Blockchain & Crypto Service Providers Shouldn’t Ignore Contracting Basics
With Smart Contracts Abuzz, Top Protocol Is Still Written Contracts
When new industries manifest overnight it’s all too common for the players to willfully ignore, conveniently forget or altogether set-aside legal issues and perceived lawyerly roadblocks. We’ve seen it firsthand with the practices of many Initial Coin Offerings or ICOs that didn’t even stop to consider whether they were selling securities. According to S.E.C. Chairman Jay Clayton, most if not all ICOs are selling securities.
On the other hand, it’s not hard to envision life through the the lens of enthusiastic, innovative, and risk-tolerant entrepreneurs when it comes to views on an unregulated technology with enormous promise and potential. I’m certain it’s very easy and straightforward to say screw it, people are changing the world and making money, why let legal formalities, disclosure requirements, and processes that may or may not apply get in between me and the future. And so, they move right along.
Creating a More Trustless System
If I’m a service provider in the industry however, I should be thinking a little more strategically. I am no more likely to get paid for working in blockchain and crypto than I am working any other project. And as for potential liability, the argument can easily be made that jumping into blockchain and crypto brings with it increased potential liability (perhaps exponentially) vis-a-vis working in an established industry with clear legal parameters.
How Should Service Providers in Blockchain and Cryptocurrency Protect Themselves?
Aside from setting up a business entity (which they should do but is outside the scope of this article), they should look no further than the fundamental relationship manager known as the written contract.
No matter how much you believe blockchain and smart contracts can change and transform the way we do business and commerce (I truly believe it will in ways we can’t even imagine right now), the best current legal structure in place to govern business relationships is still the written contract.
If you’ve been burned before because you didn’t have your legal ducks in a row, this article is probably not for you. You’ve already learned your lesson, I’m sure of it. Since then I’m sure you’ve lawyered up or at least put in place appropriate measures to minimize a lot of the issues that can creep up.
For everyone else, the message here is clear and straightforward. Don’t ignore contracting basics.
Simply Put, Contracts Help Prevent Problems
The number one question a lawyer asks every client when there’s an issue in a business deal or relationship is unequivocally “What does the contract say?”
Some answers I’ve heard over the years:
- Yea, well, umm, I knew the guy from a roommate’s friend’s cousin who I met once at a birthday party over drinks, so we never made a contract. I trusted him.
- Actually, yea, there is a contract. But I don’t think I have it. I never asked for it or kept a copy. Even if I did have a copy, I think Hotmail purged all my emails.
- Yea I have the contract! They prepared it. I signed it! But I didn’t really read it, and definitely never negotiated any of the terms. But hey, they told me everything was just standard terms so we good, right?
Standard terms? Don’t have a copy? No contract exists? Nahh, you’re not good!
Unfortunately many creatives, freelancers, entrepreneurs and businesses put themselves in these precarious positions every day. Invariably, it means that they likely just bought themselves a much more expensive, uncertain, and rocky path to resolving disputes when something goes wrong.
This message should especially be relevant to people doing business in areas where contract norms and industry standards have not yet been established.
Read: The Blockchain and Cryptocurrency Industry
Even more, there is an added relevancy in areas where regulators and the long arm of the law haven’t set out clear guidelines and parameters.
Read: The Blockchain and Cryptocurrency Industry
If there are swaths of gaps of misunderstanding between parties in established industries, how big might that gap be between people involved in an industry that popped up overnight?
Read: The Blockchain and Cryptocurrency Industry
Don’t Execute That Smart Contract Just Yet. King Protocol for Setting the Table is Still Written Contracts.
It’s a simple but age-old concept that lawyers have been pumping and dumping on people for decades: Always have written agreements in place before you start working on a project.
- If you are an independent contractor or employee, you want a contract in place
- If you run a business and are receiving goods or services, you want a contract in place
- If you run a business and provide goods or services, you want a contract in place
- If you are a client receiving goods or services, you want a contract in place
Whatever side of the coin you fall, the bottom line is that you want a written contract in place:
- Contracts set expectations
- Contracts provide guidance
- Contracts provide clarity
- Contracts provide a mechanism for managing conflicts
- Contracts make sure the terms and conditions of a relationship are unambiguous and appropriate
- Contracts make sure there is a meeting of the minds between the parties, and importantly, that this meeting of the minds occurred before any dispute or issue arose
Ultimately, contracts reduce risk and uncertainty. They provide parties with a trustworthy framework to enter into a relationship with a party they might not know much about.
Does that sound familiar? Isn’t’ that why Blockchain technology and “smart contracts” are going to be good for the world and improve our ability to transact with each other?
Yes, certainly, sure. I’m all on board here. I truly get it! But let’s not get ahead of the curve. Paper and written contracts are still king at this point.
Contracts Protect Both Parties. Blindly Accepting Terms of One Party is Not Fair. Negotiation Helps Make Things Fair.
Some of the bigger issues any contract should address are obvious. But then again, in my experience they are not always there and certainly not always clear. And even if they are there, even if they are clear, they are likely unfair to one side.
Do yourself a huge favor and read things carefully before you sign them. If something doesn’t look or sound right, look into it. Ask questions, ask for clarification, or request a change. Finally, if it’s a big enough deal to you, level up by hiring an attorney to review and/or negotiate the contract on your behalf. Even more, if you engage in similar relationships with many parties, have an attorney help you create a template you can use over and over again for similar projects with different clients.
Some of the Issues Contracts Should Address
- What is each party expecting of the other?
- Who is getting paid what? When are they getting paid?
- What’s going to be delivered? If work-product is involved, is it clearly defined?
- Under what circumstances can there be a change to the scope of work? Who must approve the change? Will there be additional compensation?
- If services are involved, what is the nature and scope of the services?
- What happens if one side is not happy with the goods or services?
- What if one side performed and did not get paid?
- Are there any specific remedies available?
- Is either side providing any guarantees or warranties?
- Is either side disclaiming any guarantees or warranties?
- Is either side assuming any liabilities? If so, what are those?
- Is either side indemnifying the other side? If so, for what?
- Who will own any intellectual property that comes out of the relationship? Is there an assignment, a license, or is this a work made-for-hire?
- Is there a termination or kill fee if one side wants out?
- What jurisdiction will govern the contract?
- Is there any way to enforce the contract given the cross-border status of the parties?
These are just a few of the very many issues every contract should clearly and adequately set forth. The goal with the above isn’t to provide you with a list of issues to include in a contract (you can find hundreds of those types of articles elsewhere); the goal is to get you thinking about the copious number of issues a contract can and should provide guidance on.
Indemnification for example, might be the most important issue in certain circumstances for some service providers to address. Yet, in all likelihood, it’s the one issue on the list you probably glanced over and know very little about.
Simple and straightforward are for simple and straightforward deals. You can be presented a one page contract and be happy and satisfied that it says everything accurately and fairly, but what you are forgetting about is all the things that the contract does not say. Often times what’s left off the page is more important than what is on the page. Short and simple, especially for complex matters, isn’t always the best route to take.
Once a Dispute Arises, It’s Usually Too Late.
To be sure, once a dispute arises between parties with no contract in place (or a contract that says nothing about a particular issue in question), both sides will lean on their natural human emotions and tendencies. Survival mode ensues. Parties begin, almost immediately and preemptively, jockeying for position, no matter how unreasonable, irrational, or obscure their position may be.
This is natural and predictable because without a baseline protocol to refer to (i.e. a contract) each party will have their own personal assumptions about how things should have gone and how things should go moving forward. The most unfortunate part is that everything usually goes down when the bargaining power between the parties are unequal. It will usually happen at a time when one side might be vulnerable, exposed, or at risk of losing more than the other. And so, regrettably, costly litigation likely ensues. If you can’t afford to litigate, you probably end up taking the L and become more cautious about how you do business moving forward.
Blockchain and Cryptocurrency Industry Considerations
Certainly, there are many blockchain and crypto industry specific concepts and terms that can and should be worked into contracts. As is clear from the headlines and discussions around the space, much is still unclear and uncertain. From securities laws issues surrounding ICOs, unclear income tax reporting obligations, and other regulatory issues, much is still unsettled. In light of this, service providers should do everything they can to manage and shift any risk to the appropriate parties as best as possible in a given situation.
For example, there are many independent contractors in the blockchain and cryptocurrency space that provide services to clients in connection with ICOs and token sales. Given the unsettled regulatory landscape and the seemingly expanding list of lawsuits and actions taken against ICOs and their founders, it would behoove those working with such ICOs to place safeguards in their contracts for their own benefit. While there may be no way to eliminate all risks flowing from participating in such activities (perhaps especially in cases involving securities laws), a well drafted contract can help manage and shift risk and liability to the parties with the most to gain in the project (i.e. the ICO and their founders). Such contracts should address issues such as limits on liability, indemnification from third parties, and include dispute resolution and cross-border judgement enforcement mechanisms, just to name a few.
IMPORTANT DISCLOSURE: For those of you savvy enough to gather, independent contractors providing services to clients in connection with ICOs brings up the question of whether they are providing assistance (material or otherwise) in the sale or issuance of a security in violation of securities laws. While that is possible, please draw no inferences from the above as it is completely outside the scope of this article. The answer to that question is likely a very complicated and lengthy discussion that can be addressed only by your securities lawyer. In this case, I am neither a securities lawyer, nor am I your lawyer, so please do what you need to do to feel comfortable.
If you are looking to get into projects surrounding blockchain and cryptocurrency, be sure to hammer out a written contract with whoever you are dealing with that accurately sets forth expectations and shifts liability appropriately. Because most in the blockhain and cryptocurrency industries probably don’t have solid written contracts, investing some time and effort into getting one specifically tailored to your particular needs will certainly go a long way.
If you have further questions or would like to learn more about how we may be able to help in this evolving area of law, tech, and commerce, please visit our website at www.lawharp.com or reach out via email to email@example.com.