A recent High Court judgment dealt with several issues relevant to the cryptocurrency sector. The claimant (Tulip Trading Company) pleaded that it had lost control of its cryptocurrency following a hack; the ‘private keys’ which would have allowed the claimant to deal with the currency had been removed. Ultimately, it was held that it would not be fair, just, and reasonable to establish a duty owed by the network developers to the wide class of cryptocurrency owners, as an imbalance of power alone was not sufficient to establish a fiduciary duty. Additionally, if there had been such a fiduciary duty, the actions sought by the claimant would have breached the obligation of ‘undivided loyalty’ owed to the rest of the class. Regarding jurisdiction, the court noted that had there been an arguable case, an English court would be the appropriate forum due to the claimant’s connections to the jurisdiction, notwithstanding the defendants’ varied domiciles across the world.

The claimant brought a claim against various network developers, claiming they owed the claimant fiduciary and/or tortious duties, which would require them to assist the claimant in regaining the control and use of its cryptocurrency.

The court ruled that the cryptocurrency network developers did not owe any fiduciary or tortious duties to the claimant, so were not under a duty to take steps to assist the claimant in regaining control of its cryptocurrency. An analysis of the key sections of the judgment is set out below.

Background

The claimant, Tulip Trading Limited (“TTL”), is a company incorporated in the Seychelles. Its CEO is Dr Craig Wright, an Australian citizen who has been resident in England since 2015. TTL claims it is the owner of digital currency valued at over £3 billion at two addresses on various cryptocurrency networks. However, TTL claims that following a hack at Dr Wright’s home in Surrey, the ‘private keys’ which would allow TTL to deal with the assets have been removed. 

TTL’s case was that the defendants are the core developers and/or otherwise control the software in the relevant digital asset networks. TTL claimed that:

• the defendants could develop: (i) a patch to transfer the digital assets to a new address with a new private key; or (ii) a patch to provide a replacement private key; and
• the defendants owe TTL fiduciary and/or tortious duties which would require them to assist TTL in regaining control and use of the digital assets. Broadly summarised, TTL was seeking: (i) orders requiring the defendants to take steps to allow TTL access to the digital assets; or (ii) equitable compensation for damages.

In April 2021, the claim form, particulars of claim and application to serve out were filed. By an order dated 7 May 2021, the claimant was granted permission to serve all the parties outside the jurisdiction. Various defendants challenged jurisdiction.

When assessing whether to grant permission to serve out, the court must be satisfied that: (i) there is a serious issue to be tried on the merits of the claim; (ii) there is a good arguable case that the claim falls under one of the gateways for granting leave; (iii) England is the appropriate forum for the trial of the dispute, and (iv) and the court ought to exercise its discretion to permit service.

Serious issue to be tried

Fiduciary duties

When considering the issue of fiduciary duties, the court cited Bristol and West Building Society v Mothew [1998] Ch 1 at p.18A, in which Millett LJ described a fiduciary as follows:

“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary.”

Citing various cases, the court also noted that:

• A fiduciary relationship will arise in a situation where one person is in a relationship with another which gives rise to a “legitimate expectation, which equity will recognise, that the fiduciary will not utilise his or her position in such a way which is adverse to the interests of the principal” (Arklow Investments Ltd v Maclean [2000] 1 WLR 594 at 598G).
• “… the “distinguishing obligation” of a fiduciary is that he must act only for the benefit of another in matters covered by his fiduciary duty. That means that he cannot at the same time act for himself” (Children's Investment Fund Foundation (UK) v Attorney General and others [2020] UKSC 33; [2022] AC 155).
• The existence of a fiduciary duty is not a voluntary assumption of any such duty, but is a consequence of the nature of the role assumed or task undertaken, objectively determined (citing Vivendi SA v Richards [2013] EWHC 3006 (Ch); [2013] BCC 771 at [139]).
• A fiduciary must act in good faith in the interest of each principal, not with the intention of furthering the interest of one to the prejudice of the other (citing Mothew p.18H).

When applying these principles to the claim brought by TTL, the Court held that the defendants did not owe any fiduciary duties to the claimant. This was on the basis of the following:

• The foundation of the claimant’s case was an alleged imbalance of power between the claimant and the defendants (given the ability of the defendants to control the network), combined with the “entrustment” of property to the defendants. However, an imbalance of power is not a defining characteristic or a sufficient condition alone for a fiduciary duty to exist (see para 73).
• A distinguishing feature of a fiduciary relationship is the obligation of undivided loyalty. However, the steps that the defendants would be required to take would be for the benefit of the claimant alone, not for the benefit of other users. TTL was seeking action to allow it to recover control of its assets, not a systemic software change that might be regarded as being for the benefit of users generally; this change could be to the disadvantage of other participants in the cryptocurrency networks (see para 76).
• A fundamental feature of the cryptocurrency networks is that the digital assets are transferred through the use of private keys; the claimant was effectively seeking to bypass this. There would be a real risk that acceding to the claimant’s demands would not be consistent with a duty of single-minded loyalty owed to other users (see para 78).

Tortious duties

The Court cited a number of cases it relied upon in identifying whether a tortious duty existed, noting that:

• An incremental approach should be adopted in identifying a duty of care, based on an analogy with established categories of liability. (N v Poole Borough Council [2020] AC 780 at [64]). This incremental approach is particularly important where relief is claimed in respect of pure economic loss. (Davis v Radcliffe [1990] 1 WLR 821 at [826E]).
• No common law duty of care can arise in the absence of a special relationship (Murphy v Brentwood [1991] 1 AC 398 at [475]).
• There is no general duty to protect others from harm, and there is a distinction between causing harm and failing to confer a benefit. (N v Poole Borough Council [2020] AC 780).
• There is no duty of care to prevent third parties causing loss or damage (Michael v Chief Constable of South Wales Police [2015] AC 1732) but there are exceptions, such as when the defendant has control over a third party (Robinson v Chief Constable of West Yorkshire Police [2018] UKSC 4; [2018] AC 736).

The claimant claimed the defendants breached a duty of care by failing to include means to recover lost keys in their software, failing to include sufficient safeguards against wrongdoing, and failing to protect TTL against fraud, or to allow it to seek to put right any future fraud. TTL argued a special relationship existed because of the defendants’ assumption of control of the Networks (para 92).

The Court said it could see how it might be arguable that software developers could have a level of responsibility to not harm the interests of users by, for example, introducing a software bug or compromising security. But here the defendants’ alleged failures were failures to change how the networks work, which would be a positive responsibility to safeguard owners (para 101).

The Court also noted that if a duty were owed, the potential class to whom the duty was owed would be unknown and potentially unlimited, and there would be no real restriction on the number of claims people could bring against the defendants. The defendants would be obliged to investigate any claim of a lost or stolen key, and may not be able to protect themselves with insurance. This strongly indicated no duty exists under principles of fairness, justice and reasonableness (para 105).

Good arguable case

Despite having concluded that, on the merits, TTL had not established a serious issue to be tried, the Court conducted an analysis of the jurisdictional gateways that could have applied had there been a serious issue. The Court concluded that TTL would have had good arguments for the application of Gateway 11 (as the bitcoin was located and controlled by Dr. Wright in England) and/or Gateway 9 (as TTL’s alleged damage in not being able to control the bitcoin anymore was suffered in England.)

Forum

Despite its conclusion on the merits, the Court also briefly conducted an analysis on forum. It concluded that it would have been satisfied that England was the appropriate forum, as TTL had a presence in the jurisdiction, and Dr. Wright’s presence in England was not “ephemeral” (para 167). The Court contrasted this with the Defendants, who were based in numerous different jurisdictions, and who were all fluent in English and thus presented no language difficulty (para 168). As participants in the cryptocurrency sphere are frequently geographically scattered, this may suggest that claimants could have an easier route to seek remedies in the English courts.

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