As disputes involving cryptocurrencies increasingly come before the courts, judicial decisions are shedding light on how legal principles are applied to these emerging issues. In Southgate v Graham [2024] EWHC 1692 (Ch), the High Court of England has contributed significant guidance to the developing intersection of contract law and digital assets.

The court upheld the County Court's decision to award damages rather than order specific performance in a dispute over the failure to return Ethereum (ETH) tokens under an oral loan agreement. However, it also cast doubt on the assumption that damages should be calculated based on the value of ETH at the date of breach, rather than at the time of judgment—almost four years later, during which the value of ETH had increased significantly.

The Dispute: What is the appropriate remedy for failure to repay an ETH Loan?

Factual background

The case involved a 2018 oral agreement under which the Claimant transferred 144 ETH (then worth around £50,000) to the Respondent, allegedly as a loan to be repaid in kind with an additional 10% premium. While the Respondent repaid part of the obligation in fiat currency, a balance of 115.69 ETH remained outstanding. The Claimant pursued legal action when repayment demands went unmet, seeking either specific performance (i.e. return of the ETH) or damages based on the value of the tokens at the time of judgment.

The Respondent argued that the transaction constituted a cash loan, with ETH merely serving as a means of transfer, and therefore his obligation was to repay £50,000 plus 10%, not the ETH itself.

County Court findings

In 2023, the County Court ruled in favour of the Claimant’s interpretation, confirming that the contract required return of the ETH. Specifically, the County Court found that under the oral agreement, the defendant was required to repay 158.4 ETH (144 ETH plus 10%) within a reasonable time after the claimant's demand in July 2019. The Judge determined that this obligation was to be fulfilled by midday on 1 October 2019.

In September 2019, the defendant paid £6,000, which the claimant applied to cover part of the ETH owed, equivalent to 42.71 ETH, leaving 115.69 ETH outstanding. The Judge found that this amount remained unpaid and that the defendant had been in continuous breach of the agreement since 1 October 2019.

This gave rise to two key questions: Was the claimant entitled to the return of 115.69 ETH, or to its equivalent value in fiat currency? If damages in fiat were to be awarded, should the ETH be valued as at the date of breach (October 2019) or the date of judgment (September 2023)?

The judge declined to order specific performance, i.e. the return of 115.69 ETH. Instead, damages were awarded, to be assessed separately, and the judge directed that their value be calculated as of the breach date - 1 October 2019.

The Claimant appealed both elements, arguing that specific performance was justified and that damages should reflect ETH’s much higher value at the time of judgment.

High Court’s decision

The High Court dismissed the appeal on the specific performance issue but allowed it in relation to the valuation date, remitting the matter back to the trial court for further determination.

Appropriate Remedies

Specific performance not warranted

The High Court reiterated that specific performance is an equitable remedy not normally available in cases in which damages are adequate to compensate the claimant for the loss they have sustained. Unlike damages, specific performance is not a remedy which is available to the claimant as of right and is, therefore, considered as a discretionary remedy available to do justice in cases in which the legal remedies to which the claimant is entitled are inadequate.

Trower J found no error in the lower court's reasoning that ordering the Respondent to acquire and transfer ETH, then valued at over £300,000, would impose undue hardship. Non-compliance with such an order could also trigger contempt proceedings, unlike a judgment for damages, which has less severe enforcement consequences.

The Claimant argued that damages were inadequate due to the dramatic rise in ETH’s price. However, the court found that this concern should be addressed through the appropriate method of valuing damages, not by stretching the equitable remedy of specific performance beyond its usual limits.

The court also observed that ETH does not constitute a unique or irreplaceable asset. Accordingly, it is typically not the type of subject matter that warrants specific performance - especially where monetary compensation can adequately redress the loss.

Timing of damages assessment: Date of breach or judgment?

The High Court was more receptive to the Claimant’s argument on the valuation date. It concluded that the trial judge erred in fixing the damages assessment at the date of breach without a dedicated remedies hearing. Given that neither party had presented detailed arguments or evidence on the issue, this determination was premature.

Although the final decision was left to the trial court, Trower J noted that there was “real merit” in valuing the ETH as at the judgment date. Several reasons supported this approach:

• The purpose of damages is to restore the Claimant to the position they would have been in had the contract been fulfilled. The law is not blind and can take into consideration market fluctuations in assessing the appropriate valuation of damages. In this context, a breach-date valuation would leave the Claimant unable to repurchase the ETH at today’s higher price and would, therefore, not be compensated for the loss he sustained from the breach.
• The nature of the agreement, effectively a loan of ETH already provided, undermined any assumption that the Claimant could have mitigated losses by re-entering the market after the breach.

Following the Court’s decision to refer the matter back to the Country Court for consideration, the question that remains unanswered is who, in all the circumstances of the case, ought to bear the risk of Etherium’s continuing volatility and the period for which they should do so.

Implications

This decision reinforces the courts’ general reluctance to order specific performance in cryptocurrency cases unless unique or irreplaceable assets are involved. It also underscores the importance of timing in valuing digital assets, where market volatility can significantly impact the adequacy of a damages award. Future litigation in the crypto space is likely to explore these valuation principles in greater detail, especially as courts continue to adapt traditional remedies to the realities of digital assets.