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Injunction granted over stolen NFTs held on constructive trust

10 June 2022. Published by Christopher Whitehouse, Senior Associate and Dan Wyatt, Partner and George Fahey , Associate

In a highly anticipated judgment, the Commercial Court in Lavinia Deborah Osbourne v (1) Persons Unknown (2) Ozone Networks Inc held that "there is at least a realistically arguable case" that non-fungible tokens ('NFTs') are to be treated as property in English Law.

Although there is now a reasonable body of case law that has determined at an interim stage that cryptocurrency is property, the expansion of these principles to cover NFTs is novel, and therefore the case represents a further milestone in the development of crypto case law in England.

The NFT theft

The claimant, Lavinia Deborah Osbourne, the founder of Women in Blockchain Talks, brought proceedings against the persons unknown who had allegedly transferred without her consent two NFTs from her digital wallet with OpenSea, a peer-to-peer NFT marketplace. The NFTs had been gifted to Ms Osbourne and were part of a collection created by the company Boss Beauties Inc. of "digital portraits to capture the empowered women they want to see and be in the world". 

Ms Osbourne was able to trace the NFTs to two other OpenSea wallets but was not able to identify the owners of the wallets in question.

The application

Similar to cryptocurrency misappropriation cases such as AA v Persons Unknown2, Re Bitcoin  and Ion Science v Persons Unknown3,  the claimant applied for what has now become the standard suite of relief in such cases, namely:

(1) an interim proprietary injunction to freeze the NFTs until the end of proceedings such that they could not be dissipated; and

(2) a 'Bankers Trust' order compelling the operator of OpenSea, a US company called Ozone Networks Inc (which was the second defendant in the proceedings) to provide the contact information of the individuals in control of the wallets to which the NFTs had been traced. 

The court granted both heads of relief. 

The injunction

In reaching its decision regarding the injunction, the Court considered two key issues:

(1) First, whether to grant an injunction (paragraphs 17 to 20 of the judgment), the relevant test for which comprises the following:

a. There being a serious issue to be tried on the merits of the case.
b. Whether damages would be an adequate remedy.
c. The balance of convenience.

(2) Second, whether to grant permission for the claim to be served out of the jurisdiction (paragraphs 21 to 30 of the judgment), the test for which comprises the following:
a. Whether there is a serious issue to be tried on the merits of the case.
b. Whether a good arguable case has been shown that falls within one of the jurisdiction gateways in Practice Direction 6B.
c. Whether England is clearly the most appropriate forum.

NFTs are property under English Law

As a preliminary matter, the judge considered that there was an arguable case that NFTs were 'property' under English law, which is a prerequisite for granting proprietary relief over an asset. Although the judge did not provide his reasoning it is to be assumed that it would follow the same lines as set out in AA v Persons Unknown, Re Bitcoin which adopted the reasoning in Legal statement on cryptoassets and smart contracts.

NFTs can be the subject of a trust and lex situs

When considering the good arguable case requirement, the judge considered that the strongest cause of action available to Ms Osbourne (of the various causes of action pleaded) was that the NFTs were held by the persons unknown on constructive trust for her (a cause of action that would not be available if NFTs were not considered property as outlined above). In this regard, the proposition that a cryptoasset could in principle be the subject of a trust was stated obiter in Wang v Darby5.  However, this case is the first time the point has formed a part of the ratio of a judgment.

Such a constructive trust claim falls within gateway 15 of Practice Direction 6B provided the subject matter of the trust relates to assets within the English jurisdiction. Whether the claim fell within the relevant gateway was therefore contingent on whether lex situs (i.e. the legal location) of the NFT was in England.

In this regard, the judge also saw no reason for departing from the position in cryptocurrency cases regarding the lex situs because the relevant cryptoasset was an NFT. The judge referred to Ion Science v Persons Unknown which held that the lex situs of a cryptoasset (in that case bitcoin) is the location its owner is domiciled.5 

Damages as an appropriate remedy

When considering whether damages would be an adequate remedy from Ms Osbourne's perspective, the Court noted that the NFTs' market value was modest (approximately £4,000). However, the Court recognised that they had significant "personal and unique value to the claimant". The personal value ascribed to them by Ms Osbourne meant that, if they were lost to her, it would be inadequate for the thieves to simply compensate her by making a damages payment following a future legal claim. This argument is novel in crypto case law and arises from the non-fungible character of NFTs. 

In practice this argument, while helpful, is unlikely to make a material difference in most cases as the 'damages as an adequate remedy' criterion is met because absent knowledge of the thieves' identities there is no evidence that they would be able to satisfy a monetary judgment for a significant sum (see for example the reasoning in paragraph 17 of Ion Science v Persons Unknown).  However, in a claim brought against an identified defendant such an argument might permit a claimant whose NFT was misappropriated to bring an injunction when they could not otherwise had it been cryptocurrency that had been stolen.

The real value of the subjectivity finding is that it appears to have been the reason the claim was heard in the Commercial Court, which the modest claim value would usually have precluded. This is good news for victims of NFT fraud who may be able to issue in the Commercial Court for smaller claim amounts than if the misappropriated asset had been a cryptocurrency.

The Bankers Trust order

The Court considered, amongst other things, whether to grant Ms Osbourne permission to serve a Bankers Trust order out of the jurisdiction on US company Ozone Networks.  The Court granted permission under the 'proper party to the claim' gateway (i.e. gateway 3) which is consistent with the approach in other crypto cases such as Ion Science v Persons Unknown

A novel feature of the order given, at least in the context of crypto case law, was the express provision of a right to Ozone to apply to vary or discharge the order within a fixed time period and the delaying of the obligation to comply with the terms of the order until after the disposal of such an application (if made), which the judge considered to be an important safeguard to add in circumstances where the potential risks to Ozone in providing the information might not have been fully appreciated. In this regard, it is noteworthy that there is no recorded case to date where an exchange / platform has sought to resist an information request order and it will be interesting to see whether that trend continues.

Conclusion

The Osbourne case represents a key milestone in the legal treatment of NFTs under English law, bringing them in line with existing authorities in relation to cryptocurrencies. Future claimants can expect NFTs to be treated as property by the English Courts, which can be subject to a trust, and which will 'exist' (for legal purposes) in the place where their owner is resident.

It is however important to bear in mind that 'without notice' applications, such as the one in this case, are heard in the absence of the other parties who do not have the opportunity to argue against the claimant's legal position. The tests used by the court in granting the freezing and Bankers Trust orders were whether the claimant's case was realistically arguable, which is a lower bar than a case being proven on the balance of probabilities at a fully contested trial. However, decisions such as this do sit in line with the helpful growing body of influential judgments that are shaping English law in relation to cryptoassets.

Finally, while this case is novel in the English Courts, it is noteworthy that in a recent Singapore case the Court also granted a proprietary injunction in favour of an NFT investor to freeze the sale and ownership transfer of a Bored Ape Yacht Club NFT. This represents another example of the convergence of legal systems around the world to recognise and protect ownership of digital assets.

1[2022] EWHC 1021 (Comm)
2[2019] EWHC 3556 (Comm)
3(unreported) [2020] (Comm)
4[2021] EWHC 3054 (Comm)
5It should however be noted that this finding conflicts with the judgment in Tulip Trading v others  (which was handed down after the hearing in this case) which held that the relevant test was actually of residence rather than domicile, which represents the better analysis and the one which is likely to be followed in the future.

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