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Under Development Law @ GDNet

What Happens When You Don’t Have a Written Agreement: [Part 2, Real Life Application]

Posted by , 24 January 2012 - * * * * * · 2,704 views
contracts, intellectual property and 1 more...

This article is the second part of a two part series. Please refer to Part 1, Contract Basics, if some terms or examples seem unclear.

Now that the contract basics are explained, it’s time to examine real life application of those principles. Ideally you don’t want disputes to go to litigation. Hopefully you’ll be able to negotiate terms that, if not favorable to all, are at least enough to make sure that everyone lets go of the matter before dumping thousands into legal fees. However, much of that negotiation will depend on your leverage under the law and your ability to determine whether the law is on your side. Below we’ll employ some of the contract principles learned before in some fairly typical contract dispute situations and specifically when no formal agreement exists.

Types of Informal Agreements

In most cases when we’re looking at the independent developer space, the contracts you’ll see most often are work-for-hire agreements or collaboration agreements among individuals. These almost always count as service agreements and don’t necessarily require a signed writing to be enforceable. Note that while service contracts that take longer than a year to perform require a signed writing, service contracts for an indefinite term don’t necessarily require the same. So even if you don’t have anything definitive in writing, a contract may still be enforceable if the circumstances suggest a valid agreement.

The Gentleman’s Agreement (Oral or Handshake Agreement) and Enforceability

Oral contracts and handshake agreements are fairly common in the entertainment industry. They are particularly common in independent game development. They rely on mutual trust and knowledge among the contributors and are frequently the result of prior relationships. It’s often said that an oral contract is “worth the paper it’s written on,” and in some cases that is definitely true. There are certainly a number of draw backs to having an oral agreement over a written one, not the least being enforceability and the likelihood of a shorter statute of limitations.

However, oral contracts are enforceable under many circumstances and shouldn’t be dismissed so easily. The problem with enforcing an oral contract is evidence—if it’s just an agreement between two people the dispute will inevitably break into to a “he said, she said” finger-pointing match unless you have a witness or some other evidence pointing to an actual agreement. Sometimes that evidence can be performance itself; however, unless there’s definitive proof or witness testimony concerning compensation for that performance, a court of law may only apply the market value of the performance instead of what was actually agreed to in order to make the person “whole”. Let’s look at an example:

Example #6: Among Friends: Anne, Bill, and Charlie worked together at a game studio that fell on financial difficulty. The three decide to go off on their own to create their own game and meet at Bill’s house to go over duties and logistics. They decide that Anne will handle art and music assets, Bill will handle design and act as production manager, and Charlie is in charge of programming/tools. They’re each entitled to a third of the income. However, no written agreement is formed. Bill acts as the unofficial leader of the group and also handles license procurement and applications to the requisite online distribution channels like as Steam and Impulse. Nine months later they complete a simple but engaging game and release it on Steam. The game is a hit and Bill starts receiving payments from Steam, which he fails to distribute to Anne and Charlie. Anne and Charlie sue Bill for breach of contract asserting their entitlement to two-thirds of the proceeds. Bill argues that he treated them as independent contractors and they are only entitled to 10% each. Everyone’s testimony is equally convincing, so the court relies on expert testimony and the market value of the contributions performed by Anne and Charlie. The experts disagree as to market value, but it’s clear that the contributions exceed 10% of the finished product. The court awards Anne and Charlie 20% each for their contributions, with the remaining 60% going to Bill.

The example above demonstrates the difficulty in proving the terms of an oral contract—however, this problem becomes less obvious if more people are involved or if disinterested third parties know about the agreement and can act as witnesses against the person breaching the agreement.

The “Living Contract” (E-mail Exchange)

Another often-seen disputed agreement comes in the form of e-mail exchange, which is probably more common than the handshake agreement these days. While e-mail or letter exchanges provide more evidence of an existing contract, they come with their own host of problems concerning enforceability. First, there’s the question of validity—is there a valid offer and acceptance, is there a counter-offer, and has a counter-offer been rejected or accepted? Then there’s the question of whether any particular e-mail constitutes a “written agreement” or “integrated agreement” for purposes of the parol evidence rule. Additionally, there’s the issue of whether later e-mail exchanges act as modifications or amendments to the earlier contract.

Offer, acceptance, revocation, and counter-offer

As mentioned above, mutual agreement requires offer and acceptance. A counter-offer is essentially a rejection of the original offer, so once a counter-offer is made, the original offer is typically treated as invalid unless offered again. An offer can be revoked at any time prior to acceptance. In the case of an e-mail exchange, many offers or counter-offers may be made before there is acceptance—and if the acceptance is based on an earlier offer that has already been revoked or rejected with another counter-offer, there’s an argument that the acceptance isn’t valid. Let’s look at an example.

Example #7: Whose line is it, anyway?: Nick and Alice are in the process of putting together a team for their newest project, “Delilah’s Curse”, a post-apocalyptic RPG where the player is the parent of the harbinger of the apocalypse. The parent is presented with a Hobson’s choice: He or she can either save his or her child or protect the world from complete annihilation. Ultimately the goal is to achieve a balance where both can be saved. Nick, without disclosing the project details, sends an e-mail to his friend Tom, a skilled level designer, and asks if he’d like to get involved with the project. Tom responds with a request for more information. Alice, who is CC’d on all correspondences, replies that the contents of the game concept can’t be disclosed without an NDA, but she strongly believes Tom is an excellent fit for the project. Nick then sends Tom an NDA for negotiation purposes. Tom doesn’t sign the agreement, but responds with the statement “I accept the terms of your NDA. Please tell me more about the project and the compensation you’re offering.” Alice sends Tom a brief synopsis of the game and the work they expect Tom to perform. She offers him $3,000 per milestone deliverable and contingent compensation of 10% of net profit. A few minutes later, Nick sends the same synopsis and offers him $2,500 per milestone deliverable and a contingent compensation of 15%. Confused, Tom accepts Alice’s earlier offer. Nick responds that Nick’s offer was meant to replace Alice’s offer and Alice’s offer is no longer valid. Tom refuses Nick’s offer and insists on Alice’s offer. Alice suggests in her reply that Nick’s offer is more favorable—however, Tom responds that he would still prefer Alice’s offer and rejects Nick’s offer. The next day he sends a follow up e-mail saying he’s thought about it, and he’s willing to consider taking Nick’s offer if the milestone deliverable payments are upped to $2,700. However, unbeknownst to Tom, Alice had sent an e-mail in the middle of the night stating that she’s sorry for his rejection, and they’ll look for someone else. The next day, Nick sees Tom’s counter-offer. He sends Tom a response stating “Let me talk to Alice and get back to you. I think she’ll accept. In the meantime, here is the work order for the first milestone deliverable.” Tom begins work on the first milestone deliverable. Two weeks later, he receives a response from Alice, which states “I’m sorry, but we’ve already found someone else for the position. Please ignore Nick’s prior e-mail.”

Tom, believing that he’s entitled to the contract for $3,000 at 10% contingent compensation, or at the very least $2,700 at 15%, sues Alice and Nick for breach of contract. The case eventually goes to Court, and the Court finds the following: 1) under that jurisdiction’s law, Tom’s acceptance of the NDA in addition to his electronic signature constitutes a valid agreement for purposes of the NDA; 2) Nick’s subsequent offer after Alice’s initial offer constitutes a revocation of Alice’s original offer; 3) Tom’s rejection of Nick’s offer and acceptance of Alice’s original offer was a counter-offer by Tom; 4) Alice’s late night e-mail constituted a valid rejection of the counter-offer by Tom; 5) Tom’s next day e-mail constituted a new offer by Tom; 6) Although Nick’s response to Tom’s offer may have created some expectancy of being hired, nothing in the response constituted an acceptance of Tom’s offer, so no contract was formed; 7) Because nothing in the e-mail sent by Nick actually requested performance on the work order, no request for work was actually made and Tom is not entitled to damages arising from promissory estoppel; and Posted Image Alice’s final e-mail constituted a rejection of Tom’s offer.

Note that the decisions reached by the Court are only hypothetical—depending on the jurisdiction and the language used in any given e-mail, Nick may have created a reasonable expectation in Tom that Tom’s offer would be accepted. In that case Tom’s performance may have entitled him to promissory estoppel. There is also the question of authority between Nick and Alice—if Alice is the person responsible for the project and Nick is only acting as her agent, a whole other slew of issues concerning agency law arise. The main point here is that the “living agreement” can get convoluted and it isn’t always clear whether a contract has actually been formed or not.

Parol Evidence Rule and the Hybrid Oral Contract/Living Agreement

A “Living Agreement” can be even more convoluted if you throw in oral correspondences in addition to e-mail exchanges. For example, if Tom had accepted Nick’s second offer of $2,500 and contingent compensation of 15%, and then later sent his e-mail accepting Alice’s first offer, the question of acceptance versus counter-offer would become even more complicated. For this situation most jurisdictions have imposed the “Parol Evidence Rule”, but even that rule may not be applicable in all circumstances. Simply stated, the Parol Evidence Rule prohibits things outside of an existing contract, such as oral or written communications (this extrinsic evidence is called “parol evidence”), from being admitted as evidence when a final or “integrated” contract exists if that evidence contradicts or adds to the written terms. This is limited to prior or contemporaneous evidence, like oral communications or e-mail exchanges made prior to or at the same time as the execution of the final written agreement.

The most obvious question for our purposes is whether an “integrated” agreement actually exists. A contract is integrated if it is a final written agreement between the parties. In other words, all of the necessary terms are set out in the agreement, and as an additional security the parties may include a merger clause that asserts that the agreement is the final agreement between the parties. The more common problem when no formal contract exists is that an agreement may only be partially integrated—in that case, only some terms are clearly agreed to between the parties while others are left in dispute or not discussed at all. In that case, some parol evidence may be admissible if it expounds on those undefined terms.

When we’re looking at an e-mail exchange, it’s possible that a partially or fully integrated agreement could come into existence through one or more of the correspondences. Let’s return to our earlier example concerning Delilah’s Curse:

Example #8: Let’s assume that Tom has decided to accept Nick’s offer of $2,500 per milestone deliverable with 15% contingent compensation. Prior to responding to Nick’s offer via e-mail, Tom calls Alice and Nick to further discuss his role in the project, when payments will be made, and when milestones are due. However, in his next correspondence he states nothing more than “As per our conversation, I’d like to accept the level design position for $2,500 p/MSD and 15% contingent compensation on release.” During the phone discussion, Nick and Alice agreed that milestone delivery payments would be paid within 10 days of delivery regardless of whether or not the milestone was approved. However, the work order forms (none of which are signed by the parties) states that payment will only be made if the deliverable is approved by Nick and Alice. A few months down the road, Tom submits a milestone deliverable. Nick and Alice fail to make payment within 10 days. Tom contacts Nick and Alice about the payment and they respond that they had some problems with the milestone that need to be fixed before they’re willing to make an agreement. Tom argues that they’d agreed to make the payment regardless of approval. However, Nick and Alice point to the provision in the work order requiring approval before payment. Angered, Tom refuses to do any more work on the project and sues Nick and Alice for breach. Nick and Alice file a counter-complaint asserting breach of contract against Tom.

The suit goes to trial and the Court decides the following: 1) A partially integrated agreement existed with regard to Tom’s position and compensation; 2) the work orders are integrated into the agreement based on Tom’s past performance of those work orders and failure to dispute the terms of the work orders; 3) the oral agreement made prior to Tom’s formal acceptance is barred by the parol evidence rule since it was made prior to the partially integrated agreement and directly conflicts with the term of the work order; 4) Tom is in breach for refusing to perform; 5) neither Nick or Alice are in breach, but are expected to exercise good faith when determining whether a milestone is “approved”.

The parol evidence rule could go many different ways depending on the circumstances; for instance, if the work order didn’t say anything about payment depending on approval, Tom’s testimony regarding their prior conversation may be admissible as clarifying a key point to the agreement. Also, the work order itself may be treated as parol evidence instead of being treated as an integrated part of the agreement if Tom disputed the payment terms prior to delivering the first milestone (in the contract world, “performance” is frequently treated as “acceptance”). All sorts of contingencies can change the game in a contract dispute—a formal written agreement that clearly defines the agreed upon terms is the easiest way to minimize those contingencies.


The most obvious lesson to take away from this is to always, always get something in writing; but more importantly you need to make sure you understand what’s written down. As stated in Part 1, you don’t need a massive legal document with a bunch of legalese and recitals to formalize your agreement. A document written in plain English with your agreement spelled out in plain and simple terms while taking into consideration as many contingencies as possible is vastly more valuable, legally speaking, than a form agreement that neither party understands. Knowing what to put in that agreement is equally important—for example, if the agreement doesn’t address intellectual property issues, confidentiality, or indemnification matters properly, you’re not covering your bases and you may end up in a conflict down the road. Although living contracts and handshake agreements are enforceable in many cases, they will rarely if ever provide you with the kind of protection you’ll want or need regardless of the outcome of your project.

Defender’s Quest Released!

  Posted by , 24 January 2012 - - - - - - · 1,298 views

Game Developer and Under Development Law client Level Up Labs recently launched their latest title Defender’s Quest for PC and digital distribution. If you’re a fan of tower defense and RPGs (two of my favorite genres) you should enjoy this title. Check out the video and press release below for more information. Incidentally, you’ll get $1 off the purchase price if you use coupon code: MONA.
Video: Defender’s Quest
Level Up Labs is proud to announce their new Tower Defense / RPG hybrid Defender’s Quest  for Mac, Windows, and Linux!
Playable demo available here: http://www.defendersquest.com/play_demo.html
In the midst of a devastating epidemic, a young woman finds herself unceremoniously dumped into a plague colony full of monsters. Discovering a strange “half-way world” between life and death, she proceeds to gather a small army of disaffected survivors and sets off in hope of escape!
Defender’s Quest is a unique blend of real-time Tower Defense strategy and tactical RPG meta-game, complete with a colorful cast of characters and fast-paced story-telling.
This game respects your time. Play through the game’s “casual” missions for a quick 2-5 hour experience, or hunker down and take on “advanced” and “extreme” missions for the hardcore 30+ hour experience you crave.
Defender’s Quest is available for sale NOW at www.defendersquest.com!
The game is currently being offered under an initial release price of $6.99. Everyone who buys the game will receive FREE updates to all future versions of the game.
In a few months a bonus release will be offered, including lots of extra goodies, secrets, and extended end-game content, at a price of $9.99.
The games original soundtrack is also available for sale for 99 cents when bundled with a purchase of the game.
  • DRM Free!
  • Import save file from the demo!
  • Runs on Windows, Mac, and Linux!
  • Tower-defense style tactical battle system!
  • Customizable characters!
  • Story written by USDA certified English major! *
  • ~100 Uniquely designed battle challenges over 34 maps!
  • Extreme challenges for Hardcore types!
  • Casual challenges for Your Mom! **
  • Skippable / pausable cutscenes!
  • Accessibility features for gamers with disabilities!
  • Bonus “endless” challenge modes! (Not available in demo)
  • Multiple bullet points!
*The U.S. Department of Agriculture does not certify the freshness of domestically grown English Majors.
 **The USDA has certified, however, that your mother is a classy lady. You should call her sometime, she misses you.
Things we didn’t include:
  • 40+ hours of padding
  • Zillions of random battles
  • Pointless fetch quests
  • Whiny emo kids
  • Deliberate micro-management
  • Cumbersome menus six layers deep
  • $60 price tag
  • Aeris dying
Nice things people have said:
“It’s a mix between Tower Defense and a traditional RPG and it’s REALLY fun.”
-Robert Boyd, Cthulhu Saves the World
“The RPG aspects are a real credit to the game… this is the first time I’ve been so engaged by tower defense in a while!”
-Rodain Joubert, Desktop Dungeons
“Pretty much the perfect expression of tower defense in its traditional form.”
-Tom Auxier, Nightmaremode.net
“Productivity = Gone”
-Andrew Smee, Rock, Paper, Shotgun

Nice articles people have written:


The Internet Blacklist Bill FAQ

  Posted by , 20 January 2012 - - - - - - · 845 views

A lot of congress’ time lately has gone to drafting, revising, and negotiating legislation that in some way shape or form controls America’s ability to access content on the Internet. You have likely heard about SOPA, PIPA, and maybe even OPEN—but how does this legislation apply to game developers, and why have these pieces of legislation created such dissention? This FAQ clarifies the details about these bills and how they affect game development.
1.       So what are SOPA, PIPA, and OPEN?
The “Stop Online Piracy Act” (SOPA) and the “Preventing Real Online Threats to Economic Creativity and Theft of Intellectual Property Act” or the “PROTECT IP Act”(PIPA) are corresponding pieces of legislation that are currently before the House of Representatives and Senate, respectively. Both Acts grant the Attorney General the power to force payment providers, advertisers, search engines, and DNS registries to block access to foreign sites dedicated to infringement. The Acts also give private parties the right to obtain court orders against infringing sites—upon obtaining a court order, private rights holders can turn around and, like the Attorney General, force payment providers and advertisers to cease providing services to the allegedly infringing site. SOPA also imposes criminal penalties for streaming content that’s deemed infringing.
The “Online Protection and Enforcement of Digital Trade Act” (OPEN Act) is a counter-measure to SOPA and PIPA and is currently before both the House and Senate. The OPEN Act puts prosecution power against foreign “rogue sites” in the hands of the United States International Trade Commission. Upon receiving a complaint, the Commission will undergo an investigation to determine whether a site’s sole or primary purpose is an infringing one. Unlike SOPA and PIPA, the penalties to rogue sites are purely financial—the Commission can issue Cease and Desist orders to payment providers and advertisers to cease operations on the rogue site, but there is no corresponding cease and desist forcing search engines or DNS registries to redirect or block access to the site. The owner of the rogue site has an opportunity to raise their defense prior to the Commission’s issuance of Cease and Desist Orders.
2.       How do SOPA and PIPA threaten the games industry and game development?
Out of all of the entertainment industries, game development will probably be the most affected if SOPA or PIPA become law. Games rely on the Internet for everything from getting player feedback to promoting their content. So how could the games industry suffer if SOPA or PIPA pass?
  •  Fan-based communities that permit users to post videos or fan-created content will be at serious risk of totally shutting down even in minor cases of infringement by its community members.
  • Funding opportunities like KickStarter, which enable small-time developers to create content without relying on a major publisher, are at risk of shutting down if even one project is suspected of infringement.
  •  Digital distribution channels (we’ve already seen what happened to MegaUpload), including Steam and Impulse, would also be at risk for the same reason.
  • Online games and online game communities would be subject to the same threats as those websites threatened by SOPA and PIPA.
  • Games in particular are affected by any Act that threatens freedom of speech—especially when that threat comes from private parties asserting IP rights. The opportunity to use such legislation to censor content for motives other than those set forth in the Act is high.
Game developers both large and small rely heavily on digital distribution and their fans. Both SOPA and PIPA pose a direct threat to distribution channels and online communities in particular.
3.        What makes SOPA and PIPA dangerous?
SOPA and PIPA are dangerous for a few reasons:
  • Both Acts use vague, ill-defined language to identify both foreign sites and sites dedicated to infringement;
  • Both Acts give search engines, DNS registries, payment providers, and advertisers clear incentive to proactively block websites even before receiving a court order—a private party/competitor could send a notice to those service providers claiming infringement, thereby giving those service providers the “good faith” belief they need to act in order to protect their immunity. This is particularly problematic if, say, an ISP is also a content provider. It gives them both the power and the incentive to censor their own competitors;
  • SOPA expressly criminalizes streaming content that contains infringing material—this could be anything from a fan-made game play video that has infringing music playing in the background to an infringing copy of a music video. Sites hosting that streamed content are subject to the blocking provisions set forth in SOPA (including internet community forums and sites like YouTube);
  • Both Acts pose a threat to constitutional rights like freedom of speech and due process. With regard to freedom of speech, the method of blocking and redirecting sites is a model traditionally used for purposes of censorship in more restrictive countries—even if the purpose of the Act is different, there is no question that the censorship of perfectly legal content is a possibility thanks to the incentives created by both Acts. As for due process, court orders are obtained ex parte and action can be taken against a website regardless of whether the website owner has actual notice—in other words, a website can be blocked or redirected without giving the owner an opportunity to raise a defense.
  • Many experts believe that the method DNS registries and registrars would have to use to redirect or block websites undermines Internet security.
Opponents of both Acts have raised a number of other complaints citing various problems, but most arguments shake down to the fact that the Acts provide a legal arsenal to censor perfectly legitimate content.
4.       How is the OPEN Act any different?
OPEN isn’t perfect, but it is a vast improvement to both SOPA and PIPA for several reasons:
  • Private causes of action are eliminated—private parties must submit a complaint to the International Trade Commission, which will then investigate the site and make a determination as to whether it is infringing;
  • It expressly protects websites that act in compliance with the DMCA Safe Harbors;
  • Sites aren’t blocked or redirected and enforcement is based purely on financial incentives. Cease and desist orders are issued to payment providers and advertisers to terminate financial support to rogue sites;
  • Prior to issuing Cease and Desist orders, the Commission provides the owner or operator of the allegedly infringing site an opportunity to raise any available defenses;
  • The Act discourages groundless complaints by requiring complainants to post a bond for preliminary injunction orders.
There are other marked difference between the OPEN Act and SOPA/PIPA, but there are some similarities as well. Some of the language used, particularly definitions, are similar to those we see in SOPA/PIPA. However, the OPEN Act is likely a step in the right direction to shut down foreign piracy sites without catching innocent non-infringers in the same net.
5.       Aren’t SOPA and PIPA already dead?
No. Both acts still have substantial congressional backing and financial support from the MPAA, RIAA, and other supporters. Although the opposition has increased and both Acts seem to be shelved for the immediate future, there is still a possibility that either Act will become law or will be re-presented in another form. Even if both Acts fail, there is a high probability that future legislation closely resembling those acts will appear before congress again—after all, they themselves are reincarnations of an earlier bill, the “Combating Online Infringement and Counterfeits Act” (COICA).
6.       So what can I as a game developer or fan do to stop this kind of legislation?
Simply being aware of the problem isn’t enough. Opponents to these and similar bills should contact their representatives and request that they withdraw support from bills that threaten a free and open Internet.


Rolling blackouts

  Posted by , 18 January 2012 - - - - - - · 831 views

As you probably know, many sites will black out tomorrow in protest of Senate Bill 968, or PIPA (Protect IP Act). Since this site is supported by WordPress (one of the companies protesting PIPA/SOPA), we may be down too. Being against SOPA/PIPA, I’m okay with that. Being trapped in a snow storm while all this is happening… Well, I’ll find something fun to do. In the meantime, please educate yourself about the ramifications this legislation will have on the Internet and the games industry and learn how to take action against it. Your voice has value. Do not let it go to waste.
My earlier article (please view the update)
A message in protest of the ESA’s support of PIPA/SOPA
Contact your congressmen and encourage them to stand against PIPA/SOPA
Thanks for hearing me out, everyone! Have a safe and happy blackout, and do your best to make the Internet the free and open environment we’ve fought so hard for.


What Happens When You Don’t Have a Written Agreement: [Part 1, Contract Basics]

Posted by , 12 January 2012 - * * * * * · 2,010 views
contracts, negotiation and 2 more...

It’s a common event—people decide to collaborate on a project without putting anything in writing. Ideally, the fact that there’s no written agreement won’t cause a problem; after all, you’ve decided to work together and hopefully the hiccups you come across won’t be deal-breaking.

But people put things in writing for a reason. Negotiations break down, trust crumbles, or outside influences such as money or the threat of litigation destroy the cohesion that once existed. In other words, things go pear-shaped and all you can do is look at the agreement to determine how you’ll handle the situation when those circumstances arise. Hopefully those circumstances aren’t inevitable. Hopefully they can be avoided. But you can’t hang your hat on hope, so it’s important to prepare for the possible eventuality of things going horribly awry.

This isn’t about being defeatist if that’s what you’re thinking right now. Three times out of ten nothing seriously horrible will happen and you’ll either break even or go bust. Two times out of a hundred you might see something great. But the reality of this industry is that things won’t always work out the way you anticipate, and more importantly (and as I’ve said in previous articles) what people anticipate or want may not always be the same thing as what you’d expect. Having something in writing can clear up any possible delusions or misinterpretations among the people you’re working with. Unfortunately, the truth is that people tend to only realize this AFTER things go wrong. So how does the law handle these situations?

Legal Theory behind Contracts


Contract law is heavy stuff, but it breaks down into two factors: a) whether a contract exists; and b) what remedies are available to the non-breaching party. Even if contract law in and of itself is complicated, forming a contract is as easy making a promise. In most cases you don’t need a bunch of legalese or a massive document signed on a specific type of paper. The basics for a contract, in writing or not, are the following:

Mutual Agreement. Just as it sounds—the parties are agreeing to something. This can be broken into two parts; offer and acceptance.

Example #1 (mutual promise): Mary and James decide to make a game together. Mary promises to handle the programming, while James promises to handle the art assets. Even though no money has changed hands at this point, a mutual agreement has been made and the “consideration” required for the agreement are the promises themselves.

Example #2 (consideration [e.g., future profit] +performance): Mary wants to make a game. She approaches James, an artist, and asks him to create the graphic content for the game in exchange for a cut of the profits. James accepts. In this case, the future promise of a profit is Mary’s consideration, and James’ promise to create art assets constitutes his consideration.

Example #3 (consideration [e.g., money] + performance): Mary wants to make a game. She approaches James, an artist, and offers to pay him $500 for James’ production of art assets for her game. James counter-offers with $1,000 for both art assets and animations. Mary rejects the counter-offer. Even though counter-offers are valid, Mary’s rejection of James’ asking price terminates the “mutual agreement” requirement of the contract, so no contract is formed.

It should be noted that a promise counts as consideration as well, provided it’s made in good faith. In all of the cases noted above, adequate consideration has been provided to form a mutual agreement for contractual purposes.

Consideration. As you’d probably noticed from the examples above, consideration is one of the most important parts of a contract. A mutual agreement generally relies on the fact that both parties have an expectation for the other—that expectation is called consideration. This could be payment for an invoice, production of content for a game, or the payment of a royalty based on that content. In any contract, both parties need to give something to make an agreement valid. Otherwise an agreement may be treated as illusory (where one party is getting something while giving nothing of value in return) or as a gift (where one party is giving something voluntarily without the expectation of receiving anything in return). In either case, the contract is unenforceable. The keyword for consideration is “bargained-for”— even if an agreement seems unbalanced or unfair on its face, it will still be treated as valid provided there’s evidence that the parties bargained or negotiated those terms.

As for examples of consideration, you can look to the “mutual agreement” section above.

Consent/Capacity. The parties have to be willing to participate in the agreement and be sane enough to do so; in other words, if you’ve got a gun pressed to your temple while making the agreement (whether literal or figurative), the agreement won’t be valid.

Example #1: (Blackmail) John knows that Mary is having an affair with Michael. John promises not to tell Mary’s secret provided she pays him to keep the secret. Apart from this being illegal (another requirement, as you’ll see below), it’s also “duress”, which can be used to render an agreement void.

Example #2: (Delusion) Mary asks her great aunt Dalia, who suffers from dementia, to fund her project while asserting that her project will save the universe from the horrible aliens Dalia has feared for the past five years. Because Dalia is not of sound mind, there is a strong argument that she lacks capacity to enter into this agreement.

Example #3 (Children) Mary wants to hire Tim, a 13 year old genius programmer, to assist her in her game’s development. Tim’s all for the project—his parents, however, are against it. Because he’s not of legal age in his jurisdiction to enter into an agreement without parental consent (the standard age is 18), any contract will likely be voidable based on his lack of capacity due to his age. Note the difference between voided and voidable—for capacity issues, the incapacitated party has the right to void the agreement, but the contract is not automatically void unless that right is exercised.

Legal Purpose. This should speak for itself, but considering the rampant copyright infringement in the games space these days, it may not be as obvious; the scope of any contract must conform to a legal purpose. In other words, if any party’s obligation results in an illegal activity, that obligation (and perhaps the entire contract, unless a severance clause is enforceable) will be void.

Example #4 (The Fan Game) Mary wants to make an unlicensed fan game based on the Star Trek franchise. She asks James to create the character models based on the original actors in the series for her game, and agrees to pay him $5,000 for this project. James accepts. Three months later, and after some research on James’ part, James turns over character models that look nothing like those in the Star Trek series. He contends that absent a license he can’t create the models Mary desires. Legally speaking, the James’ obligation to create content based on unlicensed IP is void because it constitutes an illegal purpose, so James is in the right—however, depending on the terms of the contract the entire agreement may be void, so James’ remedies may be limited to quasi-contract remedies.

In Writing. In some cases a signed writing is mandatory. Signed writings are typically necessary due to state law and the Statute of Frauds (under the Uniform Commercial Code), which has been adopted by most states. Examples of agreements that require a signed writing include: 1) a promise to pay someone else’s debt; 2) a promise in consideration of marriage (prenuptial agreements); 3) a service contract (e.g, independent contractor agreement) that can’t be completed within a year; 4) contracts for the sale of land or interest in land; 5) contracts for the sale of goods with a purchase price of more than $500; and 6) when an executor of a will promises to pay off the debt of an estate with his or her own money (not really something you’ll see in games law, but you never know).

Once it’s determined that a valid contract exists, the parties are bound to the terms of that contract. If a party breaches, depending on the seriousness of the breach, the non-breaching party can seek out remedies based on the harm suffered.

Breach versus Material Breach

If a valid contract exists the next issue comes down to performance and non-performance. If a party fails to perform their duties under an agreement, they’re in breach—however, that may not excuse the other party from performing. A non-material breach exists if the duty breached isn’t material to the entire agreement; for example, if a partial payment is made late and late payments aren’t expressly identified as a material breach, the rest of the agreement is still enforceable even though the non-breaching party may be entitled to damages arising from late payment. Both parties are still bound by the terms of the agreement and are not excused from performing.

On the other hand, if the breach is substantial—for instance, if a contractor fails to deliver the assets they’re contracted to deliver without justification, but has already accepted partial payment—that constitutes a material breach and the non-breaching party has the right to invalidate the agreement and seek contractual damages against the breaching party. The difference in the type of breach is important, and there are several circumstances where non-performance is excusable. None the less, any breach is grounds for seeking remedies.


The oversimplified explanation behind contract remedies is to put the non-breaching party in the same position she/he would have been in had the contract been performed. These remedies include specific performance, injunctive relief, and money damages. There are also “quasi-contract” damages, which include unjust enrichment and promissory estoppel;in simple terms, unjust enrichment exists when one party gets something for nothing, while promissory estoppel exists when one party acts in reliance of a promise that isn’t performed and suffers some inequity as a result. The goal of quasi-contract damages isn’t to put the non-breaching party in the same position he/she would’ve been in had the contract been performed, but to put them in the position they would’ve been in had no contract existed in the first place.

Remedies concerning agreements that aren’t in writing depend both on jurisdiction and circumstance. It almost always comes down to a case by case basis, but generally this kind of thing operates on a sliding scale. To simplify it in equation terms (and for the sake of simplification, let’s assume written agreements are necessary under the statute of frauds):

Promise + promise X no performance = no contract Promise + payment X no performance by either party = no contract Promise + promise X substantial/complete performance by either party = contract exists, contractual remedies enforceable Promise + payment X partial payment made, no performance = unjust enrichment, restitution the likeliest remedy Promise + promise X partial performance by both parties = contract may exists—court will examine relationship between parties, industry standards, and other factors to determine contractual terms Promise + payment X partial performance, no payment made= promissory estoppel/unjust enrichment damages depending on the nature of the performance

The chart doesn’t account for all available remedies or circumstances, but it should give you a bit of an idea as to how things will fall out on a case by case basis. Depending on your circumstances it may be better for you to pursue quasi-contractual remedies over contractual remedies or vice versa. To understand how these remedies break down in actual situations, let’s look at an example:

Example #5: The Illegal Contract (Fan Game): Mary wants to make an unlicensed fan game based on the Star Trek franchise. She asks James to create character models and art assets based on the series’ original IP, and agrees to pay him $5,000 for this project and his work is due a little over a year later. James accepts. Thirteen months later, and after some research on James’ part, James turns over character models and art assets that look nothing like those in the Star Trek series. He contends that absent a valid license he can’t create the models Mary desires. On the one hand, James has breached the agreement because he didn’t perform within the specified scope of his contract. On the other hand, the contract lacked a legal purpose, so the provisions requiring illegal conduct would probably be rendered void. Assuming Mary uses the new character models but doesn’t pay James, James could take two approaches—he could treat the contract as void due to illegality, or he could treat the remainder of the contract as valid and Mary’s acceptance of the new models as a waiver of the illegal provision. If he treats the contract as void, he would be entitled to restitution; this may amount to the market value of the work he performed, or injunctive relief to keep Mary from using the character models. If he treats the contract as valid with the illegal provision “severed”, he would be entitled to the $5,000 he’s owed under the contract.

Hopefully you now have a better understanding of basic contract law principles. With that said, the next part of this article will look at how this breaks down in independent game development.

UPDATE: SOPA’s Manager’s Amendment and Digital Distribution

  Posted by , 11 January 2012 - - - - - - · 494 views
In my previous article on Section 103 of SOPA, I discussed concerns relating to the Act as it was first presented to the House. The Act, however, has undergone a Manager’s Amendmentand as a result some of the language cited in the previous article has been removed. Many of the issues discussed in the earlier article have also been addressed.
Some of the salient points of the Amendment:
  • Language such as “website or any portion thereof” has been replaced with simply website or site;
  • Notification procedures by private parties to payment vendors and advertising providers have been removed and replaced by court order procedure;
  • Private parties under Section 103 of the Manager’s Amendment must now seek a temporary restraining order, preliminary injunction, or injunction against the defendant prior to sending notice to payment vendors and advertising providers for service suspension;
  • The definition for “Sites dedicated to theft of U.S. Property” has been revised in a few ways:
    • It now only applies to foreign sites;
    • the “engages in, enables, or facilitates” language has been removed, and the following definition applies: “… the site is primarily designed or operated for the purpose of, has only limited purpose or use other than, or is marketed by its operator or another acting in concert with that operator primarily for use in, offering goods or services in violation of…” copyright infringement for commercial purposes or for private financial gain, or trademark infringement;
    • the problematic monitoring language (“is taking, or has taken, deliberate actions to avoid confirming a high probability of the use of the U.S. Directed site to carry out acts” that constitute copyright infringement) has been replaced with “the operator of the site operates the site with the object of promoting, or has promoted its use to carry out acts that constitute  a violation of section 501 or 1201 of Title 17, United States Code, as shown by clear expression or other affirmative steps taken to foster such violation.”
  • Section 104 provides that in cases where the alleged violations only occur on a portion of a website, payment vendors and advertising providers are only required to blacklist that portion.
  • Section 105 has expanded the scope of its limitation of liability in a two ways: (1) the types of entities protected by the limitation of liability has increased to include credit unions and banking institutions; and (2) the limitation on liability, which was once limited to protecting the entities’ preemptive removal of sites posing a threat to public health, has increased to include the blacklisting of “foreign infringing sites” and “Internet sites dedicated to theft of U.S. Property”
The changes in the Manager’s Amendment seem to be a step in the right direction; however, a number of risks still exist and the vague, inadequately defined language used in the amendment creates a multitude of interpretations and loopholes. Taken one by one, the changes seem problematic for the following reasons:
  • Although “any portion thereof” has been removed, there is nothing to say that a website or site couldn’t be limited to a single web address—for instance, the web address for page two of a forum, or in the example referred to in my previous post, a page dedicated to the sale of a single product. The obligation restrictions provided for in Section 104 seem to support this presumption.
  • While section 104 would arguably permit payment vendors and advertising providers to limit enforcement to that single page, the option may not always be technically reasonable depending on how the payment system is structured. Furthermore, this is simply an option for payment vendors and advertising providers—they may still decide to blacklist the entire website.
  • The increased scope of Section 105 is one of the more deceptive aspects of the amendment, and potentially creates a back door approach to the revisions made to section 103. As Logan Margulies, attorney for Riot Games, pointed out in his IAmA on Reddit, the immunity offered, which is based on proactive blacklisting of allegedly infringing sites, presents a Hobson’s choice to payment vendors, advertising providers, search engines, domain name registries and domain name registrars: if a private party notifies those entities of an alleged infringement on a site and threatens to sue under SOPA, the entity has the option of either a) blacklisting the site and guaranteeing immunity based on a “good faith, credible” belief that the content is infringing (this is approximately the same standard a plaintiff needs to send a take down notice under the DMCA– in other words and based on historical reference, not much); or b) fight the good fight alongside the website owner and potentially lose that liability. As Mr. Margulies points out, that isn’t much of a choice for any business.
  • Although the notification procedure is removed and private parties can no longer submit baseless notifications to payment vendors and advertising providers, the Act now gives plaintiffs immediate access to the courts—once again bypassing the exhaustion of remedies under the DMCA Safe Harbors and other legal channels. And while this change may prohibit individuals with shallow pockets from throwing a website onto the blacklist, it certainly doesn’t prohibit deep pockets that would use those court orders to defeat competitors. As stated before, take down notifications by businesses to drive out competitors constituted more than 50% of the take down notices received by Google. It is very likely that this amendment will be treated in the same manner by companies with the financial backing to drive out foreign digital distributors from the U.S. market, even if (and possibly because) they offer customers better service;
  • While the definition of “Site dedicated to theft of U.S. property” has changed significantly, problems still exist. When we’re talking about user generated content or pages dedicated to content uploaded by a user when that content is potentially infringing, that page or “site” is arguably operated for the purpose of that infringement. However, although the website owner is not a direct infringer, the website owner would still ostensibly be on the hook for that infringement even though they are not the direct infringer, and would still be subject to injunctive relief by court order;
  • The addition of legally vague standards like those provided for in 103(a)(I)©(ii) of the Manager’s Amendment (“as shown by clear expression or other affirmative steps taken to foster such violation,”) may not actually make any difference as far as removing the obligation to monitor created in the original draft. A plaintiff could argue that an “affirmative step” includes asserting a policy of not monitoring or moderating content except as necessary to comply with DMCA safe harbors or their own country’s laws. Other “affirmative steps” may include permitting a forum to exist, or if we look at the example provided in my earlier article, having an infrastructure that permits users to create their own “sites”.
While the original hypothetical mentioned in my original article may change in light of these revisions, the Act at its core threatens legitimate digital distribution channels with both criminal and civil penalties. The threat of an injunction and the removal of financial support by private parties is still a prominent part of the Act even if the easily-exploited notification procedures are removed. Under this legislation any large business can easily petition for court orders for the sole purpose of driving out foreign competitors, thus providing customers and content creators alike with fewer options for digital distribution. And the revisions to section 105 arguably makes the court order approach unnecessary– entities granted a promise of immunity have a greater stake in protecting that immunity, legally and financially speaking, than protecting foreign sites that may only offer incremental income.
Living in a global market facilitates competition and growth. Digital distribution channels are the living example of that growth and are vital for independent game developers. The U.S. marketplace does not exist in a vacuum, and it makes little difference where a site’s owner is located. U.S. consumers still have a right to enjoy those distribution channels without the threat of those channels being blacklisted to the sole benefit of U.S. competitors.
This Act doesn’t just threaten digital distribution. It threatens every facet of the Internet and particularly online communities. At this time the markup of the Act has been delayed– other changes may be implemented that either reduce the risks presented or reintroduce earlier regulations and procedures. However, there is nothing to suggest that the core drive behind the legislation will change in any way.