Negotiating Film Contracts

Samuel Goldwyn once said, "A verbal contract isn't worth the paper it's written on." Ironically, a majority of the Indian film industry operates on verbal contracts. However, this practice of not entering into well-defined and structured agreements often results in a great deal of complications and disputes. It is advisable to enter into concrete agreements that clearly lay down the terms and conditions of the arrangement between the parties so as to avoid any future misunderstandings.

(a) Formation of a Contract

In India, the basics of forming contracts are provided under the Indian Contract Act, 1872 ("Contract Act"). Though the Contract Act is over a century old, the provisions enshrined in it are relevant even today.

Under the Contract Act, a contract has been defined as an agreement enforceable by law.²²⁹ Not all agreements are contracts. For an agreement to become a contract, five essential elements need to be satisfied. They are:

(i) There must be an offer made by one party to another and an acceptance of the offer;²³⁰

(ii) There must be lawful consideration for the agreement;²³¹

(iii) The object and purpose of entering into the agreement must be lawful;²³²

(iv) All the parties to the agreement must consent freely to enter into the agreement,²³³ That is, while entering into the agreement,²³⁴ they must not be defrauded,²³⁵ coerced,²³⁶ or unduly influenced or be under any misrepresentation from the other party²³⁷ or enter into the agreement under a mistake of fact²³⁸ or law;²³⁹ and

(v) They must have the legal capacity to enter into an agreement²⁴⁰

While the Contract Act does not make it mandatory to enter into a written contract, it is advisable to enter into a written contract to avoid any disagreements at a later stage. Even if any litigation is initiated against either party, it becomes simpler to prove the terms and conditions agreed on between the parties if there is a written contract to that effect. Moreover, under certain special laws, such as the Indian Copyright Act, an assignment or license of copyright has to be in writing and must conform to certain parameters. Thus, an oral agreement would not be valid and consequently, there would be no assignment or license of copyright.

(b) Types of Contracts

(i) Literary acquisition agreements
The success of a film, to a large extent, depends upon its script and dialogues. However, while acquiring a script for a film, the producer must be cautious about the ownership and originality of the script. It has to be ascertained whether the script is original or has been copied, adapted or translated from an existing work and accordingly necessary approvals have to be obtained. At the same time, a producer should know the exact nature of the rights which he or she acquires upon purchasing the script, for example whether he/she has the rights to modify the script; whether he/she can make another script based on the original script or a sequel to the original script or whether he/she can make a television serial or drama from the same script. All these elements need to be properly captured in the literary (script) acquisition agreement.

(ii) Agreements with actors, writers, music composers, director and crew
While in Hollywood, these types of agreements are in vogue, in Bollywood, these agreements are not generally entered into. Even when they are entered into, the agreement is a very basic one pager, which is never good enough. In fact a contract not well drafted is worse than having no contract at all as it leaves a lot of room for ambiguities and uncertainties as it does not clearly lay out the terms and conditions agreed upon by the contracting parties. Therefore, it is essential to draw up formal detailed contracts with the actors, writers, music composers, directors and crew , which specify the nature of services to be rendered, the time-period required, the consideration to be paid, the ownership of any rights, insurance considerations, exclusivity criteria, etc. Many times, due to the lack of any concrete contracts, the star cast and crew do not perform their services to the satisfaction of the producer. At the same time, producers do not provide adequate compensation and proper treatment to the star cast and crew. In order to avoid any such disputes, it is important that proper contracts are created.

(iii) Finance and production agreements

• Investor financing agreements: An investor financing agreement is useful for a producer or a production company that needs an investor or a lender to contribute money towards the production of the film. These investors may not necessarily provide any creative input in the filmmaking process, but may only be interested in recouping their investment and maximizing their returns. If there are various investors in a film, the agreement should reflect this and the profit share and rights of each investor in the film. The investors may either be partners in the equity of the production company, if they are investing in the production company per se, or partners in the intellectual property and profits of the film, if they are investing in an individual film project. Sometimes, they may even want credits as producers if not as financiers.
• Co-production agreements: In a co-production agreement, usually two or more parties enter into a sort of joint venture to produce a film. The intellectual property in the film is usually shared between the producers and therefore no assignment of the intellectual property rights can take place without a mutual agreement between both parties. In this type of agreement, the producers share the monies received from the sale of the various rights in the film in a ratio mutually agreed upon between them.
• Agreements with banks and financial institutions: Though filmmaking is a risky business, several banks and financial institutions have begun to show interest in financing film productions. However, before lending the money, they make sure to enter into detailed agreements with the producers to ensure the timely return of their money. Also, banks usually have the first lien on the film, meaning that in the event the film is not completed, or they do not get back all their money, they can complete the film or use /sell the film to any third party to recoup their share. Moreover, usually the terms and conditions imposed by banks are so stringent that a slight default on the part of a producer could result in termination of the agreement.
• Agreements with completion guarantors: As discussed earlier, completion guarantors assure a lender that the film will be completed in a timely fashion and within the budget. Usually completion guarantors charge a certain interest/commission for the guarantee that they provide and this commission has to be paid even if the guarantee is not used. While this concept of completion guarantors is relatively new in Bollywood, these contacts are commonly found in Hollywood. In fact, the presence of a completion guarantor is a must to get bank financing.
• In-film advertising agreements: Films have become a popular medium of advertising for commercial enterprises. Companies usually enter into in-film advertising agreements with the producers for subtly advertising their products or services in the film. While these agreements are an additional source of revenue, it is important to lay down an exact understanding between the parties as to when, how and the number of times the advertisements will appear, so as to avoid any problems.

(iv) Distribution Agreements
In order to showcase the film to the world at large, the producers/owners enter into agreements for distributing various rights in the film. Often, the detailed delineation of these rights is referred to as “salami slicing". While entering into these agreements, producers/owners must ensure that they own all the rights in the film and should try and capitalize on all these rights to the maximum extent possible. At the same time, producers should ensure that distributors take adequate precautions against the piracy of the film, and even assist them to fight piracy.

• Music agreements: Agreements with music companies for distributing the soundtrack of the film are more popular in India than in the U.S. Generally, under these agreements, complete music rights are given to the music companies and music companies, in turn, pay the producers a lump sum amount, as well as consideration based on the total volume of sales of the film music. Producers should check the rights that are actually being assigned to these companies so that the music deal does not hamper any of the other distribution deals for the film. The film music is generally released a few months before the film's release so as to popularize the film amongst the public. The recent practice is that of selling overseas and domestic music rights separately.
• Theatrical and other distribution rights agreements: While the studios and major film production companies have their internal distribution organizations, many independent production companies/producers need outside companies to distribute their film products. While entering into distribution deals for various rights, the producers must be aware of the different and specific rights they grant to distributors. Further, depending on whether the distribution agreement is a license or an assignment, the nature of the agreement may also vary. In negotiating such an agreement, it may also be important to distinguish between distribution fees charged by the distributor and those charged by a sub-distributor.
• International distribution agreements: While negotiating an international distribution agreement, it is necessary to keep in mind the specific territories for which the rights are being offered. This is because often, some international distributors may require territories overlapping with other distributors, especially for satellite and television rights. Moreover, even the tax aspects of such distribution agreements must be carefully considered. For example, if a film is being distributed overseas, but the overseas distributor has an office in India, the overseas distributor may get taxed in India for the distribution deal.

(v) Merchandising agreements
Sometimes in order to promote and popularize films, the producers may decide to create merchandise specifically pertaining to the films, such as clothes, bags, toys, games or even greeting cards. It is important to ensure that the merchandiser obtains the right to display the proper promotional material relating to the film on the merchandise products, as mutually decided between the producer and the manufacturer/distributor. At the same time, while entering into such agreements, producers must be careful to incorporate clauses to prevent the merchandisers from infringing any trademark or copyright relating to the film or the producer.

(vi) Agreements with laboratories
Film producers generally enter into agreements with laboratories for processing the film elements. While entering into such agreements, the laboratories need to be assured that the film producer is the real owner of the film and has all the rights to the film elements. In case the rights of the film producer are restricted, the laboratory may not enter into such an agreement with the film producer. In case the film is being funded by an outside investor, the agreement would generally be between the investor and the laboratory, as the investor would have the first lien on the film. Moreover, the laboratory may not easily enter into agreements with distributors unless it receives adequate security that the distributors will pay the laboratory its processing costs. Additionally, in most cases, the laboratories may ask a guarantor for the payment of the processing fees. It is important for the producers to carefully understand the terms of such agreements or else they may be unable to release the film elements from the laboratories at times. Even distributors must take note of these laboratory agreements while striking deals with the producers to ensure that they will get the film on time. Therefore, depending upon the nature and type of transaction, the agreement must be carefully drafted in order to protect the interests of both parties.