BREACH OF CONTRACT – BLOCKCHAIN TECHNOLOGY
Rio Christofle v Tan Chun Chuen Malcolm [2023] SGHC 66 is an interesting case concerning a claim for breach of contract in the context of blockchain technology.
Facts. At the expense of oversimplification, the salient facts are as follows.
The plaintiff is Mr Rio Christofle, who was the sole director and shareholder of GCXpress Commerce Pte Ltd (“GCX”) (at [2]). GCX was set up for the business of “over-the-counter” trading of cryptocurrencies and had, up to 28 July 2020, an exemption from holding a licence under the Payment Services Act 2019 (“PSA”) for the provision of a digital payment token service.
The defendant was the managing director of Qrypt Technologies Pte Ltd (“Qrypt”), a company engaged in the business of “digital assets, blockchain, cryptocurrency and/or management consultancy services” (at [3]). At the material time, Qrypt was listed as an exempt entity in relation to digital payment tokens by the Monetary Authority of Singapore (“MAS”) and hence did not require a licence to operate as a payment service provider (at [15]).
The transaction in question occurred on or after 1 December 2020, which was after GCX allegedly – according to the plaintiff – ceased business (at [4] – [5]).
The plaintiff claimed against the defendant for breaching an agreement (“Agreement”) where the plaintiff agreed to sell to the defendant 12.14 Bitcoin at the price of S$320,000.00 (at [10]). The plaintiff’s alternative claim was for restitution based on a total failure of consideration (at [42]).
There were three issues before the High Court (at [45]):
“(a) Was the Agreement illegal, and thus unenforceable?
(b) Are both the plaintiff and the defendant the proper parties to the Agreement, as they were dealing in their personal capacities?
(c) Can the plaintiff succeed in its unjust enrichment claim?”
While the plaintiff’s claim ultimately failed as he was “not the proper party to the Agreement” and hence had “no standing to maintain the action in contract” (at [85]), it is interesting to note a few points of the decision.
Proper parties. The plaintiff and the defendant disagreed on who were the proper parties to the agreement.
The plaintiff’s case was that it was a simple sale agreement between the plaintiff and the defendant, not contingent on any other agreement (at [67]), for the plaintiff to sell to the defendant 12.14 Bitcoin for S$320,000.00 (at [10]).
On the other hand, the defendant’s case was that (at [31] – [32]):
There was a first agreement (“1st Agreement”) made between Qrypt and GCX for GCX to sell to Qrypt 12.14 Bitcoin for S$320,000.00;
There was a second agreement made between Qrypt and the buyers of the Bitcoin (“the Buyers”) for Qrypt to sell to the Buyers 11.982443 Bitcoin for S$320,000.00 (with 0.157557 Bitcoin being the 1% administration fee for facilitating the transaction);
Qrypt (acting through the defendant) was merely acting as the middleman; and
It was necessary for the 1st Agreement to be between Qrypt and GCX (and not in their personal capacities) given the requirements of the PSA, since at the material time “Qrypt was the only entity which had the sanction of MAS to carry out such transactions”.
Lee J found that “[t]aken in the round, a reasonable person would conclude that it was GCX who was the proper party to the Agreement, and not the plaintiff acting in his personal capacity.” (at [84]) Hence the plaintiff, not being a proper party to the Agreement, had no standing to maintain the action in contract (at [85]).
Lee J also found that the defendant was not the proper party to the Agreement (at [86]), stating that the “most important factor” was “the fact that it was Qrypt that held the exemption from holding a licence under the PSA for the provision of a digital payment token service” and “not the defendant. Therefore, the defendant could not have intended to enter into the Agreement in his personal capacity.” (at [87])
Lee J hence found that the defendant succeeded in defending the action (at [89]), and observed (at [88]) that:
“It appears to me that the plaintiff ought to have included GCX as a second plaintiff, and Qrypt as second defendant in pursuing this claim.”
Alleged scam. While both parties ultimately “agreed to proceed on the assumption that the defendant had been scammed”, so that no finding was made on this (at [44]), it appears that Lee J was prepared to find that even if the defendant was a victim of a scam, this was “irrelevant to his defence” to the plaintiff’s main claim for breach of contract and alternative claim for restitution (at [42]).
At the expense of oversimplification, three Buyers arrived at the premises for the proposed transaction with the cash of S$320,000.00 for the proposed transaction (at [23] – [24]; [30]), and the defendant had assumed that one of the three Buyers, who identified himself as Kenneth (at [23]), was the same Kenneth (“TK”) who had reached out to the defendant via Telegram Messenger (“Telegram”) (at [14]) and who had informed the defendant that he would be present with his staff (at [20]).
Among others, TK had emphasised to the defendant that there should be “no verbal communication” between Qrypt, the defendant and/or himself (i.e., TK), and all communications should be via the Telegram (at [20]).
Hence, after receiving 12.14 Bitcoin from the plaintiff on the day of the transaction, Qrypt (through the defendant) sent the 11.982443 Bitcoin to the Buyers at the wallet address previously provided by TK (“the Buyers’ Wallet”) (at [33]).
Once the defendant informed TK via the Telegram that 11.982443 Bitcoin had been successfully transferred from Qrypt to the Buyers’ Wallet, “[t]he defendant saw that TK suddenly deleted his entire Telegram message history with him.” (at [37])
As stated above, there was no finding made on whether the defendant had indeed been scammed.
But Lee J made a “final observation” on the Know Your Client (“KYC”) process which the defendant had to carry out (at [91] – [92]):
“92 It must be borne in mind that the defendant, at that time, was under the impression that Kenneth was TK, the ultimate buyer of the Bitcoins. The KYC process is for the purpose of guarding against money laundering and other criminal activities within the financial system. Even though he believed that Kenneth was the ultimate buyer, the defendant was prepared to forgo compliance checks on Kenneth and agreed to make the checks in respect of Ah You. It seems to me that a responsible exempt person ought to be suspicious if the transacting party refuses to undergo compliance checks and pulls in another person to provide that person’s particulars for a transaction that the transacting party makes. It would certainly make a mockery of the KYC process. But I emphasise that I make no judicial finding on this point as it is not relevant to the issues in this action. It is an observation I make from the Bench, on the evidence before me, and perhaps the relevant authority may look into whether this practice is a satisfactory one.”
Illegality. The defendant also raised in its closing submissions the issue of whether the Agreement was illegal and thus enforceable, although this was not pleaded in his defence (at [47]).
In considering whether the Agreement was ex-facie illegal under Singapore law, Lee J examined s 5 of the PSA (at [52]) and found that “[i]t is clear from the statutory wording of s 5 that it does not expressly declare that contracts for the sale and purchase of Bitcoin or cryptocurrency are illegal”, unlike s 5 of the Civil Law Act 1909 in relation to gambling contracts (at [53]).
S 5(1) of the PSA states as follows (at [52]):
“Licensing of payment service providers
5.—(1) A person must not carry on a business of providing any type of payment service in Singapore, unless the person —
(a) has in force a licence that entitles the person to carry on a business of providing that type of payment service; or
(b) is an exempt payment service provider in respect of that type of payment service.”
(emphasis added by the High Court)
Lee J then considered whether the statute did impliedly prohibit such contracts for the sale and purchase of cryptocurrencies and found that it did not (at [54] – [59]), as “[t]he point of s 5 [was] to penalise those caught providing such services without the requisite licence or exemption.” (at [56])
Therefore, Lee J found that the Agreement was not ex facie illegal (at [60]).
Lee J went on to consider whether the Agreement had an illegal object (to contravene s 5 of the PSA) (at [61]). Distinguishing the case of Public Prosecutor v Lange Vivian [2021] SGMC 11(“Lange Vivian”), Lee J found that the Agreement did not contravene s 5 of the PSA (at [61] – [66]). In particular, as set out at [64] – [66], Lee J found that as the plaintiff was merely selling Bitcoin in his possession, this did not attract liability under s 5 of the PSA as the plaintiff was neither providing any type of payment service nor carrying on a business of providing a payment service.
“64 In the present case, I do not think that the Agreement had an illegal object. There is no contravention of s 5 of the PSA. As that provision clearly states: “A person must not carry on a business of providing any type of payment service in Singapore” [emphasis added]. As can be gleaned from the facts of Lange Vivian, there appear to be three indicia which suggest that a person is carrying on a business of providing a type of payment service in Singapore. First, that a profit had been made. In Lange Vivian, the accused had pocketed a 10% commission. Second, the number of transactions in question. Again, in Lange Vivian, the accused had received 13 inward transfers and used that money to make an unspecified number of Bitcoin transfers to various unknown parties. Third, the role which the accused in Lange Vivian played in the transactions. It was evident that she was acting as an intermediary. Party A would pass the accused fiat currency through her bank account. The accused would then take the fiat currency and purchase cryptocurrency and facilitate the transfer of that cryptocurrency to Party B.
65 This requirement of “[carrying] on a business” was, in my view, a key element in establishing liability under s 5 of the PSA. After all, the PSA is meant to establish a regulatory framework to govern service providers, especially those who provided digital payment token services. It would be a step too far to hold that the mere buying and selling of cryptocurrency could expose one to liability under s 5 of the PSA. The third indicia which I have highlighted above is therefore, in my view, an important factor that distinguishes bona fide trading in cryptocurrencies from providing an unlicensed digital payment token service which would expose one to criminal liability under s 5 of the PSA.
66 In the present case, the plaintiff was selling Bitcoin in his possession to the defendant (who was either acting in his own personal capacity, or on behalf of Qrypt). It was clear to me that the plaintiff was not providing any type of payment service and certainly was not carrying on a business of providing a payment service. Therefore, the Agreement did not have an illegal object and did not contravene s 5 of the PSA.”
Significance. This is an interesting decision for what is essentially a claim for breach of contract in the context of blockchain technology, which, according to Lee J “poses a challenge to traditional financial structures” (at [1]).
Readers are encouraged to read the judgment to fully appreciate how the (mostly) trite laws and principles were applied to “modern” facts arising from the advent of technology. It also highlights the importance of ensuring that you verify the identity of the person you are transacting with carefully, lest you expose yourself to liability.
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