Assessing the Validity of Online Arbitration Agreements: Lessons Learned and Recommendations for Tech and Blockchain Businesses

1. What happened?

In a recent arbitration ruling, the Arbitration Registrar (AR) dealt a decisive blow to Terraform’s application for a stay in arbitration proceedings, highlighting the importance for businesses, especially those in the tech and blockchain sectors, to meticulously incorporate arbitration clauses into their online contracts. The case revolved around the question of whether the arbitration clauses had been effectively integrated into contracts formed between Terraform and users visiting their websites.

2. Background

Terraform Labs encounter a substantial legal hurdle as a class-action lawsuit progresses in Singapore’s High Court. The legal action contends that Terraform’s promotion of TerraUSD was deceptive, resulting in a collective loss of $57 million for the claimants.

Terraform Labs’ legal team had sought to shift the case to an arbitration process, invoking the website’s terms of use, which purportedly required users to forgo their right to a trial and the ability to join a class-action lawsuit.

3. AR`s considerations

The AR emphasized the importance of users having actual or constructive notice of arbitration clauses, a factor hinging on whether the websites provided a legitimate opportunity for users to understand that their usage was subject to the Terms of Use/Service. The key findings by the AR were as follows:

• The hyperlink for the Terra terms of use was deemed inconspicuous, “tucked away at the bottom of the website” lacking the necessary prominence for a reasonably prudent user to take notice.
• The Anchor terms of service were not on the Anchor website’s homepage but could only be found within the “dashboard,” a separate tab, making it less accessible to users.
• The nature of the product promoted on the websites did not excuse the lack of prominence of the terms of use. Regardless of user sophistication, the terms should have been prominently displayed.
• Express notice of arbitration clauses to the contracting party was deemed essential. The facts did not establish that a reasonably prudent user would have actual or constructive notice of the terms of use, rendering the Arbitration Clauses improperly incorporated.

In an alternative argument, the AR held that even if a valid arbitration agreement existed prima facie, Terraform’s actions in the proceedings amounted to submission to the court’s jurisdiction.

4. Key-take aways

For businesses navigating the online landscape, this ruling underscores the need for clear and conspicuous presentation of arbitration clauses. To ensure enforceability, businesses should consider the following recommendations for their terms of use and/or their whitepaper:

1. Prominent Display: Arbitration clauses should be prominently placed on websites, easily accessible to users, and not hidden within obscure sections. Ensure that essential terms are not buried in separate tabs or dashboards but are readily available on the main pages for easy user access.
2. Clear Hyperlinks: Hyperlinks leading to terms of use, including arbitration clauses, should be clear and easily identifiable to users, ensuring that they are aware of the terms they are agreeing to.
3. Tailored Approach: Recognize the nature of the product or service being offered and adjust the presentation of terms accordingly. Important legal provisions, such as arbitration clauses, should be conspicuous irrespective of user sophistication.
4. Express Notice: Take proactive steps to draw attention to critical terms, especially arbitration clauses, to ensure that contracting parties are expressly made aware of their existence and implications.
5. Smart Contract Integration: Explore the use of smart contracts to automate the incorporation and notification of arbitration clauses within blockchain-based transactions, ensuring transparency and efficiency. Implement decentralized mechanisms for providing notice of crucial terms, leveraging blockchain technology to enhance transparency and traceability.

In conclusion, businesses should be vigilant in their approach to online contract formation, understanding that the incorporation of arbitration clauses requires more than mere inclusion in terms and conditions/whitepaper. Proactive steps to inform users and ensure their understanding of these clauses are vital for creating enforceable online agreements.

5. Prima Facie Presumption

“Prima facie” is often used to describe the initial or apparent validity of a claim or the existence of an arbitration agreement. When parties enter into a contract that includes an arbitration clause, there is a presumption that any disputes arising from that contract will be resolved through arbitration.

The utilization of a prima facie procedure for businesses seeking a stay of court proceedings in favor of arbitration is contingent upon satisfying well-established jurisprudential conditions:

• there is a valid arbitration agreement between the parties to the court proceedings;
• the dispute in the court proceedings (or any part thereof) falls within the scope of the arbitration agreement; and
• the arbitration agreement is not null and void, inoperative or incapable of being performed.

6. Collective actions in the context of European Union legislation

In the context of European Union (EU) law, an action could be brought before the Court of Justice or the General Court based on an arbitration clause contained in a contract concluded by or on behalf of the EU, whether governed by public or private law, which expressly provides (by way of derogation from the rules of ordinary law under which disputes arising out of such contracts are subject to the jurisdiction of the courts of the EU Member States) for jurisdiction to be exercised by one or other of the courts making up the Court of Justice of the European Union.

Thus, under Article 272 of the Treaty on the Functioning of the European Union (TFEU), the Court of Justice of the European Union is able to give judgment pursuant to any arbitration clause contained in a contract concluded by or on behalf of the EU, whether that contract be governed by public or private law.

Furthermore, European Commission`s Recommendation of 11 June 2013 (2013/396/EU) on common principles for injunctive and compensatory collective redress mechanisms in the Member States concerning violations of rights granted under Union Law states the following:

“(15) Collective redress mechanisms should preserve procedural safeguards and guarantees of parties to civil actions. In order to avoid the development of an abusive litigation culture in mass harm situations, the national collective redress mechanisms should contain the fundamental safeguards identified in this Recommendation. Elements such as punitive damages, intrusive pre-trial discovery procedures and jury awards, most of which are foreign to the legal traditions of most Member States, should be avoided as a general rule.

(16) Alternative dispute resolution procedures can be an efficient way of obtaining redress in mass harm situations. They should always be available alongside, or as a voluntary element of, judicial collective redress.”.

In conclusion, within the framework of EU legislation creates an opt-in system. Therefore, tech and/or blockchain businesses incorporating properly agreed arbitration clauses (according to Section D of this article) in their website’s terms of use or white-paper are not only allowed but also encouraged to pursue collective arbitration as a viable mean for dispute resolution.

Huială Mihai-Cristian, Associate