The Story Behind Hong Kong’s First Crypto-Litigation (Part 3): Enhanced Duty to Mitigate for Blockchain Transactions?

Editor’s Note: For the first two parts of this series, please see the Industry Insights section in the Hong Kong Lawyer’s August and September 2018 issues.

EAt the foundation of each transaction dispute is whether the suing plaintiff has fulfilled his duty to mitigate his losses. Where a plaintiff has done nothing to mitigate his losses, his claim is quintessentially a non-starter.

This is especially true for blockchain-based transactions given the fact that (unlike cash), the entire transaction is recorded online. As a result, where the trails often run cold relatively quickly for cash transaction, on the blockchain, the trail for such transactions will always be hot as anyone can find out exactly where their bitcoins are located (no matter how many times such bitcoins may have had changed hands).

Given the aforesaid, blockchain will always provide recourse for an aggrieved party (provided that such aggrieved party is willing to act upon it).

Background

One of the interesting facts raised by the defence in Hong Kong’s first crypto-litigation is the fact that instead of taking action to preserve the plaintiff’s stake in supposedly mis-transferred bitcoins, the plaintiff doggedly went after the exchange instead (though said ‘mis-transference’ might not have been the fault of the exchange at all). The following are relevant facts:

On 13 June 2015 the plaintiff discovered that they had transferred 500 bitcoins to an account not initially intended by the plaintiff (though the intention of the plaintiff’s staff who orchestrated the transaction was never examined).

On 29 June 2015, the plaintiff, instead of taking any action against the account receiving the unintended transfer, wrote to the defendant saying “… If you [1st defendant] can take the loss, it will end it in an easy way, which will be good for both of us… and we [plaintiff] can get our money back”

On 25 June 2015, the defendant informed the plaintiff that no malicious actors were involved in the plaintiff’s mis-transference and suggested that the incident may have been caused by the plaintiff’s own negligence during the transaction or by the plaintiff’s staff.

By August 2015, the plaintiff has engaged a law firm in Hong Kong to commence legal proceedings against the defendant. Meanwhile, the plaintiff’s 500 bitcoins remained in the same wallet address.

It was not until 17 September 2015, some four months after the ‘wrongful transfer,’ that the 500 bitcoins were transferred out of the unintended wallet.

Accordingly, it can be said that the plaintiff wasted four months doggedly demanding the defendant to “take the loss” instead of taking action against the said ‘unintended’ wallet address. The plaintiff’s 500 bitcoins simply sat undisturbed during this entire time (interestingly, they were moved after the litigation against the defendant).

Discussion

One of the key features of the blockchain is that an entire transaction is captured. As a result, unlike cash transfers (where the trail will go cold after going through one or two accounts), the disposition of specific transactions can be traced with little to no effort.

Accordingly, the plaintiff in this case was at all times fully capable of locating where its 500 bitcoins were situated, and could have taken action against the same.

Being a major player in the bitcoin market as the leading bitcoin mining hardware manufacturer, the plaintiff was fully capable of informing all major exchanges to mark the said bitcoin as ‘contaminated’ whereby, any attempts to liquidate the same will be flagged and/or prevented entirely.

It was therefore the defence’s case that the plaintiff completely failed their duty to mitigate given the fact that plaintiff was always in a position to take actions to recover their lost bitcoins.

Take Away Points

In the pre-digital past, it was often seen that an aggrieved party’s duty to mitigate was not always a duty taken seriously. However the advent of blockchain enables an aggrieved party to take action, on the other hand, and also raises the question as to whether the bar for mitigation of losses has just been raised (especially for transactions on the blockchain).

This article therefore highlights the following:

1. Always consider what you can do to minimise your losses. Blockchain today has enabled parties to better pursue the underlying objectives of the CJR as they can always take action (as long as they are willing).

2. Identify who has the item in dispute. Duty to mitigate aside, it is never advisable to recklessly chase against a party that might not have anything to do with your losses. Find out where your bitcoins are and recover it. Fault-finding is never helpful in any situation.

Jurisdictions: 

Solicitor, GPS McQuhae (Hong Kong)

Joshua Chu is Litigation Consultant at GPS McQuhae LLP in Hong Kong. He specialises in corporate, healthcare and technology law and has experience in cross-border and conflict of laws dilemmas. Joshua has also represented the successful Defendant in one of Hong Kong’s first cryptocurrency litigation.

Since embarking on his legal career, Joshua has developed a predominantly civil practice with a focus on general civil, commercial, company and technology. He has represented Clients in all levels of Court in a wide range of commercial and criminal litigation. 

Solicitor, GPS McQuhae (Hong Kong)

Anna Lau is Litigation Consultant at GPS McQuhae LLP in Hong Kong. A biomedical engineer by training, prior to her embarkation onto her legal career, Ms Lau had worked closely with the United States Patent and Trademark Office (USPTO) and US Food and Drug Administration (FDA) on intellectual property and FDA regulatory work.

Her unique skill set enables her to expertly deal with Technology/Intellectual Property law, being able to use an engineer’s perspective to understand each individual client’s need and advise them in their own (tech) language. Anna was part of the team that represented the successful Defendant in one of Hong Kong’s first cryptocurrency litigation.