Take Tulip: developers of bitcoin may owe fiduciary duties after all

Introduction

In Tulip Trading Ltd v Van Der Laan and ors [2023] EWCA Civ 83 the Court of Appeal unanimously overturned the High Court’s first instance decision and determined that there is a serious issue to be tried on the question of whether developers owe fiduciary duties to bitcoin owners.

High Court decision

A description of the background to these proceedings and first instance decision can be found in our article on the High Court decision.

In summary, it was found that Tulip Trading Ltd (Tulip) had no realistic prospect in establishing that the facts pleaded demonstrated a breach of a fiduciary and/or tortious duty allegedly owed by the developers. Imposing such a duty of care would have been an unequitable extension of the law particularly given that the loss was purely economic.

Court of Appeal decision

The Court of Appeal overturned the High Court decision and held that Tulip’s case on fiduciary duties gave rise to a serious issue to be tried. The Court of Appeal did not specifically consider whether the defendants owed tortious duties to Tulip. However, it was considered that if a fiduciary duty appeal succeeded, then it would follow that the appeal regarding tortious duty should also be allowed.

The Court of Appeal’s reasoning is detailed at paragraphs 70 to 88 of the judgment. Their central considerations in determining that there was at least a serious issue to be tried were:

• Decision Making: the developers had a decision-making role, in effect making decisions on behalf of all of the participants in the relevant bitcoin network, including miners and owners of bitcoin. These features of authority and discretionary decision making are common to fiduciaries.

• A Defined Group: it is arguable that the developers of a bitcoin network are as a sufficiently well-defined group, rather than, as the High Court judge initially found, a fluctuating and unidentified body. The Court highlighted that a state of trust existed between network participants and developers since they could decide what software patches would be implemented, consequently making decisions on behalf of everyone on the network.

• Existence of Positive and Negative Duties: it is conceivable that there existed a negative duty for developers not to act in their own self-interest, as well as a duty to act in positive ways, such as fixing code errors or rectifying abnormalities within the network. Hence, although it may be a significant step to identify a fiduciary duty in that manner, there is an arguable premise in Tulip’s case.

The Court of Appeal acknowledged that, for the case to succeed at trial, there would need to be a significant development of the common law on fiduciary duties. From a legal standpoint, while the established categories in which fiduciary relationships arise are not closed, it is exceptional for fiduciary duties to arise outside of them.

The key paragraph from the judgment, worth noting in full, is as follows:

“Pulling all this together, 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. However there is, it seems to me, 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.”¹

Next steps

This decision, though significant, was just the second battle in a wider war. The case will now proceed to trial, and the question of whether blockchain developers owe legal duties to their users will be decided following a full hearing.

It does not follow that Tulip will succeed simply because the Court of Appeal determined at this interlocutory stage that there was a significant issue to be tried.

However, the potential ramifications for developers are huge and will define the role and obligations of software developers as a matter of English law in the brave new world of decentralised digital assets.   

---

^{1 Tulip Trading Ltd v Van Der Laan and ors [2023] EWCA Civ 83 at [86].}