Clarification on specific performance and damages assessment in cryptocurrency loan dispute

In Southgate v Graham [2024] EWHC 1692 (Ch), the High Court considered an appeal concerning a loan agreement involving cryptocurrency. The key issues were

(i) whether the trial judge was correct in refusing to grant specific performance for the return of the Ethereum tokens;

(ii) the appropriate valuation date for assessing damages.

The High Court rejected the first ground of appeal but allowed the appeal on the second ground. In refusing to grant specific performance, the High Court held that there is nothing special about cryptocurrency to suggest that a failure to return it under a loan agreement cannot be adequately compensated by damages.

 

Background

In June 2018, the Appellant and Respondent entered into an oral agreement whereby the Appellant transferred 144 Ethereum tokens (valuing £50,000) to the Respondent.

The Appellant demanded repayment in July 2019. In September 2019, the Respondent transferred the Appellant £6,000. No further payments were made. The parties fell into a dispute regarding the Respondent’s obligations:

• the Appellant’s position was that the Respondent was obliged to return 144 Ethereum tokens (notwithstanding any change in value) plus a 10% premium; and
• the Respondent argued that the substance of the agreement was for a loan of £50,000 and that he was only obliged to repay £50,000 plus a 10% premium. The Respondent’s position was that Ethereum tokens were merely the mechanism that the Appellant had chosen to provide the Respondent with the £50,000 loan and did not form the substance of the agreement.

 

Trial Decision

Nature of the agreement and subsequent breach

At trial, HHJ Saggerson (the “Judge”) found that:

1. the agreement was a contract for the transfer of a quantity of Ethereum tokens in consideration for an undertaking by the Respondent to transfer back the same quantity, plus 10%;
2. the £6,000 payment by the Respondent was therefore a repayment of ~43 Ethereum tokens, leaving 116 Ethereum tokens still outstanding; and
3. the Judge found that the Respondent was in continuing breach from 1 October 2019 with respect to 116 Ethereum tokens, being a reasonable time after the July 2019 demand.

Specific performance

The Respondent’s position was that the Judge should not grant specific performance because the value of the 116 Ethereum tokens at trial was ~£323,000 and ordering specific performance would cause the Respondent hardship and/or be inequitable. The Judge agreed with the Respondent and refused to grant specific performance.

Accordingly, the Judge awarded damages in lieu of specific performance. The Judge ordered those damages be assessed at a remedies hearing, and indicated that valuation date be taken as of 1 October 2019, when the breach occurred.

 

Appeal decision

The Appellant appealed on two grounds:

(i) the Judge was wrong to refuse specific performance; and

(ii) in the alternative, the date set by the Judge to assess damages (the “Valuation Date”) was incorrectly set as 1 October 2019 (being the date of ongoing breach) rather than 1 December 2023, the date of judgment.

Specific Performance

The High Court noted that specific performance is an equitable remedy, not normally available where damages are adequate, and not a remedy available by right. Absent a ‘legitimate interest beyond pecuniary compensation’ [30], specific performance would not be granted.

The Appellant did not dispute that hardship was a relevant factor for the Judge to consider, rather, the Appellant argued that there was insufficient evidence to conclude the Respondent would face hardship. The High Court noted that this was a finding of fact which could only be overturned if it was plainly wrong, which the evidence did not suggest.

The Appellant’s second argument was that damages were an inadequate remedy to properly compensate the Appellant, and that this factor outweighed the Respondent’s claims of hardship. The High Court disagreed with damages being an inadequate remedy as there was nothing special about cryptocurrency to suggest that the Respondent was obliged to do anything more than return the tokens or their equivalent. The High Court agreed that specific performance in these circumstances would be ‘inept’ as the tokens were not a unique asset (e.g. land) or special property (e.g. a family heirloom), and any loss arising out of the Respondent’s failure to return could be adequately compensated by damages.

Regarding the extent of hardship, the High Court noted that not only would the financial burden of specific performance result in hardship, but an order of specific performance would likely be followed by contempt proceedings for the Respondent’s failure to perform. Such punitive consequences would be unfair, disproportionate and unnecessary, and add to the Respondent’s hardship.

On this basis, the High Court was not persuaded by the Appellant that the Judge was wrong to refuse specific performance.

Valuation Date

The High Court’s analysis followed two queries: (i) whether it was correct for the Judge to decide the Valuation Date at trial rather than at a remedies hearing, and (ii) whether the date of breach was the correct Valuation Date.

With respect to the first question, the High Court considered that the Judge had incorrectly assumed that the date of breach was the correct Valuation Date without hearing proper submissions from the parties. Alongside these submissions, the Judge ought to have considered whether it was possible and reasonable for the Appellant to acquire 116 Ethereum tokens at the time of breach, and whether the Appellant had the funds to do so.

As to the second question, the High Court considered that this should properly be decided at a remedies hearing, but did note the merit in the Appellant’s arguments in support of the Valuation Date being the judgment day, specifically:

• Remedies for breach – while the general rule for the valuation date following a breach of contract is the date of the breach, the High Court noted that authorities stipulated that this rule should not be applied rigidly. The overriding aim of the remedy for breach of contract is to ensure that the wronged party is adequately compensated by being placed back in the position they would have been in if the contract was performed.

The High Court agreed that using the date of breach as the Valuation Date would not meet this aim as damages assessed at the date of breach would only permit the Appellant to purchase a small proportion of the 116 Ethereum tokens owed to him; and

• Characterisation of damages – the Appellant argued that the Judge’s decision to award damages engaged section 50 of the Senior Courts Act 1981, which provided the court with a discretionary power to award damages in addition to or in substitution for specific performance (i.e. a money substitute for what is lost by the refusal of specific performance) – this would have to be assessed on the day the court made a decision as to specific performance.

The Appellant also noted that where specific performance is reasonably pursued, the approach recognised by precedents is to award damages based on the value at the date of the judgment which determines such a remedy is no longer available. The main test is whether the Appellant acted reasonably, and the High Court did not find any indication that the Appellant had failed to do so in the evidence and submissions.

Ultimately, the High Court did not state what the correct Valuation Date should be but ordered that the remedies hearing consider all issues relating to measure of loss, including remoteness, mitigation and whether the Appellant had reasonably pursued specific performance.

 

Key takeaways

• Specific performance is a discretionary remedy, generally unavailable where damages are an adequate form of compensation and where there is no legitimate interest beyond pecuniary compensation.
• There is nothing special about cryptocurrency to suggest that a failure to return it under a loan agreement cannot be adequately compensated by damages.
• The general rule for the valuation date for a breach of contract should not be rigidly taken as the date of breach where it is inconsistent with the overriding aim to ensure that the wronged party is put back in the position they would have been in but for the breach.
• If specific performance is sought but damages are awarded in lieu, it is likely that damages will be awarded based on the value at the date of the judgment which determines that specific performance is not available – provided that specific performance has been reasonably pursued.

 

With thanks to James Kennedy for his assistance in preparing this post.