In previous blogs (see links at the bottom of this article), cryptocurrency has been discussed in various circumstances. Like most assets, there is a ‘key’ that allows the owner to access their cryptocurrency portfolio.
Tulip Trading v Wladimir van der Laan & Ors
Case background
In the very high-profile case of Tulip Trading v Wladimir van der Laan & Ors, the Court considered whether a potential duty arose in negligence or alternatively a fiduciary duty for the providers of cryptocurrency to develop a patch to allow the owners of cryptocurrency to access their portfolio where they had lost their key, in this case by virtue of an alleged unlawful hack of the owner’s computer system. This case was so significant for two reasons:
- Tulip Trading is a Seychelles registered company, the CEO of which is Dr Craig Wright, the individual that claims to have invented Bitcoin; and
- The assets purportedly owned by Tulip Trading have a value of around $3bn.
The application before the Court related to whether the order made previously permitting the Claimant to serve the Claim Form out of the Jurisdiction should remain in place. Part of the test for whether such permission should be granted is whether there is a serious issue to be tried and if so whether there is a good arguable case.
Before delving into whether a duty was found to exist, it is worth considering what a fiduciary duty is. Mrs Justice Falk referred to a number of extracts from previously decided cases. For the purpose of this blog, it is sufficient to refer to just one of those, the extract from the case of Lehtimaki v Cooper [2018], which stated:
“…a person will be in a fiduciary relationship with another when and in so far as that person has undertaken to perform such a function for, or has assumed such a responsibility to, another as would thereby reasonably entitle that other to expect that he or she will act in that other’s interest to the exclusion of his or her own or a third party’s interest…”
In determining that the Defendants did not owe the Claimant a fiduciary duty, Mrs Justice Falk confirmed:
“At first sight it is very hard to see how TTL’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. Taking all the features relied on by TTL fully into account, and assuming in its favour that it would be able to establish the facts on which it relies at a trial, I am unable to conclude that TTL has a realistic prospect of establishing that the facts pleaded amount to a breach of fiduciary duty owed by the Defendants to TTL.
“The foundation of TTL’s case is the alleged imbalance of power, combined with an “entrustment” of property to the Defendants. However, whilst an imbalance of power, together with vulnerability to abuse of that power, is often a feature of fiduciary relationships and may in broad terms be a rationale for the concept, it is not a defining characteristic and is certainly not a sufficient condition for the existence of the duty. Further (and to the extent relevant), I do not think that bitcoin owners can 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 by TTL.
“This is not a case where it is alleged that, in making an update to the software, the Defendants acted in their own interests and contrary to the interests of owners, for example in introducing for their own advantage a bug or feature that compromised owners’ security but served their own purposes. I can see that it is conceivable that some form of duty could be engaged in that situation, although whether it would properly be characterised as a fiduciary duty is another matter. At least it could be said that in that situation the developers making the update had arguably assumed some responsibility by performing that function, although I think it is much more doubtful whether that would amount to a relationship requiring single-minded loyalty.
“In contrast, what is sought to be imposed here is a positive duty to alter software to introduce a patch to allow TTL to regain control of its assets. The undertaking to act or assumption of responsibility on which TTL has to rely is the Defendants’ alleged control of the Networks and their alleged ability to make a change to the software, irrespective of whether they are actually engaged in making changes, and in the absence of any more general contractual or other obligation to make changes in the future. But developers are a fluctuating body of individuals. As a general proposition it cannot realistically be argued that they owe continuing obligations to, for example, remain as developers and make future updates whenever it might be in the interests of owners to do so.”
In further finding that there was no duty owed in negligence either, the Judge stated:
“I can see that it might be arguable 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 Network. Further, if the Defendants do control the Networks as TTL alleges, it is conceivable that some duty might be imposed to address bugs or other defects that arise in the course of operation of the system and which threaten that operation.
“However, that is not the complaint in this case. As already indicated, the complaint made is of failures to act. Further, the failures alleged are failures to make changes to how the Networks work, and were intended to work, rather than to address a known defect. In addition, there is no allegation that any of the Defendants had any involvement with the alleged hack, or that they have done anything to create or increase a risk of harm. Rather, what is complained of is that the Defendants have not taken action to alter how the system works to ensure that TTL regains control of the bitcoin following harm allegedly caused by a third party. That would require both a) the existence, solely by virtue of the Defendants’ alleged control of the Networks, of a special relationship that continues even if no steps are actually being taken to alter software; and b) a requirement to take positive action to make changes, and in circumstances where there is no known bug or other defect preventing the software from operating as anticipated.
“I do not consider that it is realistically arguable that the imposition of such a requirement could be treated as an incremental extension of the law, particularly bearing in mind that the alleged loss is an economic loss.”
Interestingly, public interest criteria, given how widely available cryptocurrency currently is, were considered but the Judge formed the view that public interest criteria if found to exist could not override the need for a sound legal foundation. As a result of the above findings, the judge found that the order allowing service of the Claim Form out of jurisdiction made by the Deputy Master Nurse previously should be set aside as well as service of the Claim Form.
The Claimant has appealed the decision and that appeal was heard by the Court of Appeal at the start of December 2022. The judgment is reserved and accordingly, it will become apparent in the next few months whether the above set-out position remains the settled position.
How can we help
Kevin Modiri is a Partner in our expert Dispute Resolution team.
If you have any questions concerning the subjects discussed in this article, please do not hesitate to contact Kevin or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online enquiry form.
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