Singapore High Court denies stay on crypto class action against blockchain developer Terraform

In Julian Moreno Beltran, Douglas Gan Yi Dong v Terraform Labs Pte Ltd and others [2023] SGHC 340 (the “Terraform Case”), a case involving the collapsed TerraUSD (“UST”) stablecoin, the Singapore High Court (Hri Kumar Nair J) declined to grant a stay in favour of SIAC arbitration.

The action was filed by two claimants on behalf of themselves and as representatives of 375 other individuals (the “Represented Individuals”) against Terraform Labs Pte Ltd (“Terraform”), the Singapore registered company which issued TerraUSD, and others.  The claimants alleged that the defendants made misrepresentations that induced them and the Represented Individuals to purchase UST, stake UST and hold UST whilst its value plummeted, resulting in losses of over US$65 million. The representations were alleged to have been made on various websites, including the “Terra Website” and the “Anchor Website” (collectively, the “Websites”). The Websites contained hyperlinked terms requiring disputes to be resolved by arbitration.

Terraform applied for a stay of the proceedings on the basis that the claim should be dealt with in arbitration, and the other defendants applied for stays predicated on Terraform obtaining a stay and on the basis that the claims against them were closely related and/or ancillary to the claims against Terraform.  The defendants’ arguments had previously been dismissed by an Assistant Registrar (“AR”) and were heard by the High Court on appeal. 

The High Court denied the stay, primarily on the basis that the defendants had submitted to the court’s jurisdiction. We examine the High Court’s judgment in more detail below.

Background

After the claim was served on them, the defendants filed defences which asserted that the court lacked jurisdiction to hear the claims.  The defendants argued that the claimants were bound by terms and conditions hyperlinked to the Websites, which provided that any dispute would be resolved by arbitration.

Significantly, the defences filed by the defendants also addressed the merits of the claims and set out counterclaims, albeit with reservations that this was ‘without prejudice’ to the jurisdictional issue.

The first instance decision

At first instance, the AR dismissed Terraform’s application for a stay on the basis it had failed to make out a prima facie case that a valid arbitration agreement existed between it and the claimants.  She noted that whereas arbitration clauses must be expressly brought to the attention of the other contracting party to be validly incorporated, a reasonably prudent user would not have had actual or constructive notice of the terms and conditions containing arbitration clauses in this case as they were tucked away on the Websites.

The AR held that even if Terraform had made out a prima facie case that a valid arbitration agreement existed, its application would have failed on the basis that it had taken multiple “steps in the proceedings” (defined below) and consequently submitted to the jurisdiction of the court.

The AR dismissed the other defendants’ applications for “case management stays” because they were premised on Terraform obtaining an arbitration stay, which it did not obtain.

The defendants appealed the AR’s judgment.

The issues on appeal

The issues for the High Court to decide on appeal were:

1. whether Terraform had taken a step in the proceedings; and
2. whether Terraform demonstrated a prima facie case of the existence of valid arbitration agreements between it and the claimants.

The appeal judgment

Had Terraform taken a step in the proceedings?

Section 6(1) of the International Arbitration Act 1994 (2020 Rev Ed) (the IAA) states that a party to an arbitration agreement:

… may, at any time after filing and serving a notice of intention to contest or not contest and before delivering any pleading (other than a pleading asserting that the court does not have jurisdiction in the proceedings) or taking any other step in the proceedings, apply to the court to stay the proceedings so far as the proceedings relate to that matter… (emphasis added)

The High Court considered that the starting point is that an act that indicates an intention that court proceedings should proceed instead of arbitration is a “step in the proceedings”.  Such intention can be shown where a defendant (or their solicitors) have acted in a way that is objectively inconsistent with maintaining a challenge to the court’s jurisdiction.  As such, a step in the proceedings will be taken if a defendant seeks to defend the proceedings on their merits.

The High Court also noted that under the new Rules of Conduct 2021 (“ROC 2021”) (unlike under the earlier rules), a defendant is allowed to file a defence contesting jurisdiction only [a “Defence (Jurisdiction)”] and that this is expressly provided not to amount to a submission to the court’s jurisdiction.  This provision of the ROC 2021 was coupled with an amendment to the IAA, which now provides that a pleading asserting that the court does not have jurisdiction in the proceedings will not preclude the parties to an arbitration agreement from applying to stay the court proceedings. 

In this context, the High Court observed that under the ROC 2021, there is no reason for a defendant challenging jurisdiction to file a defence on the merits [a “Defence (Merits)”] and counterclaim with a reservation about jurisdiction. 

The High Court found that Terraform had taken steps in the proceedings:

1. by filing a Defence (Merits). The High Court considered that any alleged misunderstanding of the ROC 2021 on Terraform’s part was irrelevant.
2. by filing a Counterclaim, which was “plainly an acceptance of the court’s jurisdiction to decide on the merits of the dispute”.
3. by filing certain applications that went to the merits of the case.  The fact that the applications were rejected did not matter

Whilst this was sufficient to dispose of the appeals, the High Court went on to consider the second issue on appeal, as it was the primary basis on which the AR had decided the applications at first instance.

Had Terraform demonstrated a prime facie case of the existence of valid arbitration agreement between it and the claimants?

The High Court recognised the settled law that a court hearing an application for a stay of proceedings in favour of arbitration should grant such stay if the applicant can establish a prima facie case that:

1. there was a valid arbitration agreement between the parties to the court proceedings;
2. the dispute in the court proceedings (or any part thereof) falls within the scope of the arbitration agreement; and
3. the arbitration agreement is not null and void, inoperative or incapable of being performed.

The general approach is that the court will stay the proceedings in favour of arbitration except in cases where the arbitration clause is clearly invalid or inapplicable. In the Terraform Case, the only point in dispute was the first: whether there was a valid arbitration agreement between the parties. The applicable test in this regard was whether there was a prima facie case that the user had notice of the arbitration clause. 

Some observations the Court made in this regard were:

1. In relation to the Terra Website, it was the claimants’ case that the misrepresentations were on the Terra Website, an informational website which contained various documents accessible by hyperlink which users would access to gain information. As such, it was not unreasonable that a user would, in perusing the Terrra Webiste, have noticed the hyperlink to the terms of use which contained the arbitration clause.
2. In relation to the Anchor website, there was a pop-up notice referencing the terms of service

The Court noted that at the stay stage, courts should not descend into a protracted examination of the evidence to make a finding on the merits as to whether an arbitration agreement exists on a balance of probabilities”.  The question of incorporation, which the claimants argued depended on whether the claimants had actual or constructive notice of the Terra Terms of Use, hinged on mixed issues of fact and law which would rightfully be addressed by an arbitral tribunal. The Court found on the facts that Terraform had made out a prima facie case that an arbitration agreement existed between it and all the claimants on the basis of the terms and conditions of the Terra Website and with some claimants on the basis of the terms and conditions on the Anchor Website.

The Court also flagged the issues that arise where a prima facie case of an arbitration agreement is made out only in respect of some of the claimants in a representative action, but noted that this was not a live issue in this case as all the claimants were subject to the prima facie arbitration agreements.

Comment

The High Court’s judgment highlights that a party wishing to adjudicate its dispute via arbitration must be careful of the steps it takes in any court proceedings.  It will be unable to stay those proceedings if it takes steps that mean it submits to the court’s jurisdiction, even if it did not realise this was the consequence of those steps.  Filing a merits-based defence will put the contesting party at jeopardy, and a counterclaim will all but guarantee a finding of having taken a step in the proceedings, even if pleaded on a ‘without prejudice’ to jurisdiction arguments basis.

The significance of this judgment is not limited to the world of digital assets, although it is likely to be of interest to digital assets companies, who typically include provisions in their terms and conditions that disputes must be resolved via arbitration.  We would use this opportunity to flag that when those terms and conditions are said to operate worldwide, digital asset providers should be wary that in some jurisdictions (e.g. England and Wales), arbitration clauses in consumer contracts can fail on public policy grounds.^[1]

Article co-authored by James Panambalana, Trainee Solicitor at CMS.
 

^[1] See, for example, our Law-Nows here and here.