Birss LJ's leading judgment in Tulip Trading Ltd v van der Laan and Ors [2023] EWCA Civ 83 has opened the door to establishing cryptocurrency networks owe fiduciary duties to the owners of cryptocurrency.
The Court of Appeal's reversal of the first instance decision by Falk J, means that Tulip Trading Ltd's ("Tulip") claim will now proceed to trial. The court will be asked to determine whether the defendants, developers of four cryptocurrency networks looking after bitcoin (the "Developers"), owed Tulip any fiduciary and/or tortious duties as owners of the bitcoin, and if so, to what extent.
Amongst other things, the decision is interesting because Birss LJ's leading judgment, supported by Lewison LJ and Popplewell LJ, comments on what those duties may look like, although that will ultimately be for the trial judge to decide once the facts have been established.
Background
Tulip brought a claim against the Developers arising from a cyber-attack of the Developers' software in which it claims that digital assets owned by it valued at over £3 billion cannot be accessed or controlled by it, due to "private keys" needed to access or move its assets having been deleted or lost as a result of the hack. Tulip alleges that the Developers owe it fiduciary and/or tortious duties, the effect of which means that the Developers are required to assist them with regaining control and use of its bitcoin. For example, through the implementation of software patches.
Permission to serve the claim out of the jurisdiction was required, as to which Tulip needed to satisfy the Court of the principles summarised by the Court of Appeal in VTB Capital plc v Nutritek International Corp & Ors [2012] EWCA Civ 808. Namely that:
- There is a serious issue to be tried on the merits of the claim, as to which there must be a real, as opposed to a fanciful, prospect of success;
- There is a good arguable case that falls within one of more of the jurisdictional gateways; and
- That England is the appropriate forum for the trial of the dispute and that the court ought to exercise its discretion to permit service of the proceedings out of the jurisdiction.
Thirteen of the sixteen Developers[1] contested jurisdiction, as to which Falk J held that Tulip had not established a serious issue to be tried on the merits of the claim. In summary, Falk J found that Tulip had no real prospect of establishing the fiduciary duty alleged.
Falk J arrived at that decision having considered various issues relevant to the merits including, for example, ownership of the bitcoin and the alleged hack, fiduciary duties, tortious duties, the offer to pay for the work, the significance of policy consideration, and the effectiveness of any remedy (see [51]-[137] of Falk J's judgment).
Appeal Upheld
The Court of Appeal did not need to consider tortious duties since they would only arise in circumstances where fiduciary duties existed, as was argued by Tulip. Therefore, Birss LJ focused on whether fiduciary duties existed.
At paragraph 86 of the Judgment, Birss LJ recognised that "…for Tulip's case to succeed [it] would involve a significant development of the common law on fiduciary duties". He went as far as suggesting that there is a realistic argument:
"…The developers of a given network are a sufficiently well defined group to be capable of being subject to fiduciary duties. Viewed objectively the developers have undertaken a role which involves making discretionary decisions and exercising power for and on behalf of other people, in relation to property owned by those other people. That property has been entrusted into the care of the developers. The developers therefore are fiduciaries. The essence of that duty is single minded loyalty to the users of bitcoin software. The content of the duties includes a duty not to act in their own self interest and also involves a duty to act in positive ways in certain circumstances. It may also, realistically, include a duty to act to introduce code so that an owner's bitcoin can be transferred to safety in the circumstances alleged by Tulip."
Birss LJ concluded that "…to rule out Tulip's case as unarguable would require one to assume facts in the defendant developers' favour which are disputed and which cannot be resolved this way", and therefore a trial was warranted to determine the case.
Trial – Possible implications for developers
A key issue for the court will be addressing the concept of "decentralisation". The Developers' case is that they are part of a large and shifting group of contributors without an organisation or structure; whilst they develop (and continue to develop) the software for the networks, the miners could reject any changes to the software, creating a "fork" in the networks. However, Birss LJ was persuaded by reference to academic literature that Tulip's challenge to the case on decentralisation is arguable
Although the trial is unlikely to be listed for some time, the judgment will be of significant importance. If the court decides to develop the common law on fiduciary duties in this way, it will provide considerable protection and reassurance to cryptoasset owners.
It would also be another example of English common law's flexibility in dealing with cases of cryptoasset theft/hacking, opening the door to similar claims from such victims. In turn it would have significant implications for software developers, who will need to take appropriate steps to avoid breaching their fiduciary duties.
[1] The First Defendant had accepted the court's jurisdiction, the Thirteenth Defendant had not taken any steps in the proceedings, and the Fourteenth Defendant had sought an extension of time to challenge jurisdiction. The first instance decision only concerned the developers that had at the time challenged jurisdiction.
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