Enforcing Cryptocurrency Contracts

Part 2 of the “Smartblock Law Guide to Cryptocurrency Contracts, Litigation, Monetary Instruments, and Financial Institution Regulations in Canada”

Chetan Phull · April 26, 2018

The “Smartblock Law Guide to Cryptocurrency Contracts, Litigation, Monetary Instruments, and Financial Institution Regulations in Canada” is comprised of:

I. Introduction

This article is concerned with how to enforce a cryptocurrency-denominated contract, or defend against such enforcement. The reference herein to “Court” also includes arbitral tribunals unless stated otherwise.

A dispute between private commercial parties begins and ends with the parties’ rights and obligations as against each other.

While such rights and obligations tend to arise primarily from contract law, they can also arise from various statutes that supplement contract law.

Such statutes in Ontario include:

Consumer Protection Act, 2002, S.O. 2002, c. 30, Sch A;
Sale of Goods Act, R.S.O. 1990, c. S.1;
Securities Act, RSO 1990, c. S5; and
Negligence Act, RSO 1990, c N.1.

As indicated in Part 1, until Parliament addresses the Currency Act, R.S.C., 1985, c. C-52, cryptocurrency should be considered a commodity rather than “money”, to avoid the risk of voiding contracts denominated in cryptocurrency.

Likewise, a judgment or arbitral award for cryptocurrency is presently only possible in Canada if cryptocurrency is not considered “money”, and is not tied to “monetary value” (Currency Act, s.12).*

Therefore, a legal proceeding for cryptocurrency should proceed on the basis that cryptocurrency is a commodity (i.e., a type of good).

This approach is consistent with the law’s treatment of foreign currency as a commodity, in the context of obligations payable in foreign currency:

In English as well as American law, the courts adhered for many years to the “commodity theory” with respect to obligations payable in foreign currency. According to this theory, foreign currency was not treated as money in the sense of a medium of exchange, but as a commodity in the sense of an object of a commercial transaction. In this respect, foreign currency transactions were on more than one occasion likened to transactions involving chattels such as cows.

[Guy David in “Money in Canadian Law”, (1986) 65 Can. Bar Rev. 192 at 215.]

On the commodity view of cryptocurrency, the aggrieved party should seek the remedy of specific performance or a mandatory injunction, instead of damages.

II. Specific performance or mandatory injunction as the remedy

Specific performance is the remedy of compelling a person to perform a contractual obligation (G.H.L. Fridman, The Law of Contract In Canada, 6th ed. [Toronto: Thomson Reuters Canada, 2011] at 737; Chitty on Contracts, 29th ed., Vol. 1 [London: Sweet & Maxwell, 2004] at §27-004).

It is distinguishable from money awarded through the more common form of compensatory relief, known as “consequential damages” (see Hadley v Baxendale, [1854] EWHC J70).

Specific performance can also be the subject of an arbitral award (Arbitration Act, 1991, S.O. 1991, c. 17, s.31).

Since specific performance can be invoked to compel purely monetary promises (see Beswick v. Beswick, [1967] UKHL 2, [1968] AC 58), it is arguably also able to compel performance of promises involving quasi-money.

The invocation of specific performance for cryptocurrency obligations is supported by the following:

cryptocurrency as “software” appears to be subject to protections provided in the Sale of Goods Act (Bennett v. Lenovo, 2017 ONSC 1082 at paras. 13-16; The Software Incubator v Computer Associates [2016] EWHC 1587 (QB) at paras. 68-69); and
the Sale of Goods Act expressly permits the remedy of specific performance (see Sale of Goods Act, s.50).

Alternatively, if it is not as obvious that a contract is involved, the broader equitable remedy of a mandatory injunction should be investigated (see 1711811 Ontario Ltd. (AdLine) v. Buckley Insurance Brokers Ltd., 2014 ONCA 125 at paras. 49-59, 77-80, 86; Arbitration Act, 1991, S.O. 1991, c. 17, s.31).

A mandatory injunction should be sought where the relief claimed is restitution (for example, to reverse a mistaken cryptocurrency payment, or to address a cryptocurrency theft).

It should be noted, however, that if restitution is sought, the question of whether the blockchain ledger is itself admissible as evidence will be crucial.

While there is a clear basis for admissibility in at least one other jurisdiction (i.e., Vermont pursuant to 12 V.S.A. § 1913), this issue has yet to be addressed in Ontario.

III. Courts more likely to award CAD for restitution than specific performance

At common law, specific performance cannot be awarded as damages in disguise (Fridman at 741), particularly for contracts involving the sale of commodities (Chitty on Contracts at §27-011).

Moreover, mandatory injunctions will not be awarded at common law where damages are available and adequate (Traynor v. UNUM Life Insurance Co. of America, 2003 CanLII 40149 (ON SCDC) at para. 12).

However, these rules have been supplanted in Ontario by statute. (See Courts of Justice Act, s.99; Ben-Israel v. Vitacare Medical Products Inc., 1997 CanLII 12377 (ON SC) at paras. 48-49; Semelhago v. Paramadevan, [1996] 2 S.C.R. 415 at para. 11. See also Ontario's Securities Act, s.122.1(1), (7), 128(3) items 13-14.)

Therefore, the Court can potentially—with exceeding caution—award cryptocurrency in its CAD equivalent.

If this were done, the conversion date would be material due to volatility in cryptocurrency value. If the conversion mechanism was not spelled out in a contract or was in dispute, the Court would need to exercise its discretion to convert according to a date of its choosing (Courts of Justice Act, s.121(3)-(4)).

However, for specific performance awards, we expect that a Court would presently be reluctant to award a CAD equivalent of cryptocurrency, for reasons including the following:

If the contract involved an exchange of CAD for cryptocurrency, converting the cryptocurrency into a CAD award could render the contract a meaningless exchange of CAD for CAD.
An award for specific performance requires a binding contract (Fridman at 737-38; Chitty on Contracts at §27-003). A specific performance award of CAD in place of cryptocurrency may involve an acknowledgement that the cryptocurrency was functioning as “money” in the contract. On this basis, the contract may be void and not capable of being specifically performed (see Part 1).
An award for specific performance could invoke complicated securities law issues, which could frustrate performance. (See our articles on the developing concept of “security token”; the prospectus requirement; and the “business trigger” registration requirement.)

A mandatory injunction awarding CAD for cryptocurrency is probably less objectionable, because of the remedial intent to reverse a wrong.

IV. Conclusion

The laws of specific performance and mandatory injunctions are complex and demand fact-specific treatment.

They are remedies each arising from the court’s discretionary powers (Fridman at 738-39, 741, 746-47; Lomas v. Rio Algom Limited, 2006 CanLII 42681 (ON SC) at para 24).

If you have a cryptocurrency related dispute, we encourage you to view our Litigation & Arbitration service offerings, and complete our Client Intake Form.

* This likely applies to pleadings as well (Levine v. Pacific International Securities Inc., 1998 CanLII 6563 (BC SC) at para. 58).

Cryptocurrency settlements may also be possible (Champion International Corp. v. Sabina (The), 2003 FCT 39 (CanLII) at paras. 16-25; Trans North Turbo Air Ltd. v. North 60 Petro Ltd., 2003 YKSC 26 (CanLII) at para. 56).

However, because such settlements are contracts, they would presently be contingent on cryptocurrency not being “money” (see Part 1).

Continue to Part 3: Cross-Border Crypto Related Litigation.

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Enforcing Cryptocurrency Contracts