by an addendum that set out a list of fees payable upon signing (the "Addendum"), although the Addendum was not signed by C1.6

In late January 2020, two trial transactions took place between the parties as a proof-of-concept exercise.7

C. THE MEETING AND THE TRADE

The Meeting was attended by several representatives of C1, the buyer's representative and his associate, and D2 and his assistant. Immediately beforehand, the Meeting attendees were introduced to DTs founder and CEO.

The Meeting took place in a meeting room in DTs offices in the DIFC. The buyer's representative produced two new Trezor-branded cryptocurrency wallets, unopened from their original packaging. Each wallet generated a 12-word seed phrase upon first use whose purpose was to allow access to the wallet and its contents.8

Contrary to the prior agreement between the parties, the buyer's representative insisted that one of his wallets be used for the Trade and that it was to be set up by him. He told those present that the BTC could only be transferred from the wallet if the transferor knew all 12 words of the seed phrase. A member of CTs team objected to the buyer's representative setting up the wallet but ultimately CTs team allowed one of the wallets to be set up by D2 instead (the "Wallet"), following D2's proposal and assurances.9 In particular, D2 told the parties that the 12 words of the seed phrase would be divided between C1 and the buyer. He plugged the Wallet into a laptop and set it up. The first six words of the seed phrase were noted by D2 and his assistant. The laptop was then passed to the buyers' representative and his associate who appeared to write down the other six words of the seed phrase.10

The price of the 300 BTC—the subject of the trade—was nego­tiated and agreed between C1 and the buyer, following which one of CTs representatives transferred the BTC to the Wallet. Proof of the transfer was sent by D2 to the parties. The Wallet was then locked in a safe in DTs CEO's office, while the buyer's representative apparently made arrangements for the remit­tance of the agreed purchase price to D1. The attendees went to lunch save for the buyer's representative's associate. Around two hours later, the parties returned to DTs offices, discovered that 299.99 of the BTC had been transferred to another wallet without receipt of the agreed purchase price, and called the police.11

2. Legal Issues

A. The Claim

The claimants brought a number of claims against the defendants.12

I. Contractual Claims

A claim for breach of contractual duties owed under an alleged agreement between D1 and C1 broken down into claims for breaches of express terms and/or implied terms under DIFC Contract Law (DI FC Law No. 6/2004). The express terms alleged to have been breached included the following terms, namely that D1 would:

(i) propose a mechanism for the Transaction which would prevent the buyer from being able to retrieve the BTC before they had paid forthem;
(ii) not transfer the BTC to the buyer until they had received payment for the BTC from the buyer;
(iii) not permit the buyer to access or retrieve the BTC until after DI had received payment for the BTC from the buyer;
(iv) take reasonable care to ensure that the BTC were not transferred to the buyer before DI received the payment from the buyer;
(v) take reasonable care to ensure that the buyer was not able to access the BTC before DI received payment from the buyer.

The claim for breach of implied terms was based on Article 17 of the DIFC Implied Terms in Contracts and Unfair Terms Law (Law No. 6/2005 as amended) under which it was alleged to be an implied term of the alleged agreement between C1 and D1 in arranging and supervising the Trade, proposing the modalities of the Trade in the pre-Meeting negotiations and in giving the aforesaid advice, that D1 would act with reasonable care and skill.

II. Tortious and Other Claims

C1 also brought a claim under Article 18 of the DIFC Obligations Law (DIFC Law No. 5/2005, as amended) arising from alleged negligence in the advice given by the D1 and/or D2 before and at the Meeting. In particular, Cl alleged that the D1 and/ or D2 owed C1 a duty of care in that the defendants assumed at the Meeting both an advisory role and the responsibility of keeping the BTC safe, which duties were breached by D2 by his:

(a) giving the assurances he isalleged to have given as to the safety of the use of the Wallet;
(b) setting up the Wallet and passing it to the buyer's representatives to note six words of the seed phrase; and
(c) placing the Wallet in D1's safe in the mistaken belief that this would ensure the safety of the BTC.13

In support of this aspect of its claim, Cl submitted that various facts supported the imposition of a duty of care, including that:

(a) D1 held out to them that the buyer was a client;
(b) D2 provided advice on the "process" leading up to the T rade;
(c) D1 assumed the role of custodian/escrow agent; and
(d) D1 held it itself out as providing and having experi¬ence in crypto-related services including custody and escrow services.14

C1 also alleged breaches by D1 and D2 of Article 37 (breach of confidence in their handling of C1's six words of the seed phrase), Articles 71 and 72 (breach of bailment obligations), Article 155 (breach of confidentiality of a banking business) and Article 158 (breach of fiduciary duties) of the DIFC Obligations Law (DIFC Law No. 5/2005) and breaches of the DFSA Rulebook.

III. Interesting Legal and Factual Issues with Global Relevance

Aside from the causes of action, a number of interesting legal and factual issues arose in the First Instance dispute which will be of particular interest to jurisdictions internationally:

The Court permitted expert evidence on cryptocurrency transactions, including their transfer, storage and value.

(a) Expert evidence on duty of care and best practice for custody providers
The Court permitted expert evidence on cryptocur¬rency transactions, including their transfer, storage and value. At trial, this evidence addressed two main issues:
(a) how the BTC could have been misappropriated from the Wallet; and
(b) the scope of the duty of care owed by the defen-dants to the claimants (if any), including the relevant security protocols for the Trade.

Expert evidence also explained to the Court on how it was possible to trace the movement of the BTC on the blockchain.

(b) Payment of damages in BTC, or how to quantify damages in fiat currency

C1 sought payment of300 BTC in rem, or damages calculated on alternative bases, including the value of the 300 BTC:

(i) at the date of misappropriation;
(ii) at midday on the date of judgment; or
(iii) at midday on the date of payment following judgment.

Over the course of events, the value of 300 BTC fluctuated from approximately USD 3 million at the time of the misappropriation to a high of USD 18.3 million in November 2021. On the date of judgment, 300 BTC was valued at approximately USD 6.1 million.

3. Findings in the Judgment

The trial before Justice Sir Richard Field took place virtually over eight days in November and December 2021 with the Judge sitting in England and the witnesses giving evidence in Dubai.

The Judge made numerous findings on the parties' factual and expert witness evidence.15

A. BREACH OF CONTRACT

The Judge found that terms of an agreement were reached such that:

(i) D1 would provide its existing wallet to receive the 300 BTC from C1 once the price per coin had been agreed;
(ii) D1 would only transfer the BTC to the buyer once the purchase money had been paid by the buyer into an account maintained by D1 in Dubai;
(iii) if the purchase money was received into DTs account, D1 would transfer the BTC to the buyer and transfer the net proceeds from the recipient account to an account nominated by C1;
(iv) if the purchase money was not received, D1 would transfer the BTC back to C1; and
(v) C1 would pay D1 a fee and/or a commission in respect of the Trade.16

The agreement would operate alongside and within the framework of the AoA signed by both parties, with D1 (acting by D2) accepting, or being estopped from denying, that the aforesaid terms would apply notwithstanding the entire agreement clause in the AoA.17

However, the agreement was subject to:

(ii) the conditions precedent that an account opening fee would be paid by C1 to D1 and DTs due diligence processes being completed, unless these conditions were waived; and
(iii) the commission and other sums due to D1 for participating in the Trade.18

The Judge found that D2 was not the "originator" of the modalities which governed how the Trade operated.
The Judge also found that D2 had apparent authority for all that he did and said in the lead-up to the Meeting, but that he lacked authority to agree that the fee/commission C1 was to pay to D1 for the Trade could be paid out of the Trade proceeds, as DTs CEO had told CTs representative that the fee/commission was to be paid prior to the Trade.19 The Judge rejected CTs position that D1 had waived this requirement by permitting the Trade to proceed in its office without prior payment.20 Further, because the account openingfee had not been paid, the agreement between C1 and D1 never became a binding contract, and the contractual claims failed.21

B. HOW THE BTC WAS MISAPPROPRIATED

The parties' experts agreed that there were four potential means by which the BTC could have been misappropriated from the Wallet. Specifically:

(i) by physical breach,
(ii) by tamperingwith the Wallet,
(iii) by collusion between the non-claimant parties, and/or
(iv) by the buyer's representatives having scrolled down the screen of the Wallet when they were passed the laptop computer into which the Wallet had been plugged to find and then memorising or recording all 12 words of the seed phrase.

The Judge adopted the experts' view that the last of these options was the most likely explanation.22

C. NEGLIGENCE

The Judge found that D2 was not under a general contractual duty to advise C1 on the ways in which the Trade was to be carried out, but rather he had agreed to perform a narrower set of “relatively simple” tasks.

After considering the evidence on the alleged assurances given by D2 to C1 concerning the security of the modalities of the Trade, the Judge concluded that there had been no breaches by either of the defendants. In particular, the Judge found that:

(i) D2 was not under a general contractual duty to advise C1 on the ways in which the Trade was to be carried out, but rather he had agreed to perform a narrower set of "relatively simple" tasks.23 This meant that the relationship between C1 and the defendants was not "akin to contract where but for the lack of consideration there would have been a contract".24
(ii) The modalities of the Trade and particularly the BTC storage and transfer had been agreed between the representatives of C1 and the buyer, and not D2.
(iii) D2's representations to C1 about DTs experience and capabilities in advising on and/or arranging custodial services in respect of crypto assets were "puffing" without particular details, such that the Judge did not consider that C1 relied on them.25
(iv) The insistence by the buyer's representative that the BTC be transferred into the Wallet (rather than DTs wallet) was a "game changer", but ultimately C1 agreed to his insistence in the hope of being able to do future business with the buyer. At the same time, D1 and D2 were at all times subject to the direction of C1 at the Meeting.26 D2 had not taken the lead in saying anything about the appropriateness of the use of the Wallet but had set the Wallet up and made representations about its security when prompted by C1.27
(v) D1 was not a professional adviser (in this case, on the ways of trading BTC) and the facts otherwise departed from Manchester Building v. Grant Thornton UK LLP [2021] UKSC20.28

The Judge found that the relationship between the defendants and C1 was not sufficiently proximate for the alleged duty

Accordingly, the Judge found that the relationship between the defendants and C1 was not sufficiently proximate for the alleged duty of care to have existed. No duty of care was found on the assurances given to Cl because neither of the defendants had assumed any responsibility towards C1 for the statements. It was not reasonable for C1 to rely on the defendants to exercise such a degree of care as the circumstances required. It was not reasonable for C1 to rely on the assurances to the point that it transferred the 300 BTC without receiptof anyof the purchase monies.29

D. OTHER CLAIMS

Following on from his findings in the main claims above and principally his findings on negligence - the Judge dismissed the claims based on breaches of confidence, bailment, fiduciary and regulatory duties.

4. Conclusions

The Judge accepted CTs contention that BTC are property, following the English decision of AA v. Unknown Persons [2019] EWHC 3556 (Comm).

The Judge's findings in relation to the role of D2 (specifically that he did not advise C1 on the modalities of the Trade and that he did not have authority to agree that DTs fees could be deducted from the proceeds from the Trade) mean the judgment does not contain any insight regarding the appropriate security protocols for custodians of digital assets, or whether the DIFC Court would be prepared to order payment of damages in BTC, or if it would order damages in fiat currency, in what amount and on what basis. 

The claimants have been granted permission to appeal on eight grounds. These grounds include appeals on points of fact and law in relation to the claims for breach of confidence, breach of contract, negligence and breach of fiduciary duty. This leaves open the possibility that these issues may yet receive judicial consideration.

The appeal is likely to attract significant interest as it will be one of the first of its kind not only in the DIFC, but globally.

The appeal is likely to attract significant interest as it will be one of the first of its kind not only in the DIFC, but globally. Given the DAE government's focus on promoting digital assets and the recent launch of the DiFC's specialist Digital Economy Court, it is also possible that the Court of Appeal may choose to offer some guidance to those providing custody and escrow services for digital assets in the region irrespective of whether it upholds or rejects the appeal.

The substantive appeal is expected to be heard later this year.

The claimants are represented by Sara Sheffield, Peter Smith, Max Davis, James Colautti and Reem Faqihi of Charles Russell Speechlys LLP and Andrew Spink KC and Justina Stewart of Outer Temple Chambers.

[1.] Case summary available on Lexis® Middle East: DIFC DI FC Case No. TCD 001/2020 (1) Gate MENA DMCC (2) Huobi MENA FZEv(1) Tabarak Investment Capital Ltd (2) Christian Thumer.

[2.] Gate MENA DMCC(2) HuobiMENA FZEv. (1) Tabarak Investment Capital Limited (2) Christian Thurner[2020] DIFC TCD 001, paras. 1 to 2.

[3.] Ibid., para. 4.

[4.] Ibid., paras. 5-17.

[5.] Ibid., para. 10.

[6.] Ibid., para. 13.

[7.] Ibid., paras. 20 and 21.

[8.] Ibid., para. 23.

[9.] Ibid., para. 24.

[10.] Ibid., para. 25.

[11.] Ibid., para. 26.

[12.] Ibid., para. 31.

[13.] Ibid., para. 88 

[14.] Ibid., para 99. 

[15.] Ibid., para 39 to 54. 

[16]. Ibid, para. 60 

[17] Ibid., para. 61 

[18.] Ibid., para 64 

[19.] Ibid., para. 71 

[20.] Ibid., para 82 

[21.] Ibid., para 83 

[22.] Ibid., para 30 

[23.] Ibid., para 104. 

[24.] Ibid., para 105. 

[25.] Ibid., para 106. 

[26.] Ibid., para. 107 

[27.] Ibid., para. 108 

[28.] Ibid., para. 109 

[29.] Ibid., para. 110 

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