Notable cases

Gate Mena DMCC v (2) Huobi Mena FZE v (1) Tabarak Investment Capital Ltd (2) Christian Thurner (2020) TCD 001

The DIFC Court’s Technology and Construction Division considered its first cryptocurrency case in relation to a claim for failure to guard against the theft of bitcoins. It is the first DIFC claim to consider the legal status of cryptocurrency. The case came before Justice Sir Richard Field who handed down judgment on 5 October 2022 and dismissed the Claimants’ claims.

The Claim concerned the attempted sale of 300 Bitcoins (“BTC”). Justice Field found that Tabarak Investment Capital Ltd (“Tabarak”) was not liable in negligence for the loss of 300 BTC and in doing so found that the additional claims failed.

In December 2019, Gate Mena was introduced to Mr Evgeniy Morozov, a buyer, who expressed interest in purchasing 300 BTC from Gate Mena through several transactions. Gate Mena approached Tabarak to facilitate those transactions in a manner which would ensure that the BTC would be released to Mr Morozov without Gate Mena receiving payment. The material facts of the case relate to a meeting that took place on 3 October 2020 at Tabarak’s offices. The purpose of the meeting was to carry out a pre-arranged transaction by which Huobi would sell 300 BTC to Navarcon (a company registered in the Slovak Republic, as a corporate vehicle for the acquisition of, and trading in, cryptocurrencies including BTC), at a price to be fixed by reference to the wholesale prices on the cryptocurrency exchanges. On behalf of Tabarak, Mr Christian Thurner (employed by Tabark as its Director of investments) set up the wallet to receive the BTC and used the wallet to generate the twelve-word seed phrase required to access funds in the wallet.

A representative of Tabarak recorded the first six words of the twelve-word seed phrase and then passed the wallet to Mr Morozov (a Russian citizen who represented that he was acting for a group of investors which used Navarcon). Mr Thurner said that this was to allow Mr Morozov to record the second six words of the seed phrase. Mr Morozov insisted that the wallet be used for the transaction and advised that once the BTC were transferred to the wallet, it would be held in Tabarak’s safe, to which only it had access. Gate Mena transferred a total of 300 BTC to the wallet and during the course of the day, 299.90 BTC were transferred out of the wallet and no payment was received by Mr Morozov.

The principal claim advanced was against Tabarak. Its claim against Mr Thurner proceeded on the basis that he was not acting for and on behalf of Tabarak in his dealings with Huobi but instead was acting on his own personal account. In relation to the means by which the 300 BTC were misappropriated using the wallet, Justice Field accepted the joint opinion by three experts as to the compulsory verification stage in setting up the type of Trezor Wallet brought by Mr Morozov to the meeting and found on the balance of probabilities that Mr Morozov and Mr Socin (who attended the meeting to assist Mr Morozov) obtained all of the 12 words of the seed phrase by using a scrolling facility provided by the Tezor Wallet and then used those words dishonestly to misappropriate the 300 BTC by remotely accessing the Wallet.

Justice Field found that the agreement held to have been concluded between Huobi and Tabarak never became a binding contract by reason of the failure to pay the account opening fee in advance of the transaction. The question then before the Court was to consider what enforceable legal duties Tabarak owed Huobi in respect of the events that occurred during the meeting. The Court therefore had to consider whether Tabarak and/or Mr Thurner had a non-contractual liability for the loss of the 300 BTC. In doing so, Justice Field accepted that Bitcoin are property as was held by Bryan J in AA v Unknown Persons [2019] EWHC 3556 (Comm).

In determining the claim in tort, Justice Field considered the fact that Mr Morozov insisted that the transaction be done using one of the two Trezor Wallets he had come with. Mr Thurner and through him, Tabarak, acted in the honest but mistaken belief that, if the mnemonic were split into two with Mr Morozov and Mr Socin having access only to the remaining six words of the seed phrase, neither side could get access to the 300 BTC once they had been transferred to the wallet. Like the Huobi team attending the meeting, he did not know that the Trezor wallet could be prompted to reveal the whole mnemonic phrase either by scrolling up or by deliberately inputting a small number of seed words that were not part of the mnemonic. Justice Field found that, in acting as he did, setting up the wallet and passing it to Ms Zavyalova (employed by Tabarak to act as Mr Thurner’s assistant) and then to Mr Morozov stating, when asked, that he had no concerns about the proposed use of the Wallet because it would be locked in Tabarak’s safe, Tabarak/Mr Thurner were not in breach of an actionable duty of care owed to Huobi. Justice Field held that the relationship between Tabarak/ Mr Thurner was not sufficiently proximate for the alleged duty of care in respect of how the Trezor Wallet was handled to exist and, that the Claimants failed to establish that Tabarak/Mr Thurner owed the alleged duty of care in respect of the assurances given by Tabarak/Mr Thurner.

Tabarak was found not to be liable in negligence for the loss of the 300 BTC and flowing from that the Claimants’ additional claims failed in their entirety. It was held that Tabarak did not misuse the alleged confidential information in consideration of a claim for breach of confidence under Article 37 of the Law of Obligations. Similarly, Tabarak’s care of the BTC was held to be reasonable and as such the claim for breach under Article 71 of the Law of Obligations was rejected. Tabarak was not in breach of the standard set out in Schedule 3, para 5 of the Law of Obligations and was therefore not in breach of fiduciary duty under Article 158(1) of the Law of Obligations. The Claimants submitted that Tabarak was in negligent breach of Regulatory Obligations (GEN 4.2.2, GEN 4.2.3; and GEN 4.2.6) which the Court rejected and found Tabarak was not therefore liable for damages under Article 194 of the Regulatory Law.

The Claimants’ have appealed Justice Field’s decision on several grounds. The appeal concerns a point of law in relation to the claim for breach of confidence, a point of law and against a finding of fact in relation to the claim for breach of contract, against a finding of fact and on a point of law in relation to the claim for negligence, on a point of law in relation to the claim for fiduciary duty and in relation to serious procedural irregularity.