Topic: Can Coinlab collect $50M in stipulated damages? (Read 2254 times)

Yes, you're right, I was really asking about a judgement. With Mutum Sigullum's accounts in the U.S. haven been seized, collecting might be more difficult for a U.S. company.

My goodness if Mt.Gox has venture into the US with CoinLab, they will be in deep shit ... The Feds has Freeze Dwolla..funds
to Mt.gox, would coinlab make difference, I don't think so.

By the time this claim winds its way through the courts there should either be an alternative to the exchange model for crypto currencies or there should be enough competing exchanges that it doesn't matter.

Also when you say "can coinlab collect" do you really mean "can coinlab get a judgment against"? Those are two completely different things. Even if coinlab can get a $50M judgment they may never see a penny from gox.

If so, they would have been smarter simply to include an arbitration clause in the contract. 

It still wouldn't surprise me if this is some kind of attempt to take over Mt. Gox.  Alternately, they might be willing to settle for a piece of Gox rather than the liquidated damages.

It also wouldn't surprise me if Gox decided they could make more money sticking with the U.S. and Canadian market than they'd lose by carrying through.

It's all pretty opaque at this point.  I was frankly skeptical of this whole plan from the beginning.  It just didn't look like it was actually going to happen.

We discussed this on episode 4 of Let's Talk Bitcoin!  The tl;dr is this is likely a play by CoinLab to force Mt.Gox into arbitration with them where non-compliance has enforceable consequences built in.  Alternatively this could be a way to get out of the contract so they can safely launch a competing US based exchange.   
 http://letstalkbitcoin.com/post/49635881683/lets-talk-bitcoin-episode-004-the-horrible - Mt.Gox & coinlab is the last 15 or so minutes of the show.

I highly doubt it, but it is possible that Mtgox will just settle and pay them something significant.

Contracts arent worth the paper they're printed on, so $.50?

Thanks darkmule for that clear look at the stipulated damages provision and how it may be a penalty clause. I was just starting to dig into that last night.

The other issue here is that it appears that Mt. Gox providing services to U.S. users doesn't quality as an activity that is excluded. Only licensing materials seems to qualify. The last sentence of the Mt. Gox side of the exclusion even states that providing services isn't covered.

So simply continuing to service U.S. customers doesn't seem to violate the exclusivity terms. As noted, perhaps the facts will indicate otherwise, perhaps Mt. Gox has licensed materials to another company, but we will need to see.

My guess would be no, but the facts (as yet unknown) may dictate otherwise in the future.

Liquidated damages clauses, even very large ones, are fairly common in large transactions.  For example, in Sun v. Microsoft, the litigation concerned, in part, a liquidated damages clause for $35 million relating to the disclosure of the Java source code.

However, the purpose and policy behind enforcing liquidated damages clauses may not support enforcing the clause in this case.  The purpose of enforcing such clauses is that proving damages in a breach of contract suit can itself be extremely expensive, and consume a great deal of court time.  Parties agree to these clauses for different reasons.  For example, by assigning a fixed price tag to a breach, a party both limits its damages and knows when they can afford to breach ("efficient breach") when they stand to make more money by breaching than they would lose by having to pay the liquidated damages.  Additionally, in contracts where proving damages would be very difficult and time-consuming, it assures the non-breaching party some acceptable sum.

Additionally, the use of liquidated damages serves as a big stick either to ensure compliance or to be compensated for a breach.  When parties do not trust each other, the use of liquidated damages clauses makes it possible to contract without fear of being left in the lurch.

However, what liquidated damages clauses cannot be is a mere penalty or punishment for breach.  It is not the purpose of contract law to leave the non-breaching party in a better position than he would be in had the terms of the contract been executed as agreed.  The damages must have some relation to the actual damages likely to be suffered.  While they obviously need not be identical, as this would run into the exact problem of wrangling over damages determinations that such clauses are intended to avoid, a court does have jurisdiction to consider the nature of the amount in the contract.

In this case, the contract specifies as a material breach the failure in two consecutive years to achieve the following goals:


So approximately $5 million in revenue would be sufficient to meet this goal.  Clearly, "Revenue" would not be equal to actual profits, which would be smaller and would go to Gox to some extent.  In short, by not executing the terms of this contract, it is unlikely CoinLab would have lost even $5 million after all the expenses necessary to set up shop and make it all legal.  Further, according to the contract, they aren't even entitled to such damages.


Also, the agreement specifically only invokes the liquidated damages clause to the breach of two sections, only one of which is (currently) relevant to this case.


So the liquidated damages relate only to those damages directly caused by Gox's alleged breach of exclusivity.

Let's be generous and assume that would include all the damages from the projected income, and that the projected income would have been twice what they agreed to deliver, and that they would have taken all that as pure profit.

That's $10 million.  In other words, the liquidated damages are $40 million more than even a generous estimate of what the breach of the exclusivity agreement would have cost Coinlab.  And projected profits are, themselves, excluded from liability without "willful misconduct or gross negligence."  Just that Gox and Coinlab were unable to do the deal as agreed doesn't come near to qualifying.  

On Coinlab's side, the complaint is well-drafted enough to take note of this, at least by implication:


Saying that and proving it are two different things, though.

My off-the-cuff guess, based on these facts, assuming they are true as stated in the complaint, is that the liquidated damages clause, in this context, is an impermissible penalty clause rather than a reasonable value agreed upon by the parties.

I wouldn't say that without reservation, though.  Subsequent information that comes out could show that, indeed, this is a reasonable value agreed upon by the parties based on the actual likely amount of damages from breach.  

Whether or not the clause can be enforced will come down to whether it is such a reasonable estimation, or whether it is an impermissible penalty clause.

I'm just forming my impression from the information that's available to me.  Coinlab is sending me the contract in question, once we see that we'll know a whole lot more.   I was just on the phone asking if there were any surprise non-performances on Coinlabs part, we'll know soon.

I've moved this discussion here as it is more of a legal matter.


Disclaimer: I'm not a lawyer either, just a person with a fair amount of experience in business law.

As I said, it will be interesting to see how that claim plays out. Although there may be a stipulated damages clause, there may be some other factors that come into play:

Did Coinlab completely fulfill their end of the bargain? If not, they themselves may be liable for a counter-claim and it could weaken the stipulated damages clause.

Were there acts beyond Mt. Gox's control that affected their ability to perform? Such as the DDOS attacks and a massive increase in trading volume and value.

Does the massive increase in volume at Mt. Gox make the terms of the original agreement with Coinlab unconscionable?

There may be a variety of defenses by Mt. Gox, so we'll need to hear the other side of the story. Of course, that is what depositions and trials are for.