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Out-Law Legal Update | 18 Jan 2018 | 10:42 am | 10 min. read
In this case before the Singapore International Commercial Court, UK registered business B2C2 Ltd, which buys and sells virtual currencies, applied for a summary judgment against Singapore-based currency exchange platform Quoine Pte Ltd.
B2C2 argued that Quoine acted in breach of the contract between them when the platform reversed transactions for the sale and purchase of the cryptocurrencies ethereum and bitcoin.
The transactions were reversed after Quoine identified that a computer error had occurred which caused the value of the assets being exchanged to become skewed. B2C2, which stood to benefit from the mistake, argued that Quoine had acted in breach of contract when the platform 'corrected' the error by reversing the trades. However, the Singapore International Commercial Court rejected B2C2's bid for summary judgment, meaning the case will now be considered at a full trial.
Although the case before the Singapore International Commercial Court does not give rise to any form of precedent in England and Wales, the summary judgment application was heard by an English judge, Simon Thorley. It is also one of the first known cases to consider cryptocurrency trading.
B2C2 opened an account on the Quoine platform online and agreed to the terms and conditions. Those stipulated that: the contract was subject to Singapore law; and that Quoine had the ability to amend the terms and conditions unilaterally on notice, including the ability to upload 'Risk Disclosure Statements'.
The following express terms were also set out in the contract:
"The exchange functions of the Platform will fill in orders at the best possible available market price. Note that as markets move continuously, the prices displayed on user interfaces, on our web app or on mobile apps are in no way guaranteed. The Platform, however, has been designed to allow members to fill at best possible prices and in a timely manner. Nevertheless the Company will not be liable under any circumstances for the consequences of any delay in order filling or failure to deliver or perform."
"Furthermore, once an order is filled, you are notified via the Platform and such an action is irreversible," the contract said.
According to the ruling, the trades at issue were "limited orders". This meant that the trader, in this case B2C2, was able to either set the maximum price at which it was willing to buy or a minimum price at which it was willing to sell. Once that price had been matched, the platform would fulfil the order. The traders are able to control the price at which they sell, but not the timing of the trades.
All the orders placed via the platform are recorded in an orders book and the platform also displays a 'trading dashboard' to indicate the current fair market price for the items. The trading dashboard also makes use of software, referred to in the ruling as 'the quoter program', to display actual prices for completed trades on the platform and trades on other major currency exchanges.
The platform also uses technology to interrogate the orders book and quoter program to detect when buy/sell orders correspond or match.
Slightly more complicated is that members can trade using their own assets or using funds borrowed from Quoine or other platform users. However, the member must have assets in its account which are used as collateral. This is "margin trading".
In the event that a margin trader's equity, which is calculated by reference to the market value of their collateral, falls below a certain percentage of the value of their loans, the platform will automatically force close the trader's positions to prevent further loss. These are termed 'stop loss' orders. The platform relies on the quoter program to assess the margin trader's equity at any given time.
The disputed events
On 19 April 2017 B2C2 placed orders to buy and sell ethereum for bitcoin. On that day, 15 such orders were fulfilled. Some of the orders – eight in total – are not the subject of dispute. Those orders transacted at a price of c.0.04 bitcoin to 1 ethereum. In one example, at 23.29 that day B2C2 sold 46.83 ethereum at a rate of 0.0396 bitcoin.
However, some time after 23.30, a "technical glitch" occurred, Quoine said, according to the ruling. The glitch happened after changes were made to passwords and cryptographic keys on some of the critical systems within the platform, by Quoine's administrators. However, in error, the new details were not updated on the quoter program. It meant that the quoter program could not connect to the database to update the true market prices.
According to the ruling, between 23:52:52 and 23:54:33, B2C2 placed seven orders for sale of ethereum to buy bitcoin, proposing an exchange rate for those transactions of c.10 bitcoin for every 1 ethereum – a rate approximate 250 times the previous exchange rate at which orders were quoted and traded. It is not known why B2C2 offered sales at such inflated rates.
Ordinarily the order would not be fulfilled as it is unlikely that any buyer would, in the circumstances, make an offer to buy at that rate, thereby triggering a match and a subsequent transaction. However, because the quoter program could not access the market data, it used the only data available to it, namely B2C2's proposed sell price, as the relevant market data relating to the relative prices of the two cryptocurrencies.
This erroneous data about the market value of the currencies set off a chain of events: it affected the value of collateral held by another group of margin-traders; the platform calculated that the equity of these margin traders was below the threshold value of loans; it force-closed those customers and placed orders to sell their bitcoin. The platform used the only market price available to it for the purposes of evaluating the price of the forced bitcoin order to sell – this again being B2C2's order price. The system then matched that to B2C2's order to buy bitcoin and this triggered the completion of the transaction.
Quoine became aware of the technical glitch the next day and unilaterally reversed the trades. It returned the bitcoin to the forced-closed customers and the ethereum to B2C2.
B2C2 asserted that the transaction was validly executed, pointing to the express term in the contract that said that "once an order is fulfilled, you are notified via the platform and such an action is irreversible". It argued that, as a result, the reversal of the transaction by Quoine represented a breach of this term.
Quoine, however, contended that that term, properly interpreted, applied only to the parties to the transaction and not to it as the intermediary. This argument was rejected by the court. It said that the intention of the wording was to provide certainty to all parties, including Quoine.
Quoine raised six further defences, including that there was an implied term which permitted a reversal in the event of technical error, that the trades were void for common mistake, that the law of unjust enrichment would provide a remedy and that certain other terms provided exemption. These were all rejected by the judge.
However, the judge did accept that two defences were arguable, the first being that the terms of a particular Risk Disclosure Statement that had been uploaded to Quoine's website allowed the platform to reverse the trade, and secondly that the trades were void because of unilateral mistake at common law.
Consequently, the judge did not make a summary judgment but ordered a full trial of these matters and defences. He set out details of the two defences that were to be investigated.
In relation to the first defence, a Risk Disclosure Statement had been uploaded to the Quoine's website in March 2017. Under the heading 'System Risks', the statement said:
"Please be aware that in the event that a customer loses any opportunity … due to emergency system maintenance or a system failure, the Company will not be able to execute a process to fix the error because it will be unable to identify the order details that the customer intended to place (the original order). The system may produce an aberrant value for the buy or sell price of the virtual currency calculated by the system. Please be aware that if the Company finds that a transaction took effect based on an aberrant value, the Company may cancel the transaction."
Quoine contends that this Risk Disclosure Statement changed the terms on which users could trade on the platform. B2C2 has disputed this.
With regards to the second defence that the court has deemed is arguable at trial, on the doctrine of unilateral mistake, Quoine said that in the circumstances, the contract is rendered void. According to Singapore law, to succeed in rendering a contract void for unilateral mistake, Quoine must show that there was a sufficiently important or fundamental mistake as to a term of the contract and that B2C2, seeking to enforce the contract, had actual knowledge of the mistake at the time of contract.
The court referenced a Singapore case – Chwee Kin Keong v Digilandmall.com – where the doctrine of unilateral mistake was made out. In that case a website advertised printers at a significantly reduced price in error. It was held in that case that the party who placed an order for more than 4,000 printers knew that the stated price was an error.
However, here the situation is complicated by the fact that the transaction was between B2C2 and the fore-closed customers – not Quoine, with Quoine's platform mediating the transaction.
The circumstances raise a number of questions: was there a relevant mistake made by the fore-closed customers? Did B2C2 have actual knowledge of that mistake? What is the impact of the computer glitch?
These issues were acknowledged by ruling judge Simon Thorley. He said: "The doctrine of unilateral mistake is well developed in circumstances where the error is a human error and the knowledge or lack of it is directly ascertainable from the humans involved. Where computers are concerned, the law is less well developed. When can the workings of a computer or computer program constitute actual knowledge on the part of the programmer or operator of the computer?
The issues were also touched upon by the judge in the Chwee Kin Keong v Digilandmall.com case. They said:
"Inevitably mistakes will occur in the course of electronic transmissions. This can result from human interphasing, machine error or a combination of such factors. Examples of such mistakes would include (a) human error (b) programming of software errors and (c) transmission problems in the communication systems."
"Computer glitches can cause transmission failures, garbled information or even change the nature of the information transmitted," they said. "This case is a paradigm example of an error on the human side. Such errors can be magnified almost instantaneously and may be harder to detect than if made in a face to face transaction or through physical document exchanges. Who bears the risk of such mistakes? It is axiomatic that normal contractual principles apply but the contractual permutations will obviously be sometimes more complex and spread over a greater magnitude of transactions. The financial consequences could be considerable. The court has to be astute and adopt a pragmatic and judicious stance in resolving such issues."
The Singapore International Commercial Court will need to grapple with these issues when the matter comes to full trial.
Relevance to blockchain, bitcoin and smart contracts
To a large extent the case is interesting because it relates to bitcoin and other cryptocurrencies. Even though the technologies which underpin bitcoin and block chains are not at issue, the case relates to the technology and platforms that are developed in order to trade in bitcoin and other cryptocurrencies.
The case indicates that parties involved with bitcoin, blockchains and smart contracts should be mindful that:
David McIlwaine of Pinsent Masons, the law firm behind Out-Law.com, is a specialist in resolving disputes over technology contracts.
Electricity networks infrastructure proposals support the UK’s low carbon ambitions