Cryptocurrency Caselaw – Southgate v Graham

The case of Oliver Southgate v Adam Graham [2024] EWHC 1692 (Ch), provides guidance on the legal remedies available in respect of loans of cryptocurrency and illustrates the complications surrounding the valuation of highly volatile assets.

It underscores that specific performance is a remedy that is not granted lightly and that there is nothing particular unique about cryptocurrency which would additionally justify such an order.

Background

Ashtons Legal LLP represents Mr Graham. In June 2018, Mr Graham sought to borrow £50,000 from Oliver Southgate. Mr Southgate transferred 144 Ethereum Tokens (”ETH”), which was worth at c£50,000 at the time, to Mr Graham, who agreed to return the same with a 10% premium in due course. Mr Graham sold the ETH to realise their cash value.

The arrangement was intended to be a short-term loan, but unfortunately shortly thereafter Mr Graham suffered difficult personal circumstances. In August 2019, Mr Southgate demanded repayment. At this point in time, the value of the ETH had reduced to c£20,000. Mr Graham repaid £6,000 in cash, which was treated by Mr Southgate as the return of 42.71 ETH, leaving 115.69 ETH outstanding. No further repayment was made and in January 2022, Mr Southgate sued Mr Graham for breach of contract seeking:

(a) an order for “specific performance” that Mr Graham to return 115.69 ETH; or
(b) damages equal to the value of 115.69 ETH at the date of judgment.

The matter came to trial in September 2023, by which point the value of 115.69 ETH had fluctuated in price up to c£350,000 when the claim was issued, and down to c£150,000 at the date of trial.

The County Court found that Mr Graham had been obliged to re-transfer the 144 ETH plus premium by midday on 1 October 2019 and was in breach by only returning the equivalent of 42.71 ETH. His Honour Judge Saggerson declined to order specific performance on the grounds that it would cause Mr Graham substantial hardship and directed that damages should be assessed by reference to the value of 115.69 ETH at the date of breach (that is, 1 October 2019).

Mr Southgate appealled to the High Court seeking to overturn His Honour Saggerson’s decision not to order specific performance or to alter the date of valuation.

Decision

The High Court upheld the trial judge’s decision to refuse specific performance but set aside the determination of the date of assessment of damages.

Specific performance

The High Court held that the trial judge was correct to refuse specific performance:

• Specific performance is an equitable remedy, and the Court has the discretion to decide whether specific performance should be ordered.
• An order for specific performance is backed by a penal notice and non-compliance would amount to contempt of Court. The trial judge was entitled to take the view that this would amount to hardship to Mr Graham as it would merely set him up to fail.
• There is nothing special about cryptocurrency which may additionally justify the grant of specific performance (unlike other property, which is unique in character).

Valuation date for assessing damages

The High Court held that the trial court was wrong to reach a settled view on the correct valuation date for the assessment of damages, but declined to make a determination on the same, and instead referred the matter back to His Honour Judge Saggerson to consider at a remedies hearing.

The question is valuation is a complicated one and is particularly difficult due to the high volatility of the value of ETH and the stakes involved for both parties.

The general legal principle is that the wronged party should be adequately compensated by being placed in the same position he would have been in had the agreement been performed.

On the one hand, in breach of contract claims, the date of breach is the usual valuation date, however, where damages are awarded in lieu of specific performance, the default position is that the valuation date is the date of judgment. Both of these general principals can be overridden depending on the facts of the particular case.

In order to determine the proper valuation date in this case, the Court will need to consider all relevant factors, including the following:

1. The two legal principals referred to above;
2. What Mr Southgate could and should have done once the breach of the agreement became clear to him and whether he could or should have taken steps to mitigate his loss by re-purchasing ETH
3. Whether Mr Southgate acted reasonably in pursuing the remedy of specific performance through to judgment.

Summary

The recognition by the Courts that an order of specific performance would have been unjust and resulted in hardship to Mr Graham is a welcome relief.

Mr Graham had never denied that he owed Mr Southgate, but had unexpectedly found himself in difficult circumstances, which meant he was unable to fully comply with the request for repayment. Our view, and that of the Courts, is that this does not justify the severity of a penal notice.

The final outcome of this matter is yet to be determined, and will involve a detailed factual investigation into what level of compensation will put Mr Southgate into the position he would have been in if the contract had been performed. Due to the highly fluctuating nature of ETH, the potential values that could eventually be awarded vary greatly.

The key message for anyone contemplating entering into a loan agreement involving cryptocurrency is to ensure it is properly documented. Repayment terms must sufficiently clear to ensure the parties know who bears the risk of the potential increase or fall in value.

If you find yourself facing difficulty in interpreting the obligations owed in respect of a loan of cryptocurrency, please get in touch.