NFTs – contemplating copyright and contract conundrums (part II)

Posted on: June 2, 2021 by

Blockchain technology by TLC-kios, CC0 1.0 via Creative CommonsIn our post last week, we explored some of the copyright issues raised by recent stories from the world of NFTs. Today, we turn our focus to matters of contract law. How can we address the challenges posed by contractual mechanisms unfamiliar to many in the art world? And where we might look for answers – or at least for some pointers to guide us in the right direction?

NFTs are traded (almost always) on the blockchain, through SMART contracts. These contracts are essentially lines of computer code which self-execute a set of agreed actions in response to programmed triggers. So payment by a buyer will trigger the transfer of the NFT and possibly a resale royalty back to the artist, if this has been set up, and the particular marketplace on which the trade takes place allows for it.

The SMART contract isn’t the whole story however, and is generally accompanied by the text-based terms and conditions with which many of us in the legal sector are much better acquainted. It is here that any copyright licensing terms are to be found, and these vary across platforms and products. For example, if you purchase a CryptoKitty (one of the trailblazing NFT products in the early days, circa 2017) from the creators, Dapper Labs Inc., you can make commercial use of your kitty, earning up to $100,000 in gross revenue per year. In contrast, the purchase of an NBA ‘Top Shot’ from the same company prohibits any commercial use. There are many other fairly predictable restrictions on use, disallowing any modification of the underlying art, trademarking it or using it in connection with media depicting hatred, intolerance, violence or cruelty.

As you might also expect, the text-based contractual terms contain many of the typical provisions of standard ‘real world’ conditions of sales, and are generally protective of sellers/licensors. So we see the familiar attempts by sellers to limit their liability as far as possible, often excluding any protections the law would otherwise imply for buyers about matters like title to goods and their fitness for purpose, for example. NFT sellers’ exclusions tend to be fairly expansive, purporting to relieve them of responsibility for a whole range of potential occurrences, including, in some cases, errors in content, interruption of transmission from their websites, as well as any bugs or viruses they might transmit. Here are a couple of examples from the NFT marketplaces SuperRare and OpenSea; and here is what you sign up to if you buy an NBA Top Shot from Dapper Labs.

Some interesting questions of contract law arise from these arrangements for transacting in NFTs. Whether a SMART contract is legally enforceable per se is not beyond question, though there seems to be a degree of confidence that this is probably not inherently problematic. But how will its terms, expressed through lines of computer code, interact with the accompanying text-based terms, and what if there is a conflict?

As for the text-based terms, questions more familiar to contract lawyers will no doubt arise as and when trades do not go as buyers had hoped and challenges are raised. An issue which might crop up in light of recent jurisprudence relates to those clauses limiting liability – which, as noted, tend to be quite widely drawn in NFT sellers’ standard terms. The past decade has seen a marked increase in consumer protection legislation in the UK and the EU, aimed, in essence, at protecting buyers against contractual arrangements which unfairly and disproportionately burden them with risk. In an interesting recent case in the UK, the High Court declined to enforce provisions limiting or excluding liability in the standard terms of an online betting company which was attempting to rely on such terms to avoid paying out winnings to a customer. Numerous arguments were raised in the case but a key point was that an attempt to exclude liability for software errors was considered not to meet the requirements of transparency and fairness in the relevant UK legislation, the Consumer Rights Act 2015. It remains to be seen whether the exclusions attempted by NFT sellers will hold up but, if challenged by a consumer, there’s a chance that in some situations they may not.

At this stage, there are probably still more questions than answers. Undeniably, however, the food for thought provided by the crypto world on an almost daily basis is unlikely to run out any time soon. Whilst this completes our two-part exploration of NFTs on the blog for now, rest assured, we’re confident that there’ll be a part three on the horizon in the not-too-distant future!

Image: Blockchain technology by TLC-kios, CC0 1.0 via Creative Commons