The 1World token lawsuit and the perils of bad contracts

When business is booming, people frequently cut corners. In a rush to make money, they enter into dumb agreements; paper deals badly and generally act like idiots. 

Look, it seems like the drinks will be free forever and no-one will get a hangover, and those wings you ate while you were half in the bag won't give you heartburn in the morning or add to your waistline.

But morning always comes, and the hangover with it. Thus, the mortgage securitization boom and "risk free" lending begat the housing boom and the follow-on bust. Easy money and quick construction led to thousands of homes in South Florida with leaky roofs and drainpipes. I worked on some of that litigation back in the mid-aughts, and people literally hammered nails through roofs without sealing the holes in the rush to finish jobs and get paid. Several years later – wet walls and mold followed.

This may seem like a long windup for a crypto rumination, but the same is exactly the case here. The 2017/18 ICO mini-boom led many people to enter into what now seem like laughable agreements, and many of them seem to be finding their way to court.

That's the case in a lawsuit filed by a company called 1World Online, Inc. It filed suit last week on March 6 against Blockchain Generation (BG) and its CEO Mathew Grimm, in the California Superior Court of San Mateo County.

BG says it entered into something called a "Token Barter Agreement" (TBA) with the Defendants:

"...for the purpose of exchanging ownership of Utility and/or Digital tokens ... Pursuant to the terms of the TBA, if the TBA was terminated before both Parties exchanged tokens, the Parties were required to return any tokens received under the TBA. In reliance upon and per the terms of the TBA, 1Wor1d transferred one million tokens (“Tokens”) to BCG. However, the barter transaction contemplated by the TBA was never performed per the terms 0f the agreement. Accordingly, BCG became obligated to return the Tokens received by 1World, no later than December 31, 2019. However, despite multiple requests for the Tokens, BCG has refused to transfer the Tokens back to 1Wor1d in direct breach 0fthe TBA. In addition to the TBA, the Parties agreed to a partnership wherein BCG was to provide Utility and/or Digital token strategy and advisory services to clients and 1Wor1d would provide marketing services to clients."

So I think what was supposed to happen was this: Plaintiff sends Defendants a bunch of 1World tokens. Defendants find a bunch of ICO tokens of equal value and send them back, and also do some consulting work. Plaintiff sends a million tokens to Defendants and, in exchange, alleges they got what is known in the trade is absolute bupkis. 

This also sounds vaguely like it required a broker-dealer if any of the to be purchased and then bartered tokens were securities. And it appears that the tokens themselves were sold in an ICO. I’m not saying that they are or aren’t securities or that this was or wasn’t an unregistered offering, but you've got to wonder about the wisdom of hanging your dirty laundry out in public if that is at all an issue.  

For damages, Plaintiff says they entitled to $210,000 as the value of 1 million tokens it sent, $300,000 for damage done to its business relationships and $21,000 or so for expense reimbursement it says it never got.

I was curious about the $210,000 and it seems to be tied to the current spot market price of $1WO tokens, which I didn't realize were actually a thing, but can in fact be found on coinmarketcap dot com:

Valuation aside, things get a lot less clear when you look at the contract itself. 

There's no way to be nice about this: the contract attached to the lawsuit is a hot mess. What exactly is a token barter agreement? I am reminded of a contract that I once saw that was called a "bilateral business operational engagement". I was like "oh, you mean a contract?" 

Anyway, I digress. The problems with this contract (in addition to the fact that no lawyer probably ever saw it until it was not working out as planned) begin at the introduction:

Consider the following language: 

"In case of termination of the Agreement for any reason before the execution of the obligation of turning over Tokens by both Parties, the Party — transferee shall return tokens received in exchange to the transmitting Party."  

In other words, if the contract is terminated for any reason before there is an obligation to transmit tokens you have to return tokens if you received them. Which. Makes. No. Sense.

It goes on. You can read the whole thing in its glory as an attachment to the Complaint.  I'll point out a couple of my favorites. The Release is great, because it seems to (perhaps inadvertently) exculpate both sides from, well, everything (including this lawsuit):

My personal favorite is the choice of law clause. Basically, at least in the U.S., you can, generally speaking, choose the law that will apply to a dispute and the court that will adjudicate it by specifying in the contract. Here's the choice of law clause for the TBA:

Scottish law applies, without regard to conflict of law principles, that cause another jurisdiction's laws to apply. But disputes are to be "referred" to California courts "according to procedural law of California." Now, if "procedural law" is deemed to include choice of law principles, that could lead the Court to conclude that the law of someplace other than Scotland applies. 

Anyway, when people decide to ink deals themselves, it’s generally not a great idea if they have zero legal training. For them – that is, for litigators – however, it's just job security. In retrospect, the entire contract was probably a dumb idea – token issuer gives a bunch of its tokens to someone who promises to get a bunch of other ICO tokens in exchange. The whole thing was conceived and executed during the dying days of an irrational market built on hopes and dreams and thin white papers. It was papered badly, nothing was delivered, and this lawsuit ensued.