ZI WANG v GRAHAM DARBY

In a reciprocal cryptocurrency exchange, the obligation to return equivalent value before obtaining the cryptocurrency back is inconsistent with a trust. The court must characterise the transaction by objectively construing the parties’ commercial arrangement, rather than by relying on informal possessive language or familiar labels such as loan, sale or swap. A sale and buy-back structure transfers ownership and is antithetical to a trust over the transferred asset. Personal contractual obligations to use assets for a specified purpose or account for profits may remain enforceable, and may be accompanied by fiduciary duties, but cannot create a proprietary obligation to restore the assets where that would contradict the bargain. A worldwide freezing order may continue where the evidence establishes a real risk of unjustified dissipation.

The claimant and defendant entered into two related contracts involving the exchange of Tezos for Bitcoin. The claimant transferred 400,000 Tezos in two tranches and received 30 Bitcoins. The arrangements contemplated a minimum two-year period, subsequent reciprocal restoration, and payment of baking or staking profits.

The claimant alleged that the Tezos were held on express, resulting or constructive trust and that the defendant owed fiduciary duties. The defendant applied to strike out or obtain reverse summary judgment on the proprietary claims. The claimant also sought continuation of a worldwide freezing order. The central issues were the legal characterisation of the transactions, whether any trust or fiduciary duty arose, and whether dissipation risk justified continuation of the freezing order.

1. Disposition. The reverse summary judgment application was granted, save for the pleaded personal claims for equitable compensation and an account of profits based on independent fiduciary duties. The proprietary claims based on ownership or return of the 400,000 Tezos were struck out. The worldwide freezing order was continued on the basis of the surviving personal claims.
2. Summary judgment. Applying the approach in EasyAir Limited (t/a OpenAir) v Opal Telecom Limited [2009] EWHC 339 (Ch), the court considered that the proprietary claims could be finally determined because the relevant evidence was closed and the issues had been fully argued.
3. Trusts in commercial transactions. The court applied the objective-common-intention approach summarised in Re Lehman Brothers International (Europe) (In Administration) [2010] EWHC 2914 (Ch). Commercial arrangements should be interpreted purposively. A trust should not be imposed where personal rights sufficiently achieve the parties’ commercial objective, and a trust would instead frustrate the bargain.
4. Reciprocal exchange. The essential economic reciprocity of the transactions precluded a trust. The claimant could obtain the Tezos only by returning corresponding Bitcoin value. That was inconsistent with a beneficiary’s right to receive trust property and resembled a sale and re-purchase. The pleaded sale and buy-back structure transferred ownership and was the antithesis of a trust.
5. Types of trust. The express and Quistclose-resulting trust claims had no real prospect of success. The constructive trust claim also failed because the Tezos were fungible and non-identifiable, and the conditional obligation to return them could not be analogised to a specifically enforceable sale of land or unique property. The court noted obiter that an asymmetrical transfer of digital assets for baking or stake bonding might involve a trust, depending on all the circumstances.
6. Fiduciary duties. Independent fiduciary duties could potentially support personal claims concerning the generation and accounting of baking or staking profits. A fiduciary duty requiring return of the capital assets would, however, introduce a trust by the back door and would be inconsistent with the contractual structure.
7. Freezing order. Applying Lakatamia Shipping Company Limited v Morimoto [2019] EWCA Civ 2203, there was a real risk of unjustified dissipation. The defendant’s incomplete disclosure, control of digital wallets and apparent transfer and trading of the Tezos justified continuation of the order until further order.