The Anatomy of an Agreement

Most of you would be surprised at the daily number of commercial and personal transactions entered into that amounted to “agreement” – from retail purchases and discussions over domestic arrangements, through to real estate and equipment purchases, and of course, crew contracts. This article deals with essential contract ingredients, and some of the clauses frequently found in entertainment industry agreements.

There are four key components to a contract: offer, acceptance, consideration and the intention to create legal relations.

Offer

An offer is essentially a promise that is legally enforceable.

“An offer may be considered a promise conditioned on return promise of performance or on an act by the other side.” Richard Wincour, Contracts In Plain English.

The offer may be withdrawn before the recipient accepts it, and the result is no contract will have been formed. Similarly, if the recipient makes a counter-offer, this will not constitute a binding agreement until accepted by the other party.

Acceptance

The offer must be accepted for the agreement to be enforceable. Such acceptance can be conditioned by the terms of the agreement itself. For instance, a common form of contract in the film and television industries is the option agreement. Here, the “exercise” of the option and consequent acquisition of the film rights is held open until the purchaser is in a position to accept.

Consideration

For an agreement to be enforceable there must be consideration, i.e., a legitimate exchange of value.

“Consideration is an element of bargain, a quid pro quo, for doing or forbearing to do something you were not previously bound to do or avoid doing except for the contract.” Richard Wincour again.

Where, however, there is uncertainty as to the amount of consideration payable or as to the formula by which it is to be calculated, the agreement may be void for uncertainty. Other examples of contractual uncertainty that may be familiar to crew might be some deferred-fee formulas in budget film and television, and the notion that onscreen exposure is sufficient consideration for a performance.

Intention to create legal relations: Is the agreement binding?

The above example of the option agreement where no clear formula for calculating a buyout price is evident can be characterized as a contract to make a contract. The entertainment industry is notable for short form records of transactions – the “Deal memo” or “Heads of agreement” or a “Letter of intent” – none of which necessarily result in a binding agreement. Whether or not the contract is binding depends on the construction of the wording, and the intention of the parties. If you want a binding agreement, then beware of phrases like “subject to formal agreement “ or “contingent upon (certain events)”.

Assuming the parties have entered into a binding agreement, then some of the important clauses and sections are briefly dealt with below.

Recitals/Introductions

If the operative section (i.e., the clauses following the heading “the parties agree” or similar) of the agreement is clear as to what the parties have agreed, the recital or Introduction are subordinate to these provisions. However, if the contract terms are uncertain or ambiguous, then the recitals might well be included in any judicial assessment of the interpretation of the agreement or as to the intention of the parties.

Operative provisions

This is the heart of the contract, where each parties respective rights and obligations are recorded. In many commercial agreements, these clauses are sequential, ending in standard clauses known as “boilerplate” (covering aspects such as force majeure, confidentiality and governing law) but the format of many crew agreements in NZ split these clauses into negotiated deal points for the project concerned, and a schedule of the producer’s standard terms. The standard terms include a combination of important provisions – warranties from the crew member, Health and Safety reminders, work hours, IP assignments and Insurance – and boilerplate.

Some of the boilerplate provisions are discussed below.

Disclaimers

As suggested by the name, disclaimers of liability, or “exclusion clauses” operate to restrict or totally exclude liability in the performance of a duty or obligation, or even in some cases for a breach of agreement. As a matter of strict legal theory, these clauses are subject to a test of reasonableness, but that is an abstract concept to negotiate, and an expensive one to litigate!

Indemnity

This clause is similar to an exclusion clause, and requires the indemnifying party to meet any liability incurred by the party to be indemnified. The irony is of course that it is always the big guy (who issued the contract) who requires the little guy to do the indemnifying. In practice, and providing the indemnity extends only to breaches of the agreement by the indemnifying party, the clause simplifies any potential litigation. In doing so, an indemnity clause apportions risk, so it can pay to consult with your insurers before agreeing to unusual indemnity requirements.

Termination

Although it is standard industry practice for crew agreements to contain a right to terminate without cause on a few weeks notice, there is some logic (and fairness) in endeavoring to negotiate a longer notice period where a crew member is engaged on a relatively lengthy project and has thereby foregone other potential earners or pencil holds.

Governing law

Where the production and producer are based in NZ, it would be most unusual for the governing law and choice of legal forum to be anything other than NZ. However, where the producer or major funder is based overseas, then both the governing law and place where disputes will be heard will almost certainly be in that jurisdiction. Despite our love of legal dramas from the US, the UK, even Australia, having to resort to court proceedings in those countries is something to avoid (at all costs!). In a previous article I ran through the factors involved with Alternative Dispute Resolution (mediation, arbitration, expert determination). The significance of having a clause providing for alternatives to litigation is that in most instances it will operate as a “stay” to any litigation initiated by either party.