Film

Contractual Disruptions: How They Arise and How to Prepare

By Elizabeth Altman and Tyler Horowitz

With the recent spread of the novel coronavirus COVID-19 and its unprecedented precipitation of social-distancing, work-from-home policies, shelter-in-place orders, and limitations on foreign travel, many individuals may be questioning whether certain contractual obligations are excused. This article provides a primer on the contract concepts of force majeure, impossibility and impracticability, and related provisions that affect, and may in certain instances excuse, performance of contractual duties owing to changed circumstances outside any signatory’s control.

Force Majeure

A force majeure clause is a contract provision that excuses a party’s performance of its obligations under a contract when events beyond the party’s control make performance impossible. To invoke a contract’s force majeure clause, a party must typically demonstrate that (1) a disruptive event enumerated by the force majeure clause has occurred; (2) the risk of nonperformance was not foreseeable; and (3) that the event has rendered the party’s performance impossible.

A party looking to invoke a force majeure clause must follow several steps:

First, a party must examine the contract’s definition of what constitutes a “force majeure” event and demonstrate that the change in circumstances was included within the definition. Force majeure events will have been enumerated within a force majeure clause and generally include: Acts of God; severe acts of nature or weather events including floods, fires, earthquakes, hurricanes, or explosions; war; acts of terrorism; epidemics; acts of governmental authorities such as expropriation or condemnation; changes in laws and regulations; and strikes and labor disputes.

Determining whether a force majeure clause applies is a highly fact-intensive exercise, because whether a party is excused for non-performance stems from the specific contractual language used within an agreement. For example, some contracts’ force majeure provisions may specify disease, epidemics, or pandemics as cause for non-performance, while others may only refer to disease-related disruptions by reference to “Acts of God” or catch-all phrases such as “any event or circumstance beyond the reasonable control of the affected party.”

Where disease-related occurrences have been specifically enumerated, a party may find it easier to invoke its force majeure clause in the context of COVID-19. It may be more challenging where, instead, there is only catch-all language in place; however, a catch-all phrase, or similarly broad language (such as a force majeure clause that begins its list with “including, but not limited to”), may provide some protection, particularly if courts relax their traditional preference for excusing performance solely based on clearly enumerated circumstances, in response to an onslaught of COVID-19 related contract disputes. Additionally, where a party can point to a governmental restriction in place because of COVID-19, it may have additional grounds to defend nonperformance. 

Second, an affected party must demonstrate a causal link between the force majeure event and its failure to perform. In other words, a party’s performance must be impossible because of the changed circumstances surrounding the contract. For example, in light of COVID-19, the owner of a performing arts venue may successfully argue that recent government orders in his or her state have made it impossible to continue under contract with scheduled performances and obligations to performers, considering the widespread uptick in closures of non-essential businesses. On the other hand, should both parties to a contract be capable of conducting transactions online and/or having a history of remote online transactions, it may be more difficult to argue that COVID-19 has rendered performance impossible (at least without demonstrating other exigent circumstances).

Upon successfully invoking a force majeure provision, a party may either suspend performance or terminate the contract outright, depending on the scope of its force majeure clause. It is thus important to verify the terms of the clause, which may also dictate that force majeure coverage will only kick in after a certain period has elapsed, such as 90 days.

If the contract does not contain a force majeure clause, a party may turn to the common law defenses of impossibility or impracticability to excuse performance (though note that New York only recognizes impracticability in rare circumstances, such as in connection with sales of goods under the Uniform Commercial Code). A party may also invoke additional contract provisions where present, such as the “Material Adverse Effect” provision common to many commercial contracts.

Impossibility & Impracticability

Impossibility and impracticability exist where circumstances extraneous to a contract render a party’s performance either impossible or impractical. Although the contract itself was adequately formed and would otherwise maintain its binding effect, these defenses recognize that a post-formation change in circumstances has fundamentally altered the ability of the parties to perform under it. A party’s performance will be excused if the following elements are met:

  • An unforeseen event has occurred. Akin to the events enumerated in force majeure clauses, these may include natural disasters, strikes, and other major events.
  • The nonoccurrence of this event was a basic assumption of the contract. At the time of contracting, the parties did not foresee the event that has since occurred, regardless of whether it was theoretically “foreseeable”. This assumption of nonoccurrence need not be explicitly outlined within the contract, but must be generally apparent from the nature, terms, and purpose of the contract. Under the Uniform Commercial Code, which governs sales of goods, a “[d]elay in delivery or non-delivery in whole or in part by a seller . . . is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made.” U.C.C. § 2-615. For example, this provision may apply in the event of a labor dispute where striking workers fail to deliver a shipment of the seller’s goods. In such cases, a seller must seasonably notify the buyer of the delay or non-delivery, and, where a seller may still partially perform, must allocate production and deliveries among customers in a “fair and reasonable” manner.
  • The effect of the event has rendered the party’s performance impossible or impracticable. The changed circumstance must be extreme, such that it is unduly burdensome or impossible for the party to comply as originally planned; where impossibility is concerned, under New York law, the subject matter of the contract must have been destroyed or the means of performance must have been rendered objectively impossible. The party seeking relief from its obligations under the existing contract must also show that it was not at fault in causing the event. The reasoning behind this requirement is clear: a party should not be able to take advantage of his or her own misconduct. Here, it is also important to determine how risk has been allocated between the parties under the contract. Even where the other requirements are met, if the adversely affected party assumed the risk of the occurrence of the changed circumstances during contract formation (impliedly or explicitly), it will not be able to invoke impossibility or impracticability. To gauge risk allocation, a party should examine the express language of the contract (i.e., what disruptive events the parties contemplated, and which party was to bear the associated loss and expense), or even the parties’ course of business and dealings. Industry customs may also provide clues to proper risk allocation. For example, industry custom in property rentals is for a premises owner to obtain casualty insurance rather than the party hosting its event on site. As such, risk for the loss of the property would flow more naturally to the owner.

Other Contract Clauses

Various additional contractual provisions may relate to an unexpected event like COVID-19.

  1. Material Adverse Change (MAC) Clause

Many commercial contracts include a material adverse change clause (otherwise known as “material adverse effect”). Where present, this clause could excuse performance or allow a party to suspend performance should a materially adverse change occur. Events constituting a materially adverse change are, as with force majeure provisions, commonly enumerated specifically within the contract and typically also involve wide-scale disruptions.

Historically, MAC clauses have been difficult to enforce, as courts are wary of excusing contractual performance for short-term changes in circumstances, but as is possible with force majeure and related defenses, courts may shift their stance in the coming months. For example, following the September 11, 2001 attacks, New York courts were more amenable to viewing declining rental prices in Manhattan as grounds to declare a material adverse change (See In re Lyondell Chem. Co., 567 B.R. 55, 123 (Bankr. S.D.N.Y. 2017), aff’d, 585 B.R. 41 (S.D.N.Y. 2018) (citing River Terrace Assocs., LLC v. Bank of N.Y., 10 Misc. 3d 1052(A), 2005 WL 3234228 (N.Y. Sup. Ct.), aff’d, 23 A.D.3d 308 (N.Y. App. Div. 2005))). Further, New York courts have allowed commercial parties to cease contractual performance based on demonstrated extensive financial losses during the pendency of a merger (see Katz v. NVF Co., 100 A.D.2d 470, 471 (N.Y. App. Div. 1984)).

  • Covenants

Commercial contracts commonly contain covenants obligating parties to undertake or refrain from certain behavior. While it is unlikely that parties would have allocated obligations or risk regarding COVID-19 in a covenant, it is worth revisiting covenants within a contract to gauge whether they will affect or be affected by current circumstances. For example, many agreements include covenants obligating parties to provide notice that they are invoking force majeure or that material events have occurred that could give rise to litigation or loss beyond the ordinary course of business.

  • Termination Provisions

Even if parties may not utilize force majeure or other contractual provisions to justify non-performance under a contract, there may be termination provisions that kick in based on the occurrence of certain contingencies, whether at-will or otherwise, such as for late delivery or a breach of a “time is of the essence” clause. It is worth viewing any such provisions within the context of the larger defenses of impossibility, impracticability, and force majeure excusal of nonperformance, in case the other party nonetheless attempts to invoke these doctrines to negate invocation of a termination provision.

This is not the law’s first brush with the unexpected, and although this is a time of wide-reaching uncertainty, woven into contract law, particularly, is a system to guide parties through the serious impacts that unexpected events may have. Our team at Cowan, DeBaets, Abrahams & Sheppard LLP will continue to provide updates on legal developments related to the present circumstances and we are available should you request further or specific guidance.

“I Promise” Documentary Series Debuts on Quibi in April 2020

Shown in 8-minute segments, “I Promise” documents the first year of the I Promise School that LeBron James opened in his hometown of Akron, Ohio in an effort to close the achievement gap by creating a new model of urban public education. Executive produced by James and CDAS client Marc Levin, among others, “I Promise” will serve as the public launch of the Quibi platform when it goes live in April. Watch the trailer.

CDAS Partners Briana C. Hill and Benjamin Jaffe Named Co-Chairs of the Entertainment and the Digital Media & Technology groups, respectively.

Briana Hill, Co-Head of the Beverly Hills office of Cowan DeBaets Abrahams & Sheppard LLP, joins Fred Bimbler and Simon Pulman in leading the firm’s Entertainment group, which includes televison (traditional to broadband), streaming, film, new media, talent, theatre and podcasting. The group assists clients with their entertainment projects through early development, the solicitation of investment, production and ultimate distribution, securing all necessary rights and negotiating agreements with top-tier talent.

Ben Jaffe joins Joshua Sessler in leading the Digital Media & Technology group that represents top digital talent, including game developers and distributors, digital agencies, production houses, broadband video networks, mobile app developers, podcasters and social media ventures. The group provides counsel to a wide range of social media, transmedia and mobile plays that are using emerging software and hardware technologies to create, develop and distribute content in new ways.

The New Documentary Market: Four Tips to Prepare

By Simon Pulman

One thing is clear from Sundance 2020: the current market for documentary and quality unscripted projects is extremely strong. Among several eye-catching deals, the $10m paid by Apple to acquire the documentary “Boys State” matched the sum paid by Netflix to acquire “Knock Down the House” in 2019. Concurrently, premium cable outlets and SVOD platforms ranging from HBO, Netflix, Amazon and Hulu to new players HBO Max (scheduled to launch in May 2020), Peacock (July) and Quibi (April) are commissioning a diverse range of quality documentaries, either as one-off pictures or episodic documentary series such as “Cheer,” “McMillions,” “All or Nothing” and “Making a Murderer.”

In the context of this new exciting marketplace, some of the traditional rules have changed. What do producers need to know?

  1. Contemplate Flexible Formats: Given the rise of episodic content, and taking into consideration the massive amount of footage that documentary filmmakers often create, it is no surprise that there have been several examples of projects that were originally planned as one-off documentary films being reformatted into two-part documentaries or even multi-episode series. Moreover, several projects that were planned as feature documentaries have been reformatted into multiple episodes of ten minutes in order to premiere on Quibi, while other documentary projects have been developed in tandem with a tie-in series of podcasts (for instance, the “McMillions” podcast promises to allow listeners to ‘go deeper inside the story’).

    Accordingly, filmmakers should try to structure their deals and negotiate their paperwork in a manner that permits some flexibility with respect to the final form of the project. It is best not to be put in the position of having to determine whether a release that was signed with respect to a “documentary motion picture” would apply to an entire episodic series, especially if the subject at hand is very high level or somewhat tricky (such a subject who withdraws cooperation with the film during the course of production).

  2. Make Room for Buyers: Traditionally, documentary filmmakers have often adhered to the mantra that “credits are free” when according individual credits and company credits to financiers and collaborators (meaning, that filmmakers will often offer an enhanced credit in lieu of a financial entitlement). However, the new group of premium buyers strongly disfavor logos and company credits, in part because their business is predicated on keeping viewers engaged, and they don’t want people to be discouraged by long opening credits. Accordingly, it is not uncommon to see only one company logo at the top of the production – that of the platform. Filmmakers should bear this in mind, and may want to build in contractual language stipulating that all credits are “subject to network, distributor or other licensee approval” (which has been commonplace in television for some time). Likewise, most of the newer platforms do not approve of according any kind of paid advertising credit to third parties (unless it’s a very high level celebrity-like figure), so filmmakers need to be cautious when agreeing to any such obligations.

  3. Where’s My Backend?: Most documentary filmmakers (and many documentary financiers) would agree that nobody is in docs for the money. With that said, there have been multiple examples of extremely successful documentaries over the past twenty years that have generated profits for filmmakers and financiers. Under the new structure, whereby the conglomerates that own most of the platforms and outlets are seeking to acquire all rights and build their IP libraries, there is usually one “buyout” payment and no backend profit participation, while other forms of “upside” such as box office bonuses are also effectively rendered moot. Filmmakers need to bear this in mind, and may need to revise their financial structures to account for this (in consultation with experienced counsel, of course).

  4. Remakes, Remakes, Remakes: The dirty secret of documentary acquisitions is that, at least some of the time, buyers are acquiring the documentaries in order to secure the remake and other derivative rights. The right unscripted material can be fodder for a highly successful scripted series or series of scripted motion pictures – or can be used as the basis for an unscripted series spinoff format. Indeed, circumstances have sometimes arisen where potential buyers have withdrawn their interest in a documentary when it became apparent that remake rights were not available.

    Accordingly, filmmakers should pay attention to remake and derivative rights when putting together their projects. They may wish to seek to acquire life rights – or an option to acquire life rights – from subjects, although this is not always possible. They may want to consider how their collaborators and financiers participate in derivatives, if at all. And when it comes time to sell the project, filmmakers should be cognizant of the potential value of derivative rights to certain types of projects. Ultimately, for documentary filmmakers the documentary should come first – but selling remake rights can be a good way to help finance the next doc!

Lessons From Sundance 2020: Festival Trends and Predictions

By Novika Ishar

Amid concerns over a weak market and the impact of streamers on the independent film industry, the 2020 Sundance Film Festival closed with the exhibition of several highly anticipated films, some record-breaking sales and the upsurge of important new deal makers. See below for some key trends that emerged from this year’s festival.

Slower Initial Sales

As new buyers continue to flood the Sundance Film Festival each year, including big budget-backed streamers such as Disney Plus and Amazon Studios (which purchased the 2019 Sundance hit comedy “Late Night” starring Mindy Kaling and Emma Thompson for $13 million, to little box office success), the festival has witnessed an overall resurgence of record-setting sales. Nevertheless, opening weekend sales were largely sluggish. Unlike previous years, where multiple sales might be completed during opening weekend, the first sale this year took place four days into the festival and current sales can often take days or even weeks to resolve. Perhaps due to the lackluster commercial performance of films like “Late Night,” distributors are choosing to be more selective and are waiting to view a wider variety of projects before undertaking an expensive acquisition. Slower initial sales could also be attributed to the fact that more films are entering the festival with distributors already attached, like the documentary “Mucho Mucho Amor,” which was acquired by Netflix before the festival opened, or the popular entry “Promising Young Woman” (starring Carey Mulligan and produced by Margot Robbie), which was set up at Focus Features; consequently there are fewer projects in contention.

Genre-Based Films and Documentaries Still a Hit

Initial sales notwithstanding, this year was a big hit for documentaries. Beginning with Netflix’s pre-festival purchase of “Mucho Mucho Amor,” documentaries continued to drive sales at Sundance, perhaps even more so than in previous years. Some of the most buzzed-about films included the star-studded Taylor Swift and Hillary Clinton biopics. Most notably, Apple and A24 teamed up to acquire the Concordia Studio-produced “Boys State” for a staggering $12 million, a new sales record for documentaries at Sundance.

Another standout success was the Andy Samberg-led romantic comedy “Palm Springs,” which set a new festival sales record thanks to a $22 million deal with Neon and Hulu, dethroning the record previously held by “Birth of a Nation” by a substantial amount. The deal reportedly includes an acquisition fee of approximately $17.5 million along with a guaranteed bonus compensation, the details of which have not yet been disclosed.

There are a few possible explanations as to why these record-breaking sales were feasible in the current risk-averse climate:

  • First and foremost, it’s worth noting that each of “Boys State” and “Palm Springs” was jointly purchased by a traditional distributor and an OTT streaming service (with exclusive streaming rights) – a split that reduces individual financial exposure and aligns with the existing assets of each buyer. This dual arrangement presents a fruitful venture for both theatrical distributors and streamers that could in fact establish a new business model for future sales, as discussed below.
  • In an era of divisive discourse where Sundance submissions have increasingly veered into controversial topics, many of the best-selling films presented a hopeful or positive message. The non-partisan political coming-of-age story “Boys State” depicts the dramatic plot twists of contemporary politics and the importance of civic engagement. “Palm Springs” is a romantic comedy that has been widely compared to the cult classic “Groundhog Day,” a feel-good movie with wide-ranging appeal. Thus, the films offer content that is inherently less risky (indeed, some of the biggest and most successful sales in past years at Sundance were similarly genre-based, such as “The Big Sick”).

Where Does Sundance Go From Here?

What does all this mean for the future of Sundance? On the one hand, the festival’s trajectory seems somewhat uncertain. Unlike Cannes or the Toronto International Film Festival, which benefit from a larger international market, Sundance focuses primarily on small-budget independent films and documentaries, which historically have not performed well at the domestic box office. Moreover, as streamers such as Netflix continue to develop and produce original content, there is less demand for third-party content. In that respect, Sundance may begin to look more like a showcase of distribution-ready films rather than a traditional marketplace.

However, there could be a few potential developments that offer reason to be optimistic about the future of festival sales:

  • Streamers Dominate the Market: Digital streaming studios continue to aggressively search for binge-worthy content that will satisfy their numerous subscribers and hopefully attract new ones. As more buyers enter the independent film market every year (with Disney Plus and HBO Max considered major new players), the appetite for content could result in heightened competition in a market that is increasingly dominated by streamers. In turn, this influx could also spur more hybrid deals between streamers and traditional distributors.
  • More Hybrid Theater-to-Streaming Distribution: The rise of digital streamers may encourage a symbiotic theater-to-streaming sales model similar to that between Neon and Hulu or A24 and Apple, where traditional distributors control theatrical rights and streaming services piggyback with subsequent streaming rights. Netflix and Amazon seem inclined to focus on delivering hits quickly to their subscribers, rather than in engaging in lengthy and likely non-lucrative theater releases. For instance, Netflix’s “The Irishman” and Amazon’s “The Aeronauts,” two of the respective studios’ biggest recent releases, both had fairly limited theatrical runs prior to streaming. Since streaming services don’t necessarily measure success according to box office performance or other traditional metrics, they are less likely to be willing to invest in expensive theatrical runs and are instead focused on collecting a slate that will boost their subscriber numbers. In fact, according to Jennifer Salke and Matt Newman, heads at Amazon Studios, “Late Night” is one of the top five best performing films on Prime Video and is therefore viewed as a commercial success by the company, despite its box office revenues. Distributors that are exclusively theatrical, on the other hand, would benefit from a streamlined process where streaming rights are simultaneously negotiated and the financial risk is accordingly re-distributed, with streamers fronting a majority of the acquisition cost.  (As more details of this year’s biggest sales emerge, it will be interesting to see how distributors who have teamed up share profits, if any). As a result, the bifurcated sale of theater and streaming rights seems like a commercially viable approach for current buyers. Moreover, reduced costs could allow for distributors to partake in multiple sales or even larger individual sales. For all these reasons, the joint theater/streaming sales model may become a key source of growth in festival sales.
  • Potential Rise of Episodic Content: Sundance has remained a festival mainly for feature length content and has resisted embracing episodic programming compared to other markets. Nevertheless, with the continued popularity of episodic content and the potential growth of short-form content, this could rapidly change. Quibi, the short-form content mobile streaming platform, made a high-profile appearance at Sundance this year and may become yet another market disrupter following its launch in April.

Regardless of sales, Sundance continues to attract droves of industry veterans and movie enthusiasts alike. Furthermore, the festival’s reputation as a prestigious launching point for rising talent supports its ongoing relevance in the contemporary market. Nonetheless, given the unpredictable trends of the past few years and the ever-evolving digital media landscape, it will be worth keeping an eye on the direction of future Sundance sales, perhaps as an indicator of larger trends in the industry.

CDAS Named a Top Tier Firm, Nationally, for Entertainment Law and Trademark Law in U.S. News – Best Lawyers® “Best Law Firms in America 2020,” and achieved High Rankings in Copyright and Media Law

CDAS achieved a Tier 1 ranking nationally for Entertainment Law – Motion Pictures & Television as well as Trademark Law. The firm was also ranked nationally in Tier 2 for Copyright Law. Within New York City, CDAS was ranked in Tier 1 for Entertainment Law – Motion Pictures & Television, Copyright Law and Trademark Law, and in Tier 3 for Media Law.

These competitive rankings are based on extensive client and peer review, focused on practice group expertise, responsiveness, understanding of business needs, cost-effectiveness, and other important parameters. Inclusion in “Best Law Firms” is considered a significant achievement.