…but we agreed, we have a contract! waaaah

Not if you contracted in Second Life you don't.

Or do you...? 

In addition to knowing next to nothing about property law I also know nothing about the law of contract. So here goes - contracts in virtual worlds…

In many legal systems for there to be a commercial contract a number of conditions need to be met. One of these conditions is that there must be a ‘consideration’.

That is if one is receiving a good or service then you are need to give something of value in return for there to be a binding commercial contract. The value can be nominal famously as low as the value of a peppercorn, but it must be value.

Common practice in virtual worlds and in particular Second Life is the payment for services using the in-world currency.  In the case of Second Life the currency is Linden Dollars (L$), these are defined in the terms of service thus:

“1.4 Second Life "currency" is a limited license right available for purchase or free distribution at Linden Lab's discretion, and is not redeemable for monetary value from Linden Lab.

You acknowledge that the Service presently includes a component of in-world fictional currency ("Currency" or "Linden Dollars" or "L$"), which constitutes a limited license right to use a feature of our product when, as, and if allowed by Linden Lab. Linden Lab may charge fees for the right to use Linden Dollars, or may distribute Linden Dollars without charge, in its sole discretion. Regardless of terminology used, Linden Dollars represent a limited license right governed solely under the terms of this Agreement, and are not redeemable for any sum of money or monetary value from Linden Lab at any time. You agree that Linden Lab has the absolute right to manage, regulate, control, modify and/or eliminate such Currency as it sees fit in its sole discretion, in any general or specific case, and that Linden Lab will have no liability to you based on its exercise of such right.”

Source: http://secondlife.com/corporate/tos.php (retrieved on 17 Sept 2009)

Of course the ToS does not say L$ cannot be redeemed for value, it says they cannot be redeemed from Linden. So Linden are not standing in the way of two parties making an agreement using L$.

But hold on. If the parties succeed in making a contract and the consideration is L$ then the L$ must have value. What’s more the value cannot be something that has meaning only to the parties, it must be value that is widely recognized, if not any two parties can just make up value between themselves.

Also, like in cases that have popped up, we can look at what Linden say about Second Life, this link says it all really: http://secondlife.com/whatis/?lang=en-US#Make_Money.

What this suggest to me is that there are two possible states:

1. L$ have no value – thus no commercial contract is ever formed in Second Life where the consideration is L$. That is no one ever buys anything in Second Life, no agreement based on these terms is binding on any party.
2. L$ do have value (outside that defined by just the two parties) – as such Linden surely must at the very least have a duty of care to maintain the currency as an instrument of value. There must be a public interest here. Actually I’d suggest that by definition of consideration a public interest is entailed.

If so, where does this duty end? Quite apart from general considerations of unconscionability, how can Clauses in the ToS that use the phrase “reason or no reason” cannot stand as this situation must imply that Linden must have reasonable reason to act in many cases. What about if SL shuts down – do contracts then hold as the consideration has zero value (I assume that it’s fine for there to be value ‘at the time’ but I don’t know).

Go on legal types giza contract law 101 what I have I missed here?

Comments

[James Grimmelmann]

1.

Here's the bug, in American contract law. Consideration can consist of taking an action, and transferring the L$ can be the needed action. It doesn't matter whether the L$ have "value."

[ren reynolds]

2.

James - interesting.

1. Is a thing that occurs in a virtual space really an 'action' under US law?

2. Whose law prevails when one or more of the actors is not in the US?

3. If US law only applies when both parties are in the US then this is a minority issue as most SL users are not American and more broadly the vast majority of virtual world users are not American.

[brian]

3.

Sorry Ren, but your post relies on several assumptions that are either incorrect or the opposite of actual legal rules:

1. "the value cannot be something that has meaning only to the parties, it must be value that is widely recognized, if not any two parties can just make up value between themselves"

This is an incorrect statement of law. Parties can contract for consideration that only has value between the two of them, that's why contracts are referred to as a type of private law between two people. That a specific piece of consideration is "widely recognized" as valuable means nothing, it only matters that it serves a detriment to the party giving it or a benefit to the party receiving it from their point of view.

2. Even a "limited license" qualifies as consideration in the eyes of the law. As such the transfer of the same from one SL user who received it from Linden to another SL user would be sufficient value to support a legal contract, even if the limited license is subsequently devalued or revoked.

3. The fact that L$ have value does not place a duty on Linden to maintain there existence. Linden is a Licensor of L$ who has reserved the right to revoke them. Linden built this language into their EULA using "reason or no reason" type language because if they did not they would never be allowed to go out of business or eve adjust their economy to stave off collapse from inflation. This entire portion of the discussion falls into the trap of assuming that if something sounds wrong there must be a public interest against it. As is the case with most such assumptions, this one fails because it is only being looked at from the perspective of one party. Linden must have the right to revoke the license because they can not go on forever, no service can.

4. "What about if SL shuts down – do contracts then hold as the consideration has zero value (I assume that it’s fine for there to be value ‘at the time’ but I don’t know)."

You asked the right question, the value of contract consideration is determined at the time of the transaction, so Linden shutting down SL would do nothing to invalidate transactions paid for in L$. If this were not the case, then art speculators or stock traders could just ask for their money back if the value of their purchase subsequently drops or evaporates entirely. Obviously that just isn't how the law works.

A fine try friend. You brought up some issues which, while not novel, are at least interesting, so kudos on that. Next time though, I would suggest sticking to questions and letting legal folks handle the answers. Keep up the good work!

[brian]

4.

Scooped by Grimmelmann again. I have to learn to type faster or say less.

[ren reynolds]

5.

Brian
Don't say less, thx for covering each point. You'll note I asked for a legal 101 on this one as it's one of those non-obvious things to those of us that are not lawyers.

However, my question above still stands about territory - are the points being made here specific to US law / systems of Common Law?

[brian]

6.

I don't know, I believe the SL EULA has a choice of law provision that selects a jurisdiction within the US whose laws would be applied to the contract but I am unaware of how often those clauses are honored or ignored in other countries.

[Lochiel]

7.

Are you arguing that Linden has a duty to uphold the value of items, as that value is perceived by the players?

How does that translate to other virtual worlds? Can I sue Blizzard if it nerfs an item in Wow, causing its value to collapse. Do virtual worlds that allow the purchase of ingame items via RMT have a greater responsibility to maintain the perceived value of ingame items and currencies?

[ren reynolds]

8.

brian
Stretching my knowledge thiner - I thought in the EU if an eCommerce offer was made to actors in a state then the country of destination principle applied.

But
1/ I'm not sure about this
2/ I'm less sure about whether an offer between avatars would count (or what the conditions would be to make it count)
3/ Whether there is any difference in law that makes any difference anyway

Non-US lawyers?

[ren reynolds]

9.

Lochiel
>Are you arguing that Linden has a duty to uphold the value of items, as that value is perceived by the players?

Indirectly I'm suggesting that if what I said is correct (which at least in the US it looks like it's not) then if contracts hold then mb there is some duty on LL for at least the maintaining some (not any particular) value of the L$, if contracts are to hold - I'm not saying that it's necessary or making a normative argument for them to hold.

>How does that translate to other virtual worlds? Can I sue Blizzard if it nerfs an item in Wow, causing its value to collapse.

No.

>Do virtual worlds that allow the purchase of ingame items via RMT have a greater responsibility to maintain the perceived value of ingame items and currencies?

No. That's a very different argument one that I think we've done to death on TN, then exhumed it, killed it again and gone for a drink after.

[ted stevens]

10.

It seems to me that any contract between two US citizens could be adjudicated in a US court, including one involving virtual property. This is actually routine. Many cases are heard involving virtual property. Linden's language is irrelevant because Linden cannot legally develop language that would remove any right of an US citizen to avail herself of a US court. Lindenlabs may mandate arbitration, perhaps, but no language here discloses that. The Linden labs clause posted merely indemnifies Linden against an action brought by any of its members against Linden. So yes, if you have a contract involving real or virtual property it could be brought to a court with US jurisdiction. why not?

[Daniel Stengel]

11.

In Civil law, a contract requires two matching declarations of intent. Consideration, however, is not required. Thus, the question whether there is a consideration does not matter from a Civil law perspective (proviso: I'm obviously not familiar with all Civil law jurisdictions).

[ren reynolds]

12.

ted - thx, but what about one or more non-US citizens?

[Nexus Burbclave]

13.

OP, I'm not clear if you are unaware of the fact that there is a Linden Lab sponsored Linden/Dollar exchange that is a two-way exchange, or if it is your assertion that the TOS makes the running of that exchange irrelevant. On that exchange, the Linden Dollar has had a fairly consistent value of 270 Linden Dollars to 1 U.S. Dollar.

IANAL, but TOS aside (particularly given the contradictory fact that there is a Linden Lab run exchange), it would seem like this would be adjudicated the same way that any other form of barter currency or scrip would be adjudicated. Is there any precedent in these areas, perhaps involving the NYC subway tokens(one of the older more established examples of scrip)?

[Nexus Burbclave]

14.

ETA: Sorry Ren, the bylines on this blog are so small I missed it on first inspection. In case you were not aware of the existence of the lindex, you can find more info on it here:

http://secondlife.com/statistics/economy-market.php

[ipguys.wordpress.com]

15.

Quick and dirty contract law primer: There are four elements to a breach of contract claim in the US: (1) existence of a contract; (2) performance; (3) breach; and (4) damages.

When I first read this post, I didn't think there was much of an issue with consideration (which goes towards existence of the contract). Exchanging a promise for another promise usually counts as consideration.

Example that is likely a contract: Alice promises to give Bob $20, because Bob promised to mow her lawn. Alice hasn't given Bob anything but a promise, and Bob hasn't given Alice anything but a promise, but there is an exchange of promises, and therefore consideration.

Example that is likely not a contract: Alice promises to give Bob $20, because she felt like it at the time. Bob hasn't given Alice anything of value, so there's no consideration.

In the SL case, I think that a promise to transfer L$ would likely count as consideration, even if the only "real value" is a limited license right, as it is nevertheless a promise.

I think that the real issue here is with damages. Even if you have a valid contract, one party performed their duties under the contract, and the other party didn't, the plaintiff still needs to show some sort of damage in order to recover. Further, courts only reward a successful plaintiff in a contract case the amount by which they were damaged.

Example from above: If Bob mows Alice's lawn and Alice refuses to pay, Bob can show damages in several ways (the cost of the gas for operating his lawn mower, or the expectation of the $20 that they had agreed upon, etc.) If Bob never mows Alice's lawn and Alice has to hire Carl to mow her lawn for $30 (due to the incredibly volatile nature of the lawn mowing services industry), Alice can show $10 in damages based on Bob's promise, and would probably be able to recover the $10 from Bob.

Showing that a contract existed in the first place is likely to be much easier for parties in SL than it will be for them to prove damages. For example, if someone promised to do something for L$200, and the plaintiff had to get someone else to do it for L$300, the plaintiff is going to have to prove the real life monetary value of the extra L$100.

If a RMT occurred to obtain that extra L$100, maybe it would be easier to do so, but I still think it would be an uphill battle.

[Andres Guadamuz]

16.

The contractual issue in civil law countries would be that there is a contract, as we do not have consideration, all you need are valid offer and acceptance. So in the example offered by ipguys above, if Alice promises to give Bob $20, because she felt like it at the time, in continental traditions there IS a contract.

As James and others have already pointed out, you can have non-monetary consideration, what there needs to be is reciprocity.

What I find interesting is the jurisdiction and choice of law implications. According to the existing Brussels Regulations and the Rome Agreement, there are different rules depending on whether there is a consumer involved. In B2C transactions, consumer’s law prevails, but if the supplier only intended to trade on their own country, then their law will prevail. In B2B and C2C, supplier’s country prevails first, and then the law of the country where effects of contract take place.

Assuming we are talking about international transactions, say one European and one American, my guess would be that you could sue in either jurisdiction because we are talking about either two consumers or two businesses (according to EU rules). I would guess American jurisdiction rules are similar.

[Alvid Majestic]

17.

it seems to me that this part of the TOS was valid back in the days when GOM transacted L$<->US$ exchanges. With the LL takeover of the market and putting it onto the viewer interface, they in fact are in the money exchange business and as such are equating L$ and US$ at some exchange rate.

[Ren Reynolds]

18.

Alvid - i'm not sure Linden would see it that way :)