Analysis: Tulip Trading Limited v Bitcoin Association for BSV and others [2022] EWHC 667 (Ch)

Summary

The High Court has summarily dismissed the highly-publicised multi-billion dollar claim brought against bitcoin software developers, which sought an order requiring the Defendants to take steps in relation to the underlying software code and/or blockchains. 

It is the first case in the English Courts to consider the role and duties of cryptoasset software developers. 

None of the Defendants were located in the jurisdiction. The Claimant had been granted permission for service out of the jurisdiction at first instance. In setting aside the original order for service out of the jurisdiction, Mrs Justice Falk held that the claim had no real prospect of success.  

Background 

The Claimant alleged that it owned some $4.5 billion of bitcoin on the BSV, BTC, BCH and BCH ABC networks, but that in February 2020 the CEO’s computer was hacked and the private keys had been erased. It was, it said, therefore no longer able to control or use its cryptocurrency.

The Claimant alleged that the Defendants:

• were the core developers with control over the various networks; 
• had the ability to write a patch to amend the underlying software in order to enable the Claimant to regain control over its bitcoin; and 
• came under tortious and fiduciary duties which obliged them to do so. 

Since none of the Defendants were within the jurisdiction of the English Courts, the Claimant required permission to serve proceedings on them out of the jurisdiction. In May 2021, the Claimant obtained permission to do so pursuant to CPR 6.36 and 6.37 on an ex parte basis.

The Defendants subsequently contested service out of the jurisdiction and sought to set aside the original order. The First, Thirteenth and Fourteenth Defendants did not dispute jurisdiction at that time for the reasons set out at paragraph 8 of the judgment. 

The Court considered the question afresh by way of rehearing (following Microsoft v Sony Europe [2017] EWHC 374).

The issues considered by the Court were:

• whether there was a serious issue to be tried (i.e. whether there was a real prospect of success on the merits); 
• whether there was a good arguable case that the claim fell within one or more of the jurisdictional “gateways” permitting service out of the jurisdiction under paragraph 3.1 of Practice Direction 6B; and
• whether, in all the circumstances (i) England is clearly or distinctly the appropriate forum for the trial of the dispute, and (ii) the court ought to exercise its discretion to permit service of the proceedings out of the jurisdiction.

The Court decided that the claim had no real prospect of success. Accordingly, the remaining issues were addressed only briefly and on an obiter basis. 

Judgment

Whether the claim had a real prospect of success:

Principal amongst the challenges raised was that the claim had no real prospect of success. The Court agreed. With reference to Altimo v Kyrgyz [2011] UKPC 7 and Vedanta v Lungowe [2019] UKSC 20, the Court stated at [37] that:

“The claim must be more than merely arguable. Whilst the court must not conduct a mini-trial, it must take account of the available evidence and also evidence that can reasonably be expected to be available at trial. But there may be a point of law on which the court should “grasp the nettle”. The court should not allow the case to proceed because something may turn up.”

In considering whether the claim met this standard the Court focussed on whether the Claimant had a real prospect of proving the existence of fiduciary or tortious duties owed by the Defendants. 

Fiduciary Duties

Mrs Justice Falk concluded that “[a]t first sight it is very hard to see how [the Claimant’s] case on fiduciary duty is seriously arguable. Having now given the matter more detailed consideration I have concluded that my initial impression was correct.”

In reaching that conclusion, the Court’s starting point was the well-known judgment of Millett LJ in Bristol and West v Mothew [1998] Ch 1, which confirmed that:

“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.”

The Claimant submitted that: 

• the Defendants have complete power over the system through which the digital assets were held; 
• bitcoin owners had entrusted the care of their property to the Defendants and were vulnerable to abuse; 
• the Defendants had power to amend the software including to allow owners to regain control over their assets; and 
• this gave rise to a fiduciary duty to do so.

At paragraphs 73 to 83, the Court considered the elements said to give rise to a fiduciary duty. The Court ultimately concluded that the Claimant did not have a realistic prospect of establishing that there had been a breach of fiduciary duty. It noted that:

• Whilst an imbalance of power and vulnerability to abuse was “often a feature of fiduciary relationships” it is “not a defining characteristic and is certainly not a sufficient condition for the existence of the duty”. Moreover, bitcoin owners cannot realistically be described as “entrusting their property to a fluctuating, and unidentified, body of developers of the software, at least in the sense and to the extent claimed”.  
• The defining characteristic of a fiduciary relationship is the obligation of “undivided loyalty”. It was a necessary part of the claim that the underlying relationship between the Defendants and bitcoin owners generally has a fiduciary quality. Yet the steps that the Claimant wanted the Defendants to take would be for its benefit alone, and not the benefit of other users. The change could in fact disadvantage other participants in the Networks in that holders of digital assets on Networks have certain expectations regarding the security of the Network, the impact of “proof of work” on the blockchain and anonymity. A software change, as the Claimant suggested, could compromise these principles. 

Tortious Duties

The Claimant accepted that its argument regarding a tortious duty of care was novel but argued that it was a permissible incremental extension of the law. The Court disagreed. 

As to the case based on tortious duties, the Court confirmed that:

• In line with recent guidance of the Supreme Court, “in identifying whether a duty of care exists, an incremental approach should be adopted, based on an analogy with established categories of liability”.
• The loss in this case was purely economic, as a result of which no common law duty of care can arise in the absence of a special relationship. 
• The complaints made were of failures to act, yet “there is no general duty to protect others from harm”, and “the law generally imposes no duty of care to prevent third parties causing loss or damage, or for injury or damage caused by a third party”.

The Court went on to conclude that the existence of a special relationship to safeguard against pure economic loss was not arguable, and that it was also not arguable that the imposition of the alleged duties could be treated as an incremental extension of the law. 

The Court noted:

• the alleged duties would be owed to an unknown and potentially unlimited class;
• there would be no real restriction on the number of claims that could be advanced against the Defendants by persons who had allegedly lost their private keys or had them stole;  
• the duty was of an open-ended scope since the Defendants “would be obliged to investigate and address any claim that a person had lost their private keys or had them stolen”; and
• as with the claim for fiduciary duties, developers are a fluctuating body of individuals and accordingly it was hard to see a basis for imposing an obligation which would require them to be involved and make changes when they have given no previous commitment or assurance. 

The Court did raise, at paragraph 98, a possible distinction in what might be considered arguable. The example given by Mrs Justice Falk was that, when making software changes, developers assume some level of responsibility to ensure that they take reasonable care not to harm the interests of users, for example by introducing a malicious software bug or doing something else that compromised the security of the system. But as the Court noted, that was not the Claimant’s claim here.  

Change of Case

The Claimant attempted to circumvent its difficulties on the breadth of the alleged obligation by a late change to its case. It suggested that, rather than investigating the claims themselves, developers would be entitled first to require a Court Order confirming ownership before being required to act. It also suggested that they would be entitled to payment for their work in writing the software patch.

The Court also rejected these arguments, noting that the Particulars of Claim alleged an existing breach which was inconsistent with these new allegations. A change of case for jurisdiction purposes required the ‘indulgence’ of the Court (Alliance Bank JSC v Aquanta [2012] EWCA Civ 1588). This required a formal application (Magdeev v Tsvetkov [2019] EWCA Civ 1802) together with a copy of the statement of case with the proposed amendments (Practice Direction 17). No such application had been made, and the Claimant was accordingly not entitled to pursue its amended case.

In view of its findings that the claim had no real prospect of success, the Claimant failed at the first jurisdictional threshold. The order for service out of the jurisdiction was therefore to be set aside.

Other issues

Since the application was ultimately decided on the basis of whether the claim had a real prospect of success or not, no further findings were needed. Nevertheless, the Court made a number of obiter comments in relation to the remaining two issues referred to above (i.e. [1] the jurisdictional gateways and [2] the appropriate forum). The jurisdictional gateway analysis included obiter commentary on whether the threshold for property had been met, the relevant test for assessing jurisdiction and accordingly where the property was located. 

Conclusion 

The case is significant in that it is the first decision in this jurisdiction that considers the role and duties of cryptoasset software developers. The Court firmly rejected the proposition that the developers owed duties to protect blockchain users by, for example, patching the network or re-establishing access to stolen assets. 

More broadly, the case offers useful guidance on the fiduciary or tortious duties that software developers owe. While the Court rejected the duties the Claimant sought to impose, the Court did hint at possible arguments concerning more limited duties that a developer may potentially be under in certain circumstances. The examples given related to taking care not to harm the interests of users when otherwise taking positive steps in relation to the network, such as by compromising the security of a network or introducing bugs or defects that threaten the operation of the system. 

Matthew Thorne is a barrister at 4 Pump Court with a broad commercial practice with particular experience in construction, commercial litigation, insurance & reinsurance, professional negligence and technology & telecoms.

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