The English Court of Appeal has sent back for trial a claim launched by Tulip Trading Limited (Tulip) against 16 bitcoin developers which alleges that the developers owed Tulip fiduciary and tortious duties to implement software patches which would enable Tulip to recover bitcoin lost in a hack.
Tulip and its owner, Craig Wright, who has previously asserted that he is the creator of bitcoin, launched the claim against certain core software developers of multiple bitcoin networks seeking the return of access to bitcoins that were stolen from Wright's computer due to a hack. Tulip alleges that the developers owe bitcoin owners a fiduciary duty and a duty in tort.
First Instance
The English High Court rejected these allegations without a trial, finding it was difficult to see how Tulip’s case that the developers owed Tulip a fiduciary duty or a duty of care was seriously arguable:
The Defendants' evidence was certainly not sufficiently strong to enable me to conclude that [Tulip’s] factual case was no more than fanciful.
Specifically, the lower court found that:
An imbalance of power in favour of the Defendants, coupled with a vulnerability under that power imbalance is only an indication of a potential fiduciary duty and not a defining characteristic.
Bitcoin owners could only realistically be described as entrusting their property to a "fluctuating and unidentified" body of developers of the software.
A distinguishing factor in considering a fiduciary duty is an obligation of undivided loyalty, which is not found in this case.
Other users may not agree that a system change sought by Tulip accords with their interests. The changes potentially disadvantage other users.
Positive steps sought to be imposed upon the Defendants went well beyond the nature of the action and would likely expose the Defendants to risk.
The duties in tort only arise if the Defendants do owe a fiduciary duty. Since there is no fiduciary duty in this case, there is no duty in tort either.
Tulip was unsatisfied with the first instance judgement and appealed to England's Court of Appeal. Lady Justice Andrews granted leave to appeal the first instance decision in August finding that the nature and scope of developers' duties is one of considerable importance and is rightly characterized as a matter of some complexity and difficulty.
The Appeal
While the Court of Appeal did not decide whether there was a fiduciary duty owed by software developers to owners of crypto assets, it allowed the appeal and ordered the case to go to trial, saying it raised a serious issue to be tried.
The Court went on to say that, to rule out Tulip's case as unarguable would require one to assume facts in the Defendant's (i.e. the developers') favour which are disputed and which cannot be resolved without a trial.
Birss LJ, who wrote the Court's joint judgment, did recognise that Tulip's case is not easy to make:
I recognise that for Tulip’s case to succeed would involve a significant development of the common law on fiduciary duties. I do not pretend that every step along the way is simple or easy.
Nevertheless, the Court acknowledged there was a realistic argument, along the following lines:
The developers of a given network are a sufficiently well defined group to be capable of being subject to fiduciary duties.
Viewed objectively the developers have undertaken a role which involves making discretionary decisions and exercising power for and on behalf of other people, in relation to property owned by those other people.
That property has been entrusted into the care of the developers. The developers therefore are fiduciaries.
The essence of that duty is single minded loyalty to the users of bitcoin software. The content of the duties includes a duty not to act in their own self interest and also involves a duty to act in positive ways in certain circumstances. It may also, realistically, include a duty to act to introduce code so that an owner’s bitcoin can be transferred to safety in the circumstances alleged by Tulip.
Conclusion
The outcome of the Tulip case will likely have huge implications on software developers for blockchain projects. While the original decision had been hailed as absolving software developers in blockchain projects from liability, some academics have long argued for a fiduciary relationship and duties of care to be imposed upon online service providers, and by extension software developers. This appeal decision throws the issue back into muddy waters.
If developers were found to owe duties to users to reinstate lost or stolen assets, this would impose a considerable additional compliance and communication burden upon them, as well as potential legal liability. The imposition of these duties could also run counter to the functional separation in many projects between the development of open-source applications, and the use of those applications by users who have no direct contact with the developers.
Tulip Trading is the first case heard by the English Courts to consider the roles and duties of cryptocurrency software developers, and one closely watched by others around the world. That battle will now continue at trial and potentially provide greater clarity as to the legal obligations of software developers. This topic is one that developers and start-ups will need to continue to monitor for some time to come.
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