Court action stayed by party not named in arbitration agreement

The proceedings concerned a digital asset trading business specialising in foreign exchange and cryptocurrencies (the trader). The defendant was the sole director and shareholder of the trader.

The plaintiff was a customer of the trader.

The trader and customer executed a Master Purchase Agreement (MPA) which enabled the trader to purchase digital assets on the customer’s behalf and trade them on FTX Trading Limited (FTX), then the largest international cryptocurrency exchange. The MPA contained an arbitration clause, which required disputes to be referred to arbitration in accordance with the Australian Centre for International Commercial Arbitration Rules.

In November 2022, FTX collapsed. The customer claimed it should not have been subjected to third party risk via trading on FTX and commenced court proceedings against the trader’s director alleging accessorial liability for misleading or deceptive conduct under the Australian Consumer Law.

The defendant director applied to stay the legal proceedings in favour of arbitration pursuant to s 8(1) of the Commercial Arbitration Act 2010 (CAA) and in reference to the arbitration agreement in the MPA. The primary issue was whether the defendant director, although not named in the MPA, should be recognised as a party to the arbitration agreement in the MPA.

Decision

Section 2(1) of the CAA defines a party to arbitration as including “any person claiming through or under a party to the arbitration agreement”. It was successfully argued that the defendant fell within this extended definition, relying on Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332 and Rinehart v Hancock Prospecting Pty Ltd (2019) 267 CLR 514.

Rees J found that the defendant’s position “fell comfortably” within the meaning of “through or under”, citing Tanning Research and Rinehart v Hancock. The court reasoned that because the defendant intended to defend the customer’s claim on the basis that the trader did not engage in misleading or deceptive conduct (and thus no accessorial liability could arise), he was taking a stand upon a ground which was available to the trader. Consequently, the defendant was standing in the same position as the trader vis a vis the customer. This was a decisive factor and her Honour held that: (a) the defendant was a party under s 2(1) of the CAA; and (b) consequently, the defendant was entitled to a stay of the proceedings under s 8 of the CAA.

The matter was King River Digital Assets Opportunities SPC v Salerno [2023] NSWSC 510.

Assistance provided by Tabitha St George, Law Clerk.