About this case
This was a legally novel case as it was the first time the defence of unilateral mistake was raised in the context of algorithmic trading and the formation of contracts by such means – a first in cryptocurrency cases.
Facts & Background
Quoine is a cryptocurrency exchange platform operator, while B2C2 Ltd traded on QuoineExchange. Simply put, they were market makers on the platform and created liquidity.
In brief, B2C2 sold one type of cryptocurrency, Ethereum (ETH), for another type, Bitcoin (BTC), at about 10 BTC for 1 ETH. This trading rate was approximately 250 times higher above the market rate, which was around 0.04 BTC for 1 ETH then.
This was due to Quoine failing to make necessary changes to critical operating systems, leading to the 13 trades (“the Disputed Trades”) taking place on 19 April 2017 between B2C2 and two other users of the Platform, Pulsar Trading Capital and Mr Yu Tomita (who will be referred to as “the Counterparties”).
The next day, when Quoine realised that the Disputed Trades had taken place, it deemed the rates at which the trades took place highly abnormal and thus unilaterally proceeded to cancel the trade and reverse the transactions.
B2C2 then commenced proceedings against Quoine for a breach in contract and/or breach in trust.
Central issue
What was both compelling and challenging about this case was the question of whether Quoine could invoke the doctrine of unilateral mistake in the context of algorithmic trading as its defence, to justify their act of reversing the Disputed Trades unilaterally.
Essentially, the doctrine of unilateral mistake renders a contract void (or vitiates it) when one party enters the contract while being mistaken about a fundamental contract term, and the other party has constructive or actual knowledge of the mistake.
In other words, the law on unilateral mistake is concerned:
- With a type of class of mistake, that is one concerning the fundamental terms of the contracts (at least in common law); and
- With the mental state of the non-mistaken party – whether it knew (or ought to have known) of the (type of) mistake and was acting to take advantage of it.
In this case, there were two questions that needed to be answered. Firstly, whether the counterparties were mistaken about the belief that all contracts entered via deterministic algorithm should be of normal market rate, given that the Disputed Trades were carried out by a deterministic algorithm.
Mistake as a fundamental term of the contract
The majority held that the Alleged Mistake (of trades being 250 times above normal market rate) was not considered a fundamental contract term, although the counterparties held this mistaken belief. It was held that Quoine cannot be mistaken about the Alleged Mistake above. This was because the algorithm program had functioned as intended, to make as much profit as possible by capitalising on the inputs that entered into the algorithm, consequently entering in a contract based on that data and produced terms of the Trading Contracts. In fact, the court held that it was instead a mistaken assumption about how the platform operates, which would not invoke the doctrine of unilateral mistake. The onus is on the programmer of Quoine to set the relevant limits and disallow trades at unprecedented rates such as this.
Knowledge possessed by B2C2 of the mistake
Secondly, there is a second question of determining whether B2C2 had actual knowledge of the mistake. It was held that B2C2 did not possess actual knowledge of the mistake.
To establish knowledge, 3 factors are considered:
- Whose knowledge,
- When the knowledge was acquired,
- Quality of the knowledge.
To this end, it was B2C2’s programmer, Mr Boonen, and his knowledge that was called into question. By way of working backwards from the output of the deterministic algorithm, a programmer is responsible for programming the algorithm or software. Therefore, the relevant question was: whether Mr Boonen programmed the Trading Software with actual or constructive knowledge that sell orders at those prices would only ever be accepted by a party operating under a mistake, and was the programmer acting to take advantage of the mistake? Simply put, whether Mr Boonen programmed the B2C2 Trading Software with the anticipation that such a mistake could occur on the trading platform, and thereby programmed the software to exploit it. Evidence, such as Mr Boonen’s act of sending an email with the subject “Major Quoine database breakdown, please call us urgently,” suggests that Mr Boonen had no sinister intent. It is apparent that he did not foresee the “perfect storm of events” that ended with the Disputed Trade taking place. Thus, the majority ruled that Mr Boonen did not have constructive or actual knowledge of the mistake.
Dissent by Mance IJ
There was a dissent by one of the five judges, International Judge Jonathan Mance, on the subject of whether there was unilateral mistake in equity. The dissenting judge found that there was indeed a unilateral mistake in equity, under a different concept from above – that the mistake is sufficiently “fundamental” to justify equitable intervention, provided there was unconscionable behaviour by the non-mistaken party, and it was based on knowledge by the non-mistaken party of the facts involved in the unconscionability.
It also opined that the law should adapt to this legally novel case of deterministic algorithm, and that the real question is whether the law will enforce the Trading Contracts regardless of whether the two parties know that there has been a fundamental mistake as soon as it comes to their attention, where no detriment has occurred, and no relevant third parties intervene, and where mistake could easily be rectified. “The law must be adapted to the new world of algorithmic programmes and artificial intelligence, in a way which gives rise to the results that reason and justice would lead one to expect.” says Mance IJ. In his opinion, the law leaves out consideration circumstances because dealings were entrusted to computers, which lack consciousness. Therefore, it is reasonable to apply a test asking for what an honest and reasonable trader would have understood when a fundamental error has occurred.
Lastly, the dissenting judge brings up the view that it is clearly unconscionable to retain the benefit of transactions which he would and did recognise to be the cause of an error.
Other issues
There were many other arguments in this case, some of which are legally novel due to the nature of it. For example, if cryptocurrency can be considered property and dealt with in the same way.
Conclusion
B2C2 was entitled to the proceeds of the Disputed Trades from Quoine. Quoine’s appeal on the breach of contract claim was rejected, while its appeal on breach of trust claim was allowed.
Article is a summary of main points from: https://www.sicc.gov.sg/docs/default-source/modules-document/judgments/quoine-pte-ltd-v-b2c2-ltd.pdf
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to a practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.
Chloe Lee
“Now the writer, as I think, has the chance to live more than other people in the presence of this reality. It is his business to find it and collect it and communicate it to the rest of us.” - Virginia Woolf, A Room of One’s Own
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