Many in the crypto and blockchain industry view Terms & Conditions (T&C) as just another checkbox – something everyone puts on their website because it’s standard practice. But that’s a misconception, as well-drafted T&Cs serve critical legal functions, protecting the blockchain project and even its founders from liability, regulatory and financial risks, and potential lawsuits.

In this article, I’ll first explain why T&C are essential for your blockchain project or Web3 business, and what happens when they go wrong. Then, I’ll focus on the issues of having T&Cs that were drafted using AI tools, contain excessive, unfair provisions, or were copied from a competitor because their business model is kind of similar. Lastly, we will discuss how to ensure that your T&Cs are well-designed and enforceable.

What are the Terms and Conditions?

Terms & Conditions (T&Cs) – are a fundamental agreement between a project and its customers. It structures transactions between them by establishing its legal status, defining rights and obligations, and, crucially, outlining any exclusions or limitations.

How T&Cs Protect Your Crypto Project

When starting a business, various legal instruments help protect both the founder and the project. One such instrument is registering an operating company to conduct business. This entity receives financing, holds rights, and assumes obligations, including financial ones. Crucially, it shields founders from personal liability – without a legal entity, they risk their personal estate and assets if the business fails or goes bankrupt. In contrast, a registered company typically has limited liability, restricting financial exposure to its statutory capital and acting as a legal shield for founders and team members.

T&Cs function similarly as a legal shield for your project, protecting it in disputes with users and third parties. Key protective provisions in T&Cs typically include limiting liability, waiving class actions, selecting applicable law, and choosing a dispute resolution venue, among others. While T&Cs are not always legally required, they are still very essential for safeguarding a crypto project.

Take the waiver of class action clause as an example. In many jurisdictions, individuals have the right to file a collective lawsuit. For a single user, litigation might be too expensive, but if users join forces, it becomes much easier. If the company loses the case, it may have to pay damages to all claimants, potentially amounting to millions of dollars and leading to bankruptcy. In some cases, having T&C can mean the difference between facing a devastating lawsuit or not having a case against you at all (because individual litigation is too costly for users).

Another key function of T&C is that they serve as a contract that legally structures and governs your project’s relationship with users. Without this instrument, determining the applicable rules may be challenging or may put you at a material disadvantage. When operating B2C, project’s operations and relationships with users are typically subject to strict pro-consumer laws. Having T&C allows you, in most cases, to establish your own rules within the framework of basic minimum requirements that cannot be overridden.

Enforceability Issues

Enforceability is a legal concept that determines whether T&C or other legal agreements can be upheld in court in the event of a dispute. If a provision is enforceable, the state’s legal system can compel the violating party to comply.

The opposite concept is unenforceability. If a court declares T&C unenforceable, they will not apply to the relationship with your customer and you will not be able to rely on them, including in court. In such cases, standard provisions implied by law will apply instead, which could be highly unfavorable for your business.

Unenforceability can arise due to various issues, such as:

• Problematic contractual provisions, such as unfair terms.
• Lack of proper customer consent, for example, if the “I accept” button was missing or incorrectly implemented.

In essence, if T&C are unenforceable, you cannot rely on them in a dispute, which defeats their very purpose. This is why ensuring enforceability is crucial when drafting T&C.

Who is Legally Required to Have T&Cs?

In certain cases, the law mandates that a business implements T&C. In the case of the Web3 industry, this would typically include projects that require a licence to operate, such as exchanges, custodial wallets, fiat on- and off-ramp services.

However, there are other cases where T&C may also be mandatory, primarily due to consumer protection laws. For example, the European Union is widely recognised as a pro-consumer jurisdiction. As a result, certain service providers operating there must have T&C in place. This includes projects with an “online platform” feature that allows users to publish content, as regulated under the Digital Services Act.

Common Mistakes When Creating T&Cs for a Blockchain Project

Before diving into the most common mistakes, it’s essential to recognise that not all T&Cs provide real legal protection and are enforceable. Many blockchain projects either overlook key legal aspects, rely on generic templates, or unknowingly include unfair provisions. These mistakes can lead to regulatory risks, legal disputes, and reputational damage. Below, we explore the most frequent pitfalls to avoid when creating T&Cs for a blockchain project.

Poor Drafting

Imagine believing you’re protected by having T&C when, in reality, you’re not. This brings us to the issue of using AI to draft T&C, without any professional review. While AI can generate text, it’s far from perfect in legal sense, and some clauses may be outright invalid. From the legal standpoint, invalid clause means the provision doesn’t exist.

First, AI can only produce a general document, not one tailored to your specific business model. Even with a highly detailed prompt, AI is unlikely to identify what else needs to be addressed or what might be missing.

Second, if the document leaves room for misunderstandings, it will likely be interpreted against the project as a drafting party in case of a dispute.

Additionally, the structure and design of the document can sometimes affect its enforceability. For example, the way and location in which defined terms are used, the use of excessively small fonts, or the hiding of critical information within the text can all impact its enforceability.

Unfair Terms and Provisions

It is crucial to understand who your main users are. If you have a B2B business model, you have more flexibility in deciding what to include in your T&C. However, if your project is B2C, legal limitations may apply due to consumer protection laws.

Regulations in different jurisdictions state that unfair contract terms are not binding on consumers. This means that, regardless of what is written in your T&C, default pro-consumer rules will still apply. Therefore, it is crucial to understand the relevant regulations on unfair contract terms.

Examples of such unfair terms include provisions that:

• Limit the project’s legal liability in cases of death or personal injury to the consumer.
• Allow the project to unilaterally modify the contract terms without a valid reason.
• Impose disproportionate penalties on consumers for failing to fulfil their contractual obligations.
• Permit the project to terminate the contract without reasonable notice or serious grounds.

As mentioned earlier, unfair terms will be deemed non-binding for consumers in case of a dispute. And sometimes, this isn’t just a legal issue.

In the decision of April 27, 2021 (Nr. XI ZR 26/20), the German Federal Court of Justice ruled that the contract modification clause in the general service terms of German bank, which allowed that bank to amend contract terms unilaterally without the customer’s consent, was unfair and therefore unenforceable according to the EU Directive 93/13/EEC. That clause was typically used to amend contract prices and bank commissions.

This decision may seem focused on procedural matters, but it had far-reaching consequences for the defendant, as all amendments and price changes made relying on that clause were also deemed unenforceable. This ruling underscores the necessity of ensuring contractual terms comply with consumer protection standards to avoid legal and financial consequences.

Copy-Pasting T&Cs Created for Another Project

T&C are tailored to a specific project, and what works for one business, even if it operates in the same industry, may not necessarily work for another, as factors such as functionality, company jurisdiction, user location, business and payment models may differ. As a result, T&C that are effective for another business may not be suitable or enforceable for your project.

Also, the most immediate consequence of taking another’s T&C is reputational damage. From a legal standpoint, this is also prohibited under copyright laws. Since the original authors of the stolen document did not give permission for it to be used, they can demand that you take it down. While they might not be able to claim massive damages, the dispute would become public, and the project’s reputation would still suffer.

Another key point to consider is the difference between legal systems. T&C for a project in the USA will look very different from those for a project in the EU due to varying regulations and legal concepts. Additionally, when someone copies a competitor’s T&C, they’re also unknowingly copying their possible mistakes.

Five Essentials to Ensure that your T&Cs Protect Your Business and are Enforceable

1. T&C were drafted by professionals with a deep understanding of your specific product or service, its features and functionality, as well as applicable regulations.
2. T&C contain no unfair provisions, which may lead to their unenforceability.
3. T&C are designed for your specific project.
4. T&C include all necessary information required to form a valid contract under the applicable law.
5. The technical and UI implementation ensures that the customers’ consent is obtained properly and in accordance with legal requirements, and that the customers can easily access their full text.

Conclusion

I would definitely recommend having T&C for any project operating in the Web3 industry, as this document provides protection in case of disputes or other issues with users. T&C can limit your project’s liability, waive class actions and jury trials, choose the most suitable jurisdiction, and much more.

On the other hand, low-quality T&C can leave you exposed to all kinds of claims. The real catch here is that you might think you and your project are legally protected, when de facto you’re not. So, copying a competitor’s T&C or drafting them with AI tools isn’t the best option, as their ability to actually protect your project is very limited.

How We Can Help

As established, T&C are necessary for any project and a failure to provide them where required, or the use of unfair contract terms, can lead to financial losses, legal challenges, and reputational harm.

The Aurum team is here to help you create well-drafted tailored T&C. We provide comprehensive legal support customised to projects operating in the Web3 industry.

Contact us if you have doubts about whether your project requires T&C or if you need assistance in drafting them.

The information provided in this article is for general informational purposes only and does not constitute legal or regulatory advice. For specific legal guidance tailored to your business needs, we recommend consulting with a qualified legal professional.