Key takeaways
In the recent case of Oliver Southgate v Adam Graham [2024] EWHC 1692 (Ch), the English High Court provided guidelines on the valuation of cryptocurrency in contractual dispute against the backdrop of a highly volatile market.
Background
The case concerns the transfer of Ethereum tokens (“ETH”). In June 2018, the Respondent was in dire need of £50,000 to deal with certain financial responsibilities. This led to an oral agreement between the parties whereby the Appellant transferred 144 ETH (valued at £50,000 at the time) to the Respondent, which would be repaid/returned by the Respondent with a 10% premium in due course.
In late September 2019, upon the Appellant’s demand, the Respondent repaid £6,000, which was treated by the Appellant as the return of 42.71 ETH, leaving 115.69 ETH outstanding. No further repayment in any form was made thereafter. The Appellant sued the Respondent for breach of contract seeking for (i) a Court order directing the Respondent to return the outstanding ETH (that is, an order for “specific performance”); and (ii) alternatively, damages equal to the outstanding ETH valued at the date of judgment.
The trial judge at the County Court found that the Respondent was obliged to re-transfer the 144 ETH plus premium by midday on 1 October 2019. The Respondent was therefore in breach of the agreement to the extent of failing to return 115.69 ETH. Nonetheless, the trial judge refused to order specific performance and directed that damages should be assessed at the date of breach (that is, 1 October 2019).
The Appellant appealed to the High Court against the trial judge’s decision as to remedy, as (i) the value of ETH had gone up substantially (estimated at £350,000 for the outstanding ETH at the time of appeal on 21 June 2024); and (ii) the value of the ETH at the date of breach was substantially less than that at the time of transfer.
Decision
The High Court upheld the trial judge’s decision to refuse specific performance but allowed the appeal in relation to the date of assessment of damages.
Specific performance
The High Court held that the trial judge was correct to refuse specific performance:
- The Court has the discretion to decide whether specific performance should be ordered. The Court usually will not order specific performance if the defendant does not have “a legitimate interest extending beyond pecuniary compensation for the breach” (at [30]).
- In this case, non-compliance with an Order for specific performance would amount to contempt of Court. The trial judge was entitled to take the view that this would amount to hardship to the Respondent, and to refuse to grant specific performance solely on such basis (at [35]).
- While specific performance can be ordered in an appropriate case, there is nothing special about cryptocurrency which may additionally justify the grant of specific performance (at [38]).
- The argument that damages were an inadequate remedy as a result of method of computation should be addressed by adopting the correct approach for assessment of damages, rather than “by seeking to stretch the remedy of specific performance beyond its proper bounds” (at [39]).
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:
- The general 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 (at [50] to [53]).
- While the date of breach is usually the proper valuation date, the Court is free to depart from such general rule if it results in inadequate compensation (at [54]).
- Whether the Respondent should be liable for the shortfall (that is, the difference between the valuation of ETH at the date of judgment and the date of breach) is fact-sensitive and depends on the application of rules relating to remoteness of damages and mitigation of losses (at [55]). Two questions are of particular relevance:
- what the Appellant could and should have done once the breach of the oral agreement became clear to him (at [61]). The fact that the oral agreement is closer to a loan agreement than a sale agreement is relevant to the scope of the Appellant’s obligation to mitigate his loss by entering into a substitute agreement (at [57]); and
- whether the Appellant acted reasonably in pursuing the remedy of specific performance through to judgment (at [69]).
- Henceforth, the High Court directed that these issues on measure of loss should be determined in a subsequent remedy hearing (at [72]).
Commentary
Given the volatile nature of cryptocurrencies, the date of assessment of value often has a significant impact on the amount of damages recoverable in a cryptocurrency dispute. Southgate v Graham serves as a timely reminder that the date of assessment is not immutable and could be varied based on the facts of the case and even how the claim is being pursued.