ZI Wang v Graham Darby
| Jurisdiction | England & Wales |
| Judge | Stephen Houseman |
| Judgment Date | 17 November 2021 |
| Neutral Citation | [2021] EWHC 3054 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: LM-2021-000172 |
[2021] EWHC 3054 (Comm)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND & WALES
LONDON CIRCUIT COMMERCIAL COURT (QBD)
Royal Courts of Justice
Strand, London, WC2A 2LL
Stephen Houseman QC (Sitting As A Deputy Judge of the High Court)
Case No: LM-2021-000172
Tim Penny QC and Daniel Scott (instructed by Curzon Green Solicitors) for the Claimant
James Collins QC and Philip Jones (instructed by Mackrell.) for the Defendant
Hearing dates: 9 & 10 November 2021
Judgment Approved by the court for handing down
APPROVED JUDGMENT
Stephen Houseman QC sitting as a Deputy Judge of the High Court:
INTRODUCTION
The present dispute concerns two related contracts entered into by the Claimant (“Mr Wang”) and the Defendant (“Mr Darby”): the first on 28 December 2018 as allegedly varied on or about 10 January 2019 (“First Contract”) and the second on 24–25 January 2019 (“Second Contract”) coinciding with or comprising a further alleged variation of the First Contract.
Broadly speaking both contracts involved the individual parties exchanging specified quantities of respective cryptocurrencies, namely Tezos and Bitcoin, on terms as to reciprocal restoration of the same amounts of each currency upon or after an agreed period of two years, i.e. on/after 28 December 2020 and 25 January 2021, respectively. The parties' cases as to the correct legal characterisation of the transactions, and their proprietary consequences for the Tezos transferred by Mr Wang to Mr Darby, are diametrically opposed. This central issue was fully and forcefully contested at the present hearing.
There are three separate applications before the Court:
(i) Mr Wang's application dated 3 August 2021 to continue a worldwide freezing order (WFO) and proprietary injunction (together, “Injunction Order”) granted by HHJ Pelling QC at a without notice hearing on 2 August 2021 (“WFO Continuation Application” and “PI Continuation Application”, respectively; together, “Continuation Application”).
(ii) Mr Darby's application dated 6 September 2021 seeking to strike out or enter reverse summary judgment in respect of the “ proprietary claims” pleaded against him in this action (“SJ Application”).
(iii) Mr Wang's application dated 25 October 2021 seeking to vary the terms of the WFO in the Injunction Order as regards Mr Darby's expenditure allowance, which is necessarily contingent upon Mr Wang's prior success on the WFO Continuation Application (“WFO Variation Application”).
A further application dated 2 November 2021 was made by Mr Wang seeking permission to refer to a second expert report dated 21 October 2021 in connection with the Continuation Application and the SJ Application. Such report was served in support of the WFO Variation Application and was out of time in respect of the other applications, Mr Wang having previously obtained a series of extensions resulting in a final extension for service of his reply evidence on the Continuation Application. Mr Wang sought relief from sanctions in this context and for this purpose. Mr Darby did not contend that he would be prejudiced by the admission of this second expert report for such purposes, even though first intimated on behalf of Mr Wang at a hearing on 29 October 2021, at any rate so long as he (Mr Darby) was entitled to rely upon his own fourth witness statement dated 5 November 2021.
I gave permission to both sides to refer to all such evidence in relation to all applications before the Court. The contested admissibility of the second expert report had been stood over to the present hearing from the hearing before HHJ Pelling QC on 29 October 2021 at which a separate application by Mr Darby dated 13 October 2021 seeking variation of the Injunction Order to permit use of funds for legal expenditure was dismissed. Mr Darby was ordered to pay Mr Wang's costs of that application and hearing, assessment of which was reserved to the present hearing.
Mr Darby has not served any expert evidence. The nature and uses of Tezos are explained in the expert evidence served on behalf of Mr Wang, in particular the first report of Mr Sanders. This general background is not disputed.
The SJ Application concerns the proper legal characterisation of the relevant contracts pursuant to which Mr Wang transferred two separate parcels of 200,000 Tezos to Mr Darby in return for 13 Bitcoins (First Contract, concerning the “First 200k” as it was known) and 17 Bitcoins (Second Contract, concerning the “Second 200k” as it was known) transferred by Mr Darby to Mr Wang by way of simultaneous digital exchange. The key issue is whether some form of trust arose in respect of the 400,000 Tezos transferred by Mr Wang to Mr Darby. Both sides contend that both contracts were of the same essential nature and structure as one another: the core dispute concerns their proper legal characterisation as a matter of objective common intention.
It is common ground that whether cryptocurrency such as Tezos is regarded as property which can be the subject of a trust is to be determined by English law for present purposes. English law is also assumed to govern the relevant contracts and any fiduciary duties arising in connection with such transactions. It is further agreed that, as a matter of English law, a unit or token of Tezos constitutes property which can in principle be the subject of a trust. This is so notwithstanding its entirely fungible character and non-identifiable status: no single unit bears any unique serial number or means of identification.
Mr Wang contends that there was an express or resulting or constructive trust in respect of the 400,000 Tezos in the hands (i.e. digital wallet) of Mr Darby and/or that Mr Darby owed fiduciary duties in respect of such digital assets, notwithstanding that Mr Wang himself was free to use or dispose of the 30 Bitcoins he received from Mr Darby. Hence the proprietary claim against Mr Darby in respect of the Tezos. Mr Darby says such claim lacks any real or reasonable prospect of success: the bilateral exchange and obligatory re-exchange (upon demand after two years) of different cryptocurrencies constituted a sale and buy-back arrangement akin to a ‘repo’ transaction which, by definition, precluded any trust arising in respect of the Tezos.
A notable feature of the present case is that the only evidence said to contain or demonstrate both contracts is comprised within the parties' private dialogue via an online communications platform called Telegram (“Telegram Transcript”). The parties communicated extensively through this platform between late December 2018 and early March 2019 predominantly in writing but with occasional voice messages left by Mr Wang. Mr Darby controlled the underlying Telegram account and blocked Mr Wang from it on 6 March 2019. The Telegram Transcript was, however, produced by Mr Wang and underwent modifications from its native format (including removal of voice messages) as described further below. There is a separate transcript of the deleted voice messages (“Voice Message Transcript”) which augments the Telegram Transcript in a limited way so far as material.
This judgment deals with the SJ Application and the WFO Continuation Application. The PI Continuation Application was stood over to await the outcome of the SJ Application. The WFO Variation Application was stood over to await the outcome of the WFO Continuation Application.
I am grateful to counsel on both sides for the high quality of their oral and written submissions, including additional focussed written submissions requested by me as to the formation and content of the contracts.
RELEVANT BACKGROUND
The relevant background is of two kinds: general background about Tezos and specific background relating to the parties, their mutual dealings and other circumstances relevant to the determination of the SJ Application and WFO Continuation Application.
As regards Tezos, the following summary suffices for present purposes:
(1) Tezos (XTZ) is one of the estimated 2000+ cryptocurrencies now in existence, the best known of which is Bitcoin (BTC). Tezos underwent its Initial Coin Offering (ICO) in mid-2017. Tezos is a so-called ‘altcoin’ denoting the fact that due to its scale it is not commonly used as a primary trading currency, in contrast to Bitcoin.
(2) As noted above, individual units or tokens lack any unique identification. Their functional identification is achieved by reference to the unique digital wallet (i.e. account) in which they are held at any given time. They are readily transferable and completely fungible. They can be traded, i.e. bought and sold, in return for e.g. other cryptocurrency and/or traditional (so-called ‘fiat’) currency. They can in principle be held on trust by one account-holder for and on behalf of another account-holder.
(3) Tezos offers what is known as a ‘baking’ option whereby individual tokens are utilized so as to yield rewards in the form of additional tokens credited to the relevant account-holder by the global issuer. The underlying activity which constitutes baking involves the signing and publishing of a new block in the blockchain, thereby validating transactions and growing the digital system organically so as to increase its capital base. It is akin to ‘mining’ in other crypto contexts. Baking requires the relevant holder — known as the ‘baker’ — to run a blockchain node with appropriate software and to keep it online and current. There is, in effect, a minimum capital margin requirement for this activity which requires that the baker holds at least...
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