Previously I discussed why the adorably naive (and now cancelled) Star Wars open world RPG Kickstarter would not be able to use the Star Wars IP for his proposed game without the express permission of the copyright holder, Lucasfilm Ltd. Today I discuss the potential legal recourse a backer to a crowdfunding project has against a project organizer who fails to deliver on their promised rewards.
What is a Contract?
When a creator posts a project on Kickstarter, they’re inviting other people to form a contract with them. Anyone who backs a project is accepting the creator’s offer, and forming that contract.
Kickstarter is not a part of this contract — the contract is a direct legal agreement between creators and their backers.
But what does it really mean to form a contract? In a nutshell, a contract is a promise that is enforceable by law. On the first day of Contracts class every semester, law school professors across the land will utter variations on the following statement: “Three elements are required for a valid enforceable contract: offer, acceptance, and consideration.”
- An offer is an objective manifestation of the offeror’s willingness to enter into a specific, defined agreement with the offeree.
- Acceptance is an objective manifestation of the offeree’s willingness to be bound by the terms of the offer.
- Consideration can be defined as “a bargained-for legal detriment.” In other words, it’s a promise to do something (you didn’t already have to do) or refrain from doing something (you have the right to do) in response to the proposed agreement. (This is the part that can often get a complicated.)
If all three elements are present (an offer is made, the offer is accepted, and consideration is present between the parties), a contract has been formed as agreed upon by the parties (and can’t be arbitrarily altered by either party without coming to a new agreement).
A Backer’s Contract with a Crowdfunding Project Organizer
Here’s an example of how this all works in practice, in a crowdfunding context:
When a page for a crowdfunding campaign goes up on, say, Kickstarter or Indiegogo or something, there are typically a number of different rewards described for various “tiers” of backers contributing different amounts. These various tiers are different offers that a prospective backer may accept.
In Devin’s Internet-famous Star Wars open world RPG Kickstarter, the listed reward for a $60 backer was “[a] copy of the game when it becomes available.” This conveys that the offeror (Devin the project organizer) would like to enter into an agreement with the offeree (the prospective backer), wherein the backer contributes $60 now, and in exchange, the organizer sends the backer a copy of the finished game, whenever that happens (with estimated delivery date of December 2017).
A prospective backer viewing this Kickstarter page could read Devin’s offer, and if they so choose, accept it. In the simplest law school hypotheticals, an acceptance is conveyed by a person actually speaking to the offeror and saying “I accept your offer,” but an acceptance need not be so literal. Acceptance can be by word or by deed, and in this case, going to the Kickstarter page, selecting the $60 pledge tier and clicking through the contribution process would amount to an acceptance of Devin’s offer of a copy of the finished game in exchange for $60.
There is also consideration: the “bargained-for legal detriment” for the backer is the $60 contribution, and for Devin it is delivery of a copy of the finished game. Note that a contract is formed only if the backer’s pledge is actually fulfilled and the money goes to the project organizer, as some Kickstarter/Indiegogo/etc. campaigns only take the pledged money and give it to the organizer if the stated financial goal is reached by the campaign deadline.
So Devin puts up this page, a backer clicks through and contributes $60, and bam, a contract between Devin and the backer has been conjured into existence. Awesome. So what happens next?
Breach of Contract
In a perfect world, the terms of the contract are fulfilled, both parties are completely satisfied, no one wants to sue anyone, and the phrase “starving lawyers” begins to replace “starving artists” in everyday usage.
Unfortunately, that’s not the world in which we live. On Kickstarter alone, as of the time of this writing only about 36% of projects are successfully funded, and even among projects that are fully funded, about 1-in-10 projects still fail to deliver the promised rewards to its backers. In those situations where a crowdfunded project takes backers’ money but fails to deliver the rewards it promised, the project organizer has breached the contract it had with the backers.
When a contract is breached, the injured party can sue breaching party for a remedy. Different types of remedies are available for someone who has been injured by a breached contract, but in the crowdfunding backer situation, at a minimum a backer is going to be seeking a refund of their contribution. (A party may also seek the value of what was originally promised under the contract and reasonable costs incurred as a result of the contract breach, or performance of the original contract in the case of the sale of something unique like land. In this example, since a new game typically has a market value of around $60, seeking a refund of the original $60 contribution would be the most likely course of action for most people.)
The Reality of Suing for Breach of Contract
However, even though one could sue a project organizer to recover their contribution, in practice it doesn’t happen often for a number of reasons. First and foremost, the rituals to summon and bind a lawyer to your will can be expensive, and most people aren’t going to be willing to to spend the hundreds or thousands of dollars it may cost to take the actions required to recover that $60 contribution (which may require anything from a strongly worded letter on a lawyer’s letterhead all the way up to a full-blown lawsuit). As fun as it may be to daydream about for someone who’s been snubbed by a crowdfunded project, it’s probably not the best idea to spend several thousand dollars just to recover less than a hundred merely out of spite.
There is an option for people who are strongly motivated to pursue a refund through the legal system but don’t want to pay a lawyer to do so: small claims court. The specifics are different in each state, but here in California, you can generally go to small claims court to sue for amounts up to $10,000. You must first attempt to collect the money owed somehow, such as by a demand letter or phone call, before suing in small claims court. Lawyers are not allowed within small claims court (due to powerful wards made from garlic and holy water), but you can have a lawyer help prepare your case beforehand if you like. For breach of contract cases, the statute of limitations is four years for written agreements and two years for oral agreements (more on those below).
The “Judgment Proof” Defendant
But whether you choose to hire a lawyer or sue on your own, there’s one big caveat: is the person you’re thinking of suing judgment proof? Informally, we refer to someone as being “judgment proof” when they have no significant assets to their name that could be collected in a successful lawsuit anyway. (In other words, “too poor to sue.”) When you win a lawsuit, the court doesn’t just take the money from the defendant and give it to you; rather, the court enters a judgment and it’s up to you to collect the money. If the defendant has no money to speak of and no wages to garnish (say, for example, if the financial and reputational fallout from the failed crowdfunded project has driven them into bankruptcy), even if a court agrees with you that the defendant owes you money, you’re not likely to see any of it.
Sidenote: But Where’s the Actual Contract?
Note that in the preceding discussion about breached contracts, there was never a paper contract physically signed by hand by both parties, which is what generally comes to mind when one hears “contract.”
Consider that the most basic list of required elements for a contract (“offer, acceptance, consideration”) doesn’t also include “…and a piece of paper with all the terms of the agreement and two signatures” at the end. Colloquially we all generally refer to the written instrument that outlines the terms of the agreement as “the contract,” but if you want to get technical (and let’s face it, you probably do if you’re reading this blog) the contract is actually the incorporeal concept of the agreement between the two parties (old-timey courts like to call that “the meeting of the minds”) – the written instrument that we usually call “the contract” is actually just the physical evidence of the terms of the contract.
At first this may seem like a distinction without a difference, but this is the reason why non-written oral agreements between two parties can also form a valid enforceable contract. A written instrument is handy for referring back to to verify terms of the agreement when there is a dispute, but it’s not always strictly necessary. As with most things in the law, there are exceptions – certain types of agreements must be in writing in order to be valid (e.g., the sale of land, the sale of goods over a certain value, agreements that will take more than one year to complete, etc.), but it’s still important to remember that purely spoken promises can sometimes be binding as well.
If you have a lawyer or work at a company with a legal department, you may have wondered why cautious lawyers will often discourage employees of a company from having certain kinds of interactions with external parties that the company does business with, like vendors or distributors. In some situations, if people on both sides make enough promises for a deal to be reasonably inferred, an employee may inadvertently bind their company to a contract without a formal paper contract ever being drawn up and signed by both parties.
To form a contract, there must be an offer, acceptance of that offer, and consideration (“bargained-for legal detriment”) between the two parties. Backing a crowdfunding project that promises backer rewards constitutes a contract between the backer and the project organizer. If the project organizer fails to deliver, they’ve broken that contract and could potentially be sued for breach of contract. In practice, this doesn’t happen often because suing someone can be expensive and time-consuming, and many project organizers of failed crowdfunding projects often don’t have much money left to take anyway. Finally, keep in mind that a “contract” is an agreement between two parties, not necessarily a piece of paper.