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02 May 2019
The Amsterdam Court of Appeal recently had to decide on an application for recognition and enforcement of an online arbitral award regarding a loan in bitcoins.(1) To date, this has been a subject that the Dutch courts have seldom encountered. Notably, the Amsterdam Court of Appeal took a critical approach in what may be considered a test case for recognition and enforcement of online arbitral awards in the Netherlands.
Using an online trading platform, X provided three loans to Y, all in bitcoins (for a total of approximately 0.5 bitcoins) at an interest rate of 5% per month. To borrow these bitcoins, Y had to agree on the conditions of the online bitcoin-trading platform applicable to the loans. These conditions included the following dispute resolution mechanism clause:
If you fail to pay principal and/or interest on the date on which the loan falls due, you will be considered in default of the Registration Agreement... Should your loan become 90 days past due ("Defaulted") the loan will be sent to Dhami Law Firm ("Arbitrator"), an independent, international arbitration firm whose awards are recognized internationally under The United Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
I understand that in the event that I want to appear in the arbitration by email to contest the potential issuance of an award in favor of the lenders, I must send a written request to firstname.lastname@example.org and pay a $ 99.00 fee. Such request must be within 7 calendar days from the date of the Notice of Default. The Arbitrator's decision shall be final and legally binding. In the event that the Arbitrator issues an award in favor of the investor, an investor may enforce that judgment in a court of competent jurisdiction.
The conditions further contained the following arbitration clause:
All claims and disputes arising under or relating to this agreement are to be settled by binding arbitration in the state of California or another location mutually agreeable to the parties. An award of arbitration may be confirmed in a court of competent jurisdiction.
Y defaulted on his loans. X subsequently obtained three arbitral awards in the United States through the process described above. Y did not contest the claim in accordance with the dispute resolution mechanism.
In the awards, Y was ordered to pay a certain number of bitcoins to X. The arbitral awards were rendered by a sole arbitrator, the US entity net-ARB, Inc. The awards were signed by net-ARB, Inc's CEO. The arbitral awards did not mention the seat of arbitration.
X sought to have the awards recognised and enforced in the Netherlands.
Both the Netherlands and the United States are signatories of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. Dutch law on the enforcement of arbitral awards is largely based on the convention.
Article V of the New York Convention and Article 1076 of the Dutch Code of Civil Procedure exhaustively list similar grounds for refusal of recognition and enforcement. One of the common grounds for refusal is that recognition and enforcement of a foreign arbitral award would be contrary to public policy.
X sought enforcement of the three online arbitral awards in the Netherlands. Y had no known place of residence in the Netherlands. The Amsterdam Court of Appeal's competence was based on the fact that enforcement was sought in its district.
Because Y had no known place of residence, summoning him to appear in court proved to be difficult. In the end, summoning was done via the Staatscourant (the government gazette). However, Y did not respond to the summons or appear in court.
The Amsterdam Court of Appeal first noted that it can exercise its power to refuse enforcement of an arbitral decision based on a violation of public policy on its own initiative. Even if the defendant (Y) does not object to the arbitral award's enforcement, the court still has this power. The Amsterdam Court of Appeal was of the opinion that this was not changed by X's allegation that Y had already confirmed that he would not object to the awards' enforcement.
The Amsterdam Court of Appeal decided that enforcement of the arbitral awards would violate Dutch public policy because the fundamental principle of audi alteram partem was not adhered to by the arbitral tribunal. Under this principle, the arguments of both sides of the disputes must be heard properly.
According to the Amsterdam Court of Appeal, there were a number of reasons why this principle had been violated. First, the court took issue with the circumstance that – in its view – online arbitral proceedings automatically become pending after 90 days. Second, a defendant wishing to defend itself in these arbitral proceedings had been required to write an email within seven days from receiving a notice of default. Third, the arbitral tribunal had failed to inform Y that a dispute was pending against him or of the legal grounds of the action.
Following questions from the Amsterdam Court of Appeal, X confirmed that he had "automatically" received the arbitral awards.
Consequently, the court ruled that Y had not been given sufficient opportunity to defend himself in the underlying dispute. This was a violation of the principle of audi alteram partem, which is a fundamental principle in the Netherlands that must be adhered to, even in online arbitration proceedings. According to the court, the violation of this fundamental principle meant that no legal effect could be given to the arbitral awards in the Netherlands, as their enforcement would be contrary to public policy as set out in Article 1076(1)(B) of the Code of Civil Procedure and Article V(2)(b) of the New York Convention. As such, the Amsterdam Court of Appeal refused recognition and enforcement of the three online arbitral awards.
The Amsterdam Court of Appeal did not answer a number of other questions with regard to the unconventional online arbitral proceedings (eg, the composition of the tribunal and the lack of a specified seat of arbitration). Notably, pursuant to Article 1023 of the Code of Civil Procedure, only a natural person may be appointed as an arbitrator. Consequently, under Dutch arbitration law, a corporate entity cannot be appointed as arbitrator.
Online arbitration is a valid dispute resolution mechanism as long as the principles of due process are respected, which was not true in this specific case.
The Amsterdam Court of Appeal decision confirms that, even in futuristic cases containing cryptocurrencies and email arbitration, traditional principles of due process will, rightly so, be upheld by the Dutch courts.
For further information on this topic please contact Jeroen van Hezewijk or Sandra Coelen at Freshfields Bruckhaus Deringer LLP by telephone (+31 20 485 7000) or email (email@example.com or firstname.lastname@example.org). The Freshfields Bruckhaus Deringer LLP website can be accessed at www.freshfields.com.
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