Out-Law News | 11 Mar 2020 | 10:11 am | 2 min. read
David McIlwaine of Pinsent Masons, the law firm behind Out-Law, was commenting after the Singapore Court of Appeal ruled that a platform that facilitates cryptocurrency trades was not entitled to unilaterally reverse trades it performed where the value of assets traded was inflated following a computer error.
The broader significance of the case stems from the way the court considered how the doctrine of unilateral mistake should operate where contracts are entered into by way of algorithms.
Nathanael Lim of Pinsent Masons MPillay, the Singapore joint venture partner of Pinsent Masons, said the case was significant as there was a need to apply traditional legal principles to algorithmic trading systems.
The case before the court concerned a dispute between Singapore-based currency exchange platform Quoine and UK registered business B2C2, which trades cryptocurrencies.
In this case, B2C2 placed orders to buy and sell ethereum for bitcoin through the Quoine platform. There were two counterparties to the trades, Pulsar Trading Capital and Mr Yu Tomita.
The trades on Quoine's exchange are performed automatically and the system is designed to set the value of trades with reference to market data. However, the trades in dispute in this case were in fact set with reference to prices a B2C2 software programmer had suggested. Quoine's system referenced the B2C2 prices after its own program was affected by a technical glitch that occurred after changes were made to passwords and cryptographic keys on some of the critical systems within the Quoine platform.
The result was that the trades between B2C2 and the two counterparties were settled at around 250 times the then going rate for bitcoin relative to ethereum. Quoine cancelled the trades the following day after spotting the error. This prompted B2C2 to sue Quoine for breach of contract and breach of trust.
A judge at the Singapore International Commercial Court previously ruled in B2C2's favour, but the Court of Appeal has now partly upheld Quoine's appeal.
The court looked at the mind of the computer programmer, when he was programming the deterministic software
The court held that Quoine was not responsible for a breach of trust in the case after it dismissed the notion that cryptocurrency is a form of property capable of attracting trust obligations. However, it rejected Quoine's arguments that its contracts with B2C2 for the trading of cryptocurrencies were void or voidable due to "unilateral mistake".
Quoine's case centred on its claim that the counterparties had mistakenly believed they were trading cryptocurrencies at prices were accurately represented or did not deviate significantly from the true market value of bitcoin and ethereum respectively. It said the programmer of B2C2's software, from which the prices for the trades in dispute were taken, "had actual or at least constructive knowledge" of this mistaken belief and had programmed the B2C2 software accordingly so as to "unconscionably profit from potential errors of the other market participants", according to the judgment.
The Singapore Court of Appeal rejected Quoine's arguments on this point.
McIlwaine said: "The court looked at the mind of the computer programmer, when he was programming the deterministic software, and found that he was not acting under a mistaken belief. This consideration is important generally in the context smart contracts – if something were to go wrong because of the coding, one would need to consider what was in the mind of the smart contract coder. Therefore, whilst this case did not involve a smart contract, it is of real importance to this area."
A smart contract is a form of digital programming code, which exists on a blockchain platform and which will self-execute. In simplest terms these coded obligations can operate to say 'if A occurs, B will follow'. Coded obligations or outcomes have different characteristics to those which ordinarily exist in natural language contracts containing legal rights and obligations. The courts in many jurisdictions are most familiar with natural language contracts being the way in which parties agree their legal obligations, whether oral or written.
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