Service by NFT – Implications for arbitral proceedings

By Harriet Jones-Fenleigh, Aditya Badami, and Olivia Fox, Norton Rose Fulbright LLP

In the recent High Court decision of D'Aloia v Persons Unknown & Others [2022] EWHC 1723 (Ch), the court allowed service out of the jurisdiction by means of distributed ledger technology, in a novel application of the technology. The claimant, Mr D’Aloia, commenced proceedings against persons unknown alleging fraudulent misappropriation of cryptocurrency. In particular, Mr D’Aloia alleged that he was the victim of a scam to induce him to transfer USDT and USDC from his Coinbase and Crypto.com wallets to persons unknown, those persons sitting behind a website with the name ‘www.tda-finan.com’. The case raises the prospect of adopting this method of service in the context of arbitral proceedings, which we consider in this blog.

In D’Aloia, the court granted the claimant an order permitting service of proceedings on the defendants via a non-fungible token (NFT) on a blockchain. The judge explained that service by NFT was effectively a form of airdrop into the tda-finan wallets into which the claimant had transferred cryptocurrency. The court determined that service effected this way would ‘embed the service in the blockchain’. This would create an immutable record of the service. In granting the application, the judge stated that he was satisfied that ‘in this particular case, it is appropriate for service to be effected by NFT in addition to service by email’, and that permitting service by NFT was ‘likely to lead to a greater prospect of those who are behind the tda-finan website being put on notice of the making of this order [for injunctive relief], and the commencement of these proceedings.’

The court’s reasoning makes it clear that its decision to allow service by NFT was restricted to the particular facts of the case before it. A claimant seeking permission to serve proceedings by NFT must satisfy the court that doing so is appropriate in the circumstances. In D’Aloia the fact that the claimant was able to establish a  prima facie basis for alleging fraud and misappropriation of crypto assets against individuals allegedly hiding behind a website seemingly weighed in favour of permitting service by alternate means. Another factor that appears to have persuaded the court was that service by NFT would result in the claim documents being airdropped into the digital wallets into which the claimant made payment. It is not clear, however, that service by NFT would be considered appropriate in a non-crypto case against anonymous (or difficult to trace) defendants.

Since D’Aloia, there has been a further case in which the High Court permitted, for the first time, exclusive service of court proceedings by NFT (Osbourne v. Persons unknown and others [2023] EWHC 39 (KB)). The case again involved victims of crypto-asset fraud, such fraud involving an anonymous hacker.

In view of D’Aloia and Osbourne, claimants in arbitral proceedings may seek to apply the court’s reasoning in an attempt to effect service of arbitral documents by NFT. As in the D’Aloia case, this approach may be useful where the defendants to arbitral proceedings are difficult to trace by ordinary means, but are known to operate on the blockchain to which the NFT transmitting service could be embedded. However, a claimant in arbitral proceedings hoping to effect service by NFT would need to carefully consider whether their proposed service method complied with all relevant requirements. This would include confirming whether:

• the parties have specified in their arbitration agreement how any proceedings should be commenced and the method of service for any notices and/or documents;
• the parties have chosen  to include, in the arbitration agreement itself, reference to applicable institutional rules (i.e. ICC, LCIA, UNCITRAL), as the selected rules may prescribe requirements for service of documents; and
• the applicable procedural law (usually that of the seat of arbitration) mandates any requirements for service.

If the applicable procedural law is English law, then section 76 of the Arbitration Act 1996 will be relevant.  Section 76 states that:

‘(1) the parties are free to agree on the manner of service of any notice or other document required or authorised to be given or served in pursuance of the arbitration agreement or for the purposes of the arbitral proceedings

(2) if or to the extent that there is no such agreement the following provisions apply

(3)  A notice or other document may be served on a person by any effective means.’

Parties should also be mindful of case law interpreting section 76, including Glencore Agriculture Bv V Conqueror Holdings Ltd [2017] EWHC 2893 (Comm) and Bernuth Lines Ltd v High Seas Shipping Ltd (The Eastern Navigator) [2006] 1 Lloyd's, confirming the importance of the factual matrix in each case:

‘Section 76(3), when providing that a notice could be served upon a person by any effective means was, in my judgment, purposely wide. It contemplates that any means of service will suffice provided that it is a recognised means of communication effective to deliver the document to the party to whom it is sent at his address for the purpose of that means of communication (e.g post, fax, or e-mail).’

The court’s willingness to permit service by NFT in D’Aloia and Osbourne therefore presents an opening in the context of arbitrations for parties to explore the same service mechanism. The viability of doing so, however, turns on the relevant requirements under the prevailing arbitration agreement, the applicable institutional rules, and the applicable procedural law. Although this approach to service may be effective, depending on the circumstances of the parties’ particular arbitral arrangement and the background facts to the dispute, given its novelty it may give rise to costly satellite disputes regarding jurisdiction and the effectiveness of the notice itself.

Want to see more from the Arbitration Blog? Click here.