Overview of common NFT contract conditions
Participants in the fast-moving – but legally uncertain – NFT (non-fungible token) market can maximize their business opportunities and reduce risk by defining their specific role early and clearly defining where their obligations begin and where their responsibilities end. It is crucial to understand and define your role, and the role of your counterparts. Here are some of the most important contractual issues that NFT market participants can expect to face.
1. Terms of use for seller
The artist who creates the underlying media content associated with NFT (NFT Media) legally owns the intellectual property rights to the artwork. Unless the artist mediates these rights in the sale of NFT, a buyer will not automatically have the right to exploit the artwork commercially. The terms of use for NFT sales will regulate what an NFT buyer can and cannot do with NFT and NFT Media.
2. The trading platform’s terms of use and agreements
Trading platforms where NFTs can be created, listed, sold or purchased will have terms of use that govern the NFT marketplace operator’s liability and disclaimers of liability to its customers. These terms of use will also apply between buyers and sellers of the NFTs displayed on the trading platform. NFT trading platforms may also enter into specific agreements with NFT sellers or technical suppliers.
3. Technical supplier agreements
NFT salespeople often hire technical vendors to perform NFT customizations and other deliveries on behalf of the salesperson, such as creating or creating NFTs, managing NFT sales, or offering cloud accounts or decentralized storage solutions to host NFT Media. These agreements may contain certain provisions on work for hire.
4. Payment processor and exchange agreements for cryptocurrency
Cryptocurrency payment processors allow NFT sellers to accept cryptocurrency payments and convert these cryptocurrency payments into fiat currency. In some cases, these services can be extended to stock exchange and wallet hosting services that allow NFT sellers to store cryptocurrencies, and even store NFTs, in hosted wallets. These agreements regulate the use of payment gateways for cryptocurrencies, and depots for cryptocurrencies and NFT, for NFT sellers.
5. Intangible agreements related to NFT Media
The media artist used to create an NFT may modify the original media to create new NFT media jointly owned by the artist and a second owner without infringing on the original artist’s sole copyright. Agreements between the original copyright owner and any joint owners in the new NFT Media will govern this relationship.
6. Sales agreements related to commercial exploitation of NFTs
Third-party vendors can offer viewing and viewing options for NFT owners, such as digital art frames that give NFTs a lifelike shape and virtual land (eg, digital malls) to display NFTs. Opportunities for the use of NFTs in the meta-verse may also be offered by certain third-party vendors. Terms of use, and sometimes tailor-made agreements, will regulate the relationship with these suppliers.
Key issues to address / assess in NFT contractual relationships
Although NFTs are full of legal issues that have not yet been explored, the business opportunities in the NFT market show no signs of abating. On the seller side, the main goal is often to secure future income from an NFT through first-time sales and perpetual royalties. On the buyer side, the main goal is often to utilize NFT for various consumer or other benefits. On the third-party supplier side, the main goal is to extract the value of the agreement without long-term obligations after the service has been completed. These various interests include increased focus on negotiations on rights such as the seller’s underlying intellectual property rights, the buyer’s resale rights and controlled access from the third party supplier. As these negotiations develop, there are some important contractual provisions to consider.
1. Define “Services”
Providers should clearly define the scope of their services and avoid tertiary obligations beyond their services during use or service agreements. The terms and conditions for the sale of an NFT in the primary marketplace should comply with consumer protection laws to prevent misleading a buyer into buying stolen work, a trademarked trademark or a celebrity parable.
2. perpetual royalties
It is in the artist’s and / or NFT seller’s best commercial interest to receive future royalties from any subsequent sale of NFT on the secondary market. After all, royalties can grow over time as NFT increases in value in the secondary market. To the extent practicable, royalty rights should be both articulated in contract terms and programmed into smart contract code, to ensure that NFT artists and sellers receive royalties as specified.
3. Rights in NFT Media
one. Reproduction / income generation
The right to use NFT for commercial gain depends to a large extent on whether, and to what extent, the seller actually mediates the underlying intellectual property rights with the transfer of NFT. The rights of NFT sellers and buyers should be explicitly defined in this connection. Important intellectual property rights to consider include rights in the media used to generate the new NFT medium, as well as the rights of the copyright owner (s) to use the NFT media vis-à-vis NFT buyers, other contractors or other third parties who may have an interest in market the NFTs.
b. Show, see, use
At the very least, the buyer of an NFT gets the basic bragging rights that come with owning an NFT. Basic NFT buyer rights should provide many opportunities for the buyer to enjoy NFT, such as viewing it in a metaverse or using it in a gaming application. However, all rights beyond viewing, viewing and consumption should be carefully considered before being granted to NFT buyers.
c. Offensive / inappropriate content
Although there is no clear distinction between art and adult content, some NFTs have already been removed for allegations of inappropriateness, or sometimes even without an explanation as to why. If necessary, adult content should be carefully designed when incorporating into an NFT. In addition, NFT marketplaces and sellers should consider contract terms that provide protection against offensive and inappropriate content in an NFT that may cause business interruption or damage to reputation.
4. Smart contracts
Smart contract coding and rollout will often be a core component of agreements related to NFTs. A key issue that the parties should consider, and remember in contract terms, is whether the NFT smart contract will be programmed with a “kill switch” that allows the smart contract code to be changed or updated.
Under certain circumstances, there may be benefits to programming the smart contract without a kill switch. For example, the absence of a kill switch can give the market a higher degree of confidence that the NFTs will not be changed after sales. On the other hand, the ability to change smart contract code can offer certain benefits, especially as technology continues to evolve and new technical functionality becomes available. A special area of relevance here is related to ensuring perpetual royalty features. As the open source code community continues to find creative ways to enhance perpetual royalty functionality, NFT vendors can benefit from implementing smart contract upgrades to improve these features as new techniques are deployed, tested and validated.
Third party audit rights are another area that should be considered. Providing a third party technical revision of the smart contract code will provide assurance that the code will function as intended. The cost of a third party technical audit, and the cost of all the work required to correct any identified deficiencies, is a point for contract negotiation. In the same way, the parties may have an interest in defining certain key smart contract functions and designating responsibilities and remedies in case these functions are not implemented correctly.
5. Privacy and security of data
Privacy issues should be carefully considered during NFT contract negotiations. As a minimum, contract terms should address privacy rules and compliance with applicable privacy laws. Depending on the nature of the transaction, it may be necessary to incorporate additional data protection issues, such as remedies for breaches of privacy and data breaches, as well as related insurance and indemnification. Security incidents and notification procedures should be clearly defined. In some cases, a separate supplement for privacy and security may be applicable.
6. Access to sales / customer data or other valuable data
In some cases, technical service agreements involving NFTs may lead to the collection and generation of valuable data. In these cases, privacy provisions will have to be integrated with provisions governing the parties’ rights to access, use and claim ownership of certain data. This data can be especially valuable because the NFT market is so new and reliable market reference data is not readily available. In some cases, one contracting party may seek ownership of certain data, while the other party may apply for a limited license to use the data in a manner that is mutually beneficial to the parties. The parameters for these schemes should be well evaluated and clearly defined in the contract terms. To the extent that one party is allowed to maintain and use data owned by the other party, the terms of the contract should formulate standards for anonymisation and / or de-identification of data that can be considered personal data in accordance with applicable privacy laws.
7. Digital Millennium Copyright Act
The Digital Millennium Copyright Act (DMCA) will provide certain remedies in scenarios where NFTs are created and sold using NFT Media in a manner that infringes a third party’s copyright. NFT marketplaces and other vendors involved in the embossing and initial sale of NFTs should have a clear DMCA notice as well as an internal DMCA response plan to combat intellectual property infringement. DMCA notification procedures and a designated DMCA agent are also required and should be included in the Terms of Use.
8. Standard terms are no longer standard
As with the cryptocurrency market, the unique aspects of the NFT market require certain updates of contract clauses that typically regulate things like termination, indemnity, limitation of liability and other concepts that are sometimes thought of as standard clauses. With regard to termination, market conditions may require provisions that reflect the evolving balance of power between different market players. Provisions on indemnification and limitation of liability should address copyright / intellectual property, technical aspects of decentralized blockchain networks and other NFT-specific issues.
The content of this article is intended to provide a general guide to the topic. You should seek specialist advice on your specific issues.
