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Verbal Agreements and Detrimental Reliance: What Went Wrong with Iceberg Competitive Esports?

October 12, 2018

via http://esportsjunkie.com/2018/03/02/iceberg-esports-fail-pay-esports-players/


 

The esports industry is no stranger to life-changing contracts formed entirely via the Internet. Whether it’s a new player signing onto a team, or a pre-existing organization securing a sponsorship deal, parties often enter legal relationships with those they’ve met online.

 

With the beginning of a new Dota Pro Circuit season, I wanted to look back at an unfortunate event that occurred in the gaming community earlier this year. Iceberg Competitive Esports (ICE) was a new Canadian organization that had signed promising teams for Counter-Strike: Global Offensive and Dota 2…only to announce insolvency a few months later.  At the time of insolvency, ICE owed the CSGO roster over $13,000 CAD in salaries, and had completely failed to pay the Dota 2 team. Several players who confronted ICE staff about non-payments got blocked on Discord and Twitter.

 

ICE released a public statement on March 1st, 2018 and told their side of the story. To summarize:

  • A potential investor had “made representations and repeated assurances” to pay ICE by the end of January 2018. ICE signed players only after knowing about this investment situation.

  • Shortly after the CSGO and Dota 2 players were signed, the Investor decided not to fund ICE. ICE informed its players of the news, but players decided to stay with the organization.

  • ICE attempted, but failed, to find new investors and sponsors.

  • ICE was forced to terminate player contracts “without cause after 30 days.”  

  • Players were told that “should [ICE] become capable of compensating the players for their salaries up to the termination date, the players would receive such compensation as quickly as able.”

 

This is only one of many stories about failed organizations and unpaid players in esports. However, this incident is interesting because it raises the question of “Who is at fault?” To begin, let’s examine the legal relationships between the three major parties involved in this situation: the investor; ICE; and the players:

 

1. ICE and the Investor
 

We will likely never know all the details of this business relationship, but based on the public statement, there was some sort of agreement between the Investor and ICE. Both parties acted as if they already established and accepted the terms to the Investor funding ICE. The Investor was promising to send ICE money before a specific deadline, and ICE had signed players after this promise.
 

There was no mention of a signed-and-dated document to formalize the agreement, but a contract can exist even without without a written document. Verbal agreements can be legally binding and enforceable. Courts will find it difficult to enforce the agreement without written evidence showing intent of the parties to each of the contested terms. However, in this case, there were likely emails and chat logs between the parties. These can leave a sufficient paper trail!

 

Barring any reasons that allow parties to escape the legal obligations created by the contract, the Investor might at least be partially responsible for the damages caused by the organization relying on the Investor’s promises. At the same time, we know that ICE either did not try to, or was unsuccessful at, enforcing this funding promise against the Investor. Why not? In this section, we will discuss possible reasons for why the verbal agreement failed to be legally binding and enforceable. We will ask the following:

 

a. What were the terms of the agreement?

 

Immediately, I would suspect that the funding was contingent on a term that the organization failed to meet. If so, then the Investor had every right to not fund ICE. For example, the Investor might have agreed to fund ICE only if ICE was able to acquire specific players on their roster. In fact, one of the most questionable claims in the public statement was on how the Investor promised funding before ICE confirmed teams. After all, why would any esports investor promise money this recklessly? Esport teams derive revenue largely from sponsors and tournament winnings, so the profitability of investing in ICE would depend heavily on the players’ skills, marketability and popularity.

 

Realistically speaking, the parties might not have had a mutual understanding of the terms. Verbal contracts are tricky, especially when there are so many terms that need to be discussed in detail. Here, a written contract would have helped both parties define and clarify relevant terms.  For example, if the Investor had agreed to “fund the acquisition and development of competitive and professional esports teams,” the following questions must be answered:

 

  • How did the parties define “competitive and professional”? Here, it would be efficient to use objective criteria. For example, the parties might decide that the pre-existing team must have already qualified for at least one tournament with a prize pool of more than $100,000.

  • Which games can be in “Esports”? Again, the parties can create objective criteria. How popular does the game have to be? How many tournaments must exist every year for the game, and what are the prize pools?

  • Did ICE discuss potential signings with the Investor prior to being promised the funding? This would imply that the funding was contingent on ICE signing a particular team. If so, what defines “team”? How many players can be replaced before it is not the agreed-upon team anymore?

  • What activities fall under “acquisition and development”? Investors want to know how their investment is being used to create a return on investment. What happens if the organization claims that an extravagant vacation is essential for team-building and individual well-being, so it classifies as “player development”? What if the organization makes luxury purchases that are unnecessary for Esports organizations, but claims that it was for the purpose of attracting or “acquiring” new players? We don’t know if the Investor intended for the money to be used in such a manner. This is why the parties must mutually agree on where to draw the line for “acquisition and development.”

 

Terms in a contract can be implied. If any of the above questions were unanswered, the courts can read between the lines and figure out what ICE needed to have done in order to secure the Investor’s funding. After all, the information is crucial for the contract! The Investor had the intention of funding ICE as an esports organization, and the terms in the funding agreement should reflect that. If the Investor did not care about the return on investment and just wanted to give ICE money unconditionally, it would have been a donation and not an investment.

 

b. What would ICE have done without the Investor’s promise of funding?

 

Even with a funding agreement and breach thereof, the Investor must have caused the damages. The public statement seems to suggest that ICE wouldn’t have signed any players if it wasn’t for the Investor promising to send money. In other words: ICE relied on, and incurred losses, due to the Investor’s failure to keep a promise. This is detrimental reliance, and the Investor would be responsible for the losses that ICE incurred.

 

ICE wouldn’t have a claim for damages if the Investor’s alleged wrongdoing did not cause the organization to be in a situation that was any worse than if the ICE-Investor relationship never existed. Consider this: ICE might have planned to signed players regardless of whether or not there was enough funding to pay salaries with. This is a reasonable possibility. A nameless organization with no roster wouldn’t even be presentable to potential investors and sponsors. Here, ICE might have decided to take on the costs of acquiring players, and the try to find investors and sponsors before salaries were due. We know, based on what actually happened, that ICE would be unable to find adequate funding. This means that if ICE had never met the Investor and had ended up signing players anyways, then the organization would end up unable to pay player salaries. The outcome is no different from what happened after the Investor retracted the promise of funding. Basically, if ICE would have signed players without any promise of funding, then the organization didn’t actually lose anything from interacting with the Investor. The Investor has no obligation to put ICE in a better financial situation than what would have happened.

 

The difficult part is proving what ICE’s intentions were. Again, we would need more details about what was actually said between the parties. There would be evidence of detrimental reliance if ICE explicitly told the Investor that no players are to be signed until the funding was agreed upon. On the other hand, the Investor’s breach would be irrelevant to ICE’s current situation if the parties, for some reason, had agreed that no amount of the promised funding would be used to play player salaries.

 

c. Were there any disclaimers to undermine the existence of a legally binding contract?

 

There could be valid reasons for ICE to not rely on the Investor’s promises. We would need to look at the language being used when the supposed agreement was formed.

 

2. ICE and Player

 

The public statement mentioned the existence of player contracts. Normally, these contracts contain a compensation clause that specifies when, how and how much a player is to be paid.  

 

Players wouldn’t reasonably foresee that their salaries depended on a third party, so it was on ICE to provide this information. Between the player and ICE, at least one of the parties is responsible for the messy situation. It all depends on how the compensation clause was presented:

 

  • Scenario 1: The players knew that they would only receive salary if the Investor delivered on the promised funding, and ICE made honest and accurate representations on how the funding was not guaranteed.

 

Had this happened, ICE wouldn’t be liable for the unpaid players. The players would be responsible for their own decision to sign with ICE. However, this scenario did not happen. Players were not aware of this funding situation. There was an obligation for ICE to pay players, as evidenced by how ICE staff had once paid player salaries out of their own pockets and how the contracts were eventually terminated “without cause.”

 

  • Scenario 2: The players knew that they would only receive salary if the Investor delivered on the promised funding, but ICE made misrepresentations about the funding situation.

 

In hindsight, we know that the Investor decided against investing in ICE. What we don’t know is how foreseeable this was to ICE. If ICE was not confident that the Investor’s promises were legally binding and enforceable, then there was a foreseeable risk of not receiving the funds and being unable to pay the players. This is information that players should know prior to signing with ICE. Also, ICE needed to have communicated carefully. Imagine if the organization simply told players “We have an investor who is going to fund us before the end of the month.” Players would be led to believe that the funding was confirmed, and consequently sign with the organization when they otherwise would not have.

 

What if ICE genuinely believed that the Investor would deliver on the funding?  It would not change the fact that ICE owes money. The remedy for innocent misrepresentation is either damages or rescission of the contract. Rescission isn’t practical when teams have already spent months playing under the organization publicly.

 

We should also consider how players were told about the Investor’s change of heart. Players had chosen to remain with the organization, even after they knew that ICE was not getting funding from the Investor anymore. Here, we can’t help but ask “Why?” Does this mean the players had confidence in ICE finding new investors or sponsors? If so, how much of this confidence came from what ICE said? ICE needed to be honest about the probability of the organization securing funding in the near future. The other possibility is that the players didn’t think that ICE’s financial situation affected them at all. We will discuss this next:

 

  • Scenario 3: The player contracts were not contingent on the outcome of the funding situation with the Investor.

 

This is the most likely scenario. It is difficult to imagine why accomplished players would sign with a nameless new organization just for the possibility of receiving salary. Chances are, the compensation clause made no mention of the funding situation, and players expected salary regardless of the Investor does.

 

In such a case, the Investor’s breach of the funding agreement does not change ICE’s obligations to pay players. There is no legal relationship between the Investor and players. Simply put, ICE is responsible for the unpaid players. The Investor’s actions were no excuse!

There hasn’t been an update from ICE for months, so it is likely that we will never know all the pertinent details behind this incident. This incident may be just another story about a failed esports organization, but it came with a valuable lesson.

 

Do not underestimate the consequences of a promise! Even online, an agreement can become legally binding and enforceable. All parties should make an effort to protect themselves when entering into an agreement.

 

  • Had a written investment contract existed between the Investor and ICE, the terms would have been clearer. The parties could have avoided the miscommunications that led up to this current situation, and strengthened the enforceability of their agreement. Not only would ICE benefit from having a document that clearly outlines the Investor’s obligations, but the Investor could set out clear conditions for ICE to fulfill in order to be worthy of funding.

  • This entire situation could have also been avoided had ICE disclosed relevant information pertaining to financial situation prior to signing the players. Players would have been able to make an informed decision to sign with ICE. If ICE had expressly stated that the player salaries were contingent on the the receiving funds from the Investor, then the organization would be less responsible for what happened to players who voluntarily assumed this risk of not getting paid.

 

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