The success of an audit can depend on the wording of a contract. Geoffrey Macnab looks at common contract flashpoints — and how they can be avoided
In theory, a strongly worded contract with a distributor should leave very little room for dispute. The producer or sales agent should be able to head off any potential problems at source with well-chosen wording.
Nothing frightens a distributor quite like the ‘termination’ clause — the threat that if the distributor fails to honour an agreement, it will lose the rights to the film. Almost as alarming is the ‘cross-default law’, which takes away rights to other films licensed to a distributor if it fails to pay up on a new movie that it no longer wants. The hitch is that distributors are fiercely resistant to such measures.
“Our contracts are strong enough. They should be. Otherwise, we’re not doing our jobs because we’re representing multiple bodies of investors,” says Tim Haslam, CEO of HanWay Films.
Nothing frightens a distributor quite like the ‘termination’ clause or the ‘cross-default law’
Jane Barclay, consultant at Aramid, likewise highlights the importance of making sure the contract allows the rights holder to approve the distributor’s p&a costs and TV sales. “If you don’t, you can audit as much as you like but you’ll have very little recourse,” Barclay says.
In practice, though, contracts still leave grey areas. Rights holders will often come under intense pressure to sign before these areas are resolved. “It’s a big temptation to close and let small detail points go,” Jane Wright of BBC Films points out. “For example, compounded interest on too short a period can be a real problem. A collection agency only acts on what has been drawn up in the agreement.”
Some sales agents use standard-form IFTA contracts which can then be modified. Given the rapid advances in technology, contractual language is forever changing in a bid to keep pace. Rights holders try to be extra vigilant to make sure their distributor clients are not exploiting rights to which they are not entitled.
When a distributor is pre-buying a film that will not be delivered for a number of months, neither party knows how the market will change in the intervening time. And things can change: in Cannes in 2009, Russian distributors announced they were seeking to renegotiate their contracts on the grounds that the rouble had fallen, US independents had not lived up to their delivery obligations or had misrepresented budgets and — most crucially — that the distributors simply were not in a position to pay.
Sales agents have limited sympathy for buyers who do not honour contracts. They point out that these buyers do not suddenly offer enhanced minimum guarantees when economic times are good. Why, then, should the buyers receive special treatment when the economic pendulum swings the other way or when the film they’ve just released in their territory has not turned out to be a big hit?
Moreover, the paperwork is often ferociously complex. As Abigail Payne, a partner at Harbottle & Lewis, puts it: “Recoupment schedules, residuals and royalty clauses are very complicated and there can be genuine mistakes.”
As a rule of thumb, dealing with bigger companies means more demanding contracts.
“Hollywood accounting can be one step away from criminal,” one UK producer notes. “Producers very rarely see any return unless they’ve managed to negotiate themselves some gross position, which is very difficult to do.
“Therefore, you have to make sure that whatever recompense you want for the work, you get it at the front because you’re unlikely to see it at the back.” Rights holders are unlikely to see overages, which is why they fight for contracts to provide recoupment corridors and box-office and DVD bonuses that are payable regardless of overall recoupment.
“Hollywood accounting can be one step away from criminal”
A UK producer
“Contracts [in the independent sector] are not very good. Why not? It depends on the relative power of the producer in the territory,” notes Christine Corner of Grant Thornton. “Obviously, a US studio has a lot more power when they go into a country. They might have a number of titles the distributor wants to represent — so the US studios can have much tighter contracts.”
Collection agencies and auditors will have exhaustive databases through which they track distributors’ records. Those who fail to honour their contractual obligations are easy enough to identify. They can be banned from markets or clients may be warned not to do business with them.
“The sales business is a small world. A bad reputation is something you can get easily and is very hard to get rid of,” points out Gadi Wildstrom, managing director of Freeway Entertainment.
At the same time, the best-informed rights holders will know if there are mitigating reasons as to why the distributors are not paying when or what they should.
“In Mediterranean countries, fewer people go to the cinemas in the summer,” one collection agent points out. “If delivery is made just prior to the summer, distributors have their least amount of cash then because they want to sit on it.”
There is one generally reliable way of enforcing contracts — one which follows the rhythm of the market year and the ongoing relationship between sales agents and buyers.
“Ultimately, one of the best tools in collections by a sales agent is having another film the distributor really wants in the future,” says Christos Michaels, a partner at Lee & Thompson. “Distributors who owe money on advances will often pay up just before the next market on the understanding they can’t buy any more films from the sales agent at that market until they’ve paid their debts. However in these harder times, even this understanding does not always apply.”
What to look out for in contracts
“The reporting. It would be better if you went to the contracts at the very beginning and made the reporting clauses workable for everyone — for the one who needs to report as well as the one who receives the reporting. It can be done in a more consistent and straightforward way.”
Peter Kostense, Protocol International
“There can be arguments over what type of marketing expenses are deducted and levels of returns allowed. It’s often just misinterpretation of contracts, not necessarily deception. Maybe the more calculated area is where people delay payment. You should have interest provisions in your contracts for late payment, but a lot of contracts don’t.”
Christine Corner, Grant Thornton
“If your payment terms are contingent on any outside event occurring, such as a US theatrical release, beware if that outside event hasn’t been put in place prior to execution of the contract. Have strong accounting and auditing terminology in there to make sure that if your film is a success, you have the rights to go in and make the most of it.”
Rebecca Roffey, Protocol International