What is a "Pay-or-Play" Agreement
In the entertainment industry, contracts are the lifeblood of a project. As such, producers and celebrities alike can be choosy when it comes to the types of contracts they want to enter into. One common type of contract that offers all parties some assurance is a pay-or-play contract. More specifically, a pay-or-play contract – which may also be called a pay or play contract – is a type of contract that ensures that a party is compensated, regardless of whether or not a project is ever released. In Hollywood, for example, an actor may sign one of these contracts with a studio in order to guarantee that he will continue to be paid, even if his role is recast before production goes forward. Whereas actors are the most common parties to use these contracts, they are not the only ones. In the entertainment industry, pay-or-play contracts provide a great deal of security to everyone involved and are often an essential part of the negotiations process. However, it is important to keep in mind that, even when a contract of this sort is entered into, there is no guarantee that the project itself will actually move forward. It is also possible to enter into a very one-sided contract that ensures that one party will be paid while leaving the other with nothing, should the project ultimately fail. While there are many benefits to pay-or-play contracts, it’s important to keep in mind what these guarantees even mean . When a project is scrapped or changed significantly, the money already paid out may come at the cost of future profits, thereby hampering the financial future of a studio or production company. For this reason, while parties may need to take a pragmatic approach when negotiating contracts, that doesn’t mean that they should ignore the long-term implications of such contracts. In the event of a broken contract, parties may be able to sue for damages or seek mediation from a neutral third party. However, even when a breach occurs, the courts will be hesitant to get involved in a financial dispute. When these contracts are made, the parties all have to acknowledge the possibility that a project could be scrapped with little to no notice. While it’s certainly not uncommon for projects to fall through due to a major star being unavailable to perform, the studio pays out anyway with the hope that it will recoup its investment elsewhere. Because producers can count on these sorts of contracts, artists should be prepared for their only recompense to be the money they received if a project falls through. For that reason, pay-or-play contracts are an important issue for everyone in the industry because they are often one of the simplest ways to ensure that everyone is able to walk away with something, even when a project fails to move forward. In some cases, celebrities may even waive this right.
Historical Background and Development of Pay-or-Play Agreements
The origins of pay-or-play contracts in the entertainment industry can be traced back to the post-World War II era, when film studios began negotiating options and contingent-compensation clauses for actors, directors, and big-name writers. These clauses offered a minimum level of security to actors and directors and allowed studios to ensure that their projects would be made. While there had always been individual agreements between studios and key personnel, it wasn’t until the 1970s that specialty arrangements began to gain popularity in the industry as a whole.
Initially, these clauses, long contained only in the film industry, were viewed by insurers as clear election of coverage. If a producer exercised its right to place a project on hold in perpetuity, so the logic ran, the insurer would not have to honor its commitment to insure an unfinished film. On the other hand, studios thought it would be absurd to insure an indefeasible risk. Gradually, however, courts carved out exceptions to the general rule that pay-or-play contracts constituted a "buy-back" of the risk. For example, in earlier cases, courts held that an insurance carrier may only "regard the likelihood of a lawsuit ultimately reaching trial as a contingent risk within the context of liability insurance." After all, California courts defined the term "accident" for insurance purposes as "an unexpected and unintended happening or event, or a change in circumstances, which produces, in its sequence, the result of the insured loss."
The court’s ruling in MacKinnon v. Truck Insurance Exchange (2003) 31 Cal.4th 635 reinforced the opinion that the term "accident" did not require the fortuity aspect traditionally required for insurance coverage: A fortuity requirement . . . is inconsistent with the broad scope of the term "accident," which we have defined to mean "an unexpected, untoward event which produces damage contemporaneously with its other effects." … Emphasizing the concept that insurance is protection against accidental loss, we have explained that under the [insurable] interest rule[,] a contract must merely afford protection against : [a] pecuniary loss that may reasonably grow out of the destruction of the property, or the incapacity of the insured against which the insurance runs, by peril insured against.
From that ruling forward, it became clear that the insured should not reap the benefit from a potential risk that had not materialized.
Physics and entertainment worked similarly in the late 19th century, especially in regard to alchemy. It was not until alchemists learned to embrace the provenance of a chemical change that significant changes became apparent. Likewise, in the entertainment industry, pay-or-play contracts have evolved into a valid bonding arrangement. Initially, limited to veteran actors and directors, they have dominated the industry for the last 15 years, and their prevalence shows no signs of waning.
Key Terms and Provisions
Pay-or-Play Contracts often contain the following key terms and conditions:
The First Look Exclusivity Term. Also known as First Look Exclusivity Period, Exclusivity Period, Exclusivity Term, or First Look. This is an agreed upon period of time wherein one party has the first right of refusal to purchase all of another party’s product in a specific territory, exclusively, prior to anyone else.
Territory. The geographical territory within which the pay-or-play contract applies.
Term. The length of time that the pay-or-play contract will be in effect.
Purchase of Product. Once the parties have agreed upon a territory, term, and price, the party with the right of first refusal can then exercise its obligation to purchase the product and pay for the right.
Price. This is the purchase price the party has agreed to pay for the right to purchase product.
Penalties. Because the nature of pay-or-play contracts is such that parties may be bound to a product or project prior to budget approval, timeline deadlines, and the like, they often include penalties for any party failing to meet its obligations as set forth in the agreement.
The Benefits to Actors and Producers
Pay-or-play contracts offer security for actors and producers. An actor enjoys compensation and fulfillment of the contract even if the movie is not made. A producer benefits because it assures them against large outlays for putting together a film project that will not be made.
A pay-or-play contract can also be a bargaining chip in contract negotiations. For instance, if an actor is interested in a project, but only if the film is made with a certain director, the actor can tell the studio that his play-or-play option to star in the film is contingent on the hiring of the desired director.
Potential Pitfalls and Issues
Pay-or-play contracts, while often advantageous to both parties, are not without their pitfalls. One common issue is the "subject to financing" condition. It is not unusual for pay-or-play parties to find themselves in disputes over whether financing has been obtained and whether a pay-or-play contract remains in force. This can create tension between producers. Producer A might enter into a deal with Studio B, who then fails to get financing, and then Producer A wants to renegotiate with Studio C. Or Studio B no longer wants to make a payment to Actor X, and now Producer A must choose to honor the payment arrangement and lose a potentially lucrative deal with Studio C or cancel the deal with Actor X .
Disputes also arise out of an interpretation of what qualifies as "force majeure." For instance, is a production shut down because of an earthquake, flood or a terrorist attack grounds for terminating a pay-or-play contract? Producers may also want to include a "best efforts" clause, requiring they do everything in their power to finance and produce a project while protecting their financial interests.
Mitigating disputes often involves careful contract drafting. Parties should ensure a strong force majeure clause exists, as well as a clause mandating attempts to minimize claims.
Enforcement and Disputes
From a practical standpoint, pay-or-play contracts are fundamental to ensuring that the contractual expectations of both parties are clearly defined and ultimately enforced.
For the purposes of this discussion we will assume that a dispute over the meaning and scope of a pay-or-play contract has arisen. We should also point out that while the parties are free to enter into pay-or-play contracts with different compensation models, the focus here will be on the most common model used in the entertainment industry (i.e. pay-or-play contracts with payment). Generally speaking, the following key provisions and principles are common methods for enforcing these contracts:
Litigation: If a party feels that it has suffered from a breach of a pay-or-play contract, it may seek an order from a court requiring the breaching party to comply with the contract – by entering into the employment or services agreement. In the context of a pay-or-play contract, dispute theory is frequently seen in the form of specific performance. That is, courts are generally motivated to grant specific performance when money damages cannot reasonably substitute for the actual enforcement of a contractual obligation.
Arbitration: arbitration is a commonly used method for resolving disputes in the entertainment industry. While contractual language may refer to either "binding" or "non-binding" arbitration, well drafted arbitration clauses typically require that each party execute a submission agreement. Accordingly, after notice of the arbitration and the appointment of a neutral arbitrator, the parties will submit themselves to a decision of the arbitrator, which has the effect of a binding judgment. As such, if the party against whom the award is granted fails to comply, the party is entitled to seek a judgement and remedies similar to those obtained in litigation.
All Things Equal: not all breaches of contract are so clear-cut, let alone predictable. That said, it is possible to fashion contractual relationships that assume certain event(s) may occur relative to a third party. Often times, these events are tied to funding and/or production company commitments which can necessarily shift to other parties, affiliates, subsidiaries, or even different projects. More often than not the scope and binding nature of a contract may not be so clear-cut. Where there is a reasonable possibility of ambiguity or uncertainty, courts will generally apply a "reasonableness" or "materiality" doctrine to help determine what effect the vague or uncertain issue will have on the remaining clear and unequivocal portions of the contract.
Current Trends and Future Implications
Despite the differences in the use of pay-or-play contracts in both the film and television industries, common trends remain. For one, the use of pay-or-play contracts in television and film has become a best practice. This is especially true once production has commenced, as most, if not all, of the cast and primary crew are usually already under contract. Further, the use of pay-or-play contracts tends to significantly lessen the cost of having to renegotiate a contract in the middle of production and/or relisting the lead roles(s) in the event a party has to exit a project.
Pay-or-play deals also have become a common motif in the emerging digital streaming content industry. Indeed, more platforms for digital streaming content have begun to appear, such as Hulu, Apple TV+, Disney+, Paramount+ and Peacock, among others. These new platforms have started to create exclusive content specifically designed to be streamed on their networks, making the field of platforms for digital streaming content more competitive than ever.
Particularly, in the context of television, as these platforms begin to produce their own content and launch competitive networks, the emergence of more streaming services has led to an increase in pay-or-play contracts for leading roles. For example, in 2018, Hulu announced its first live-action series, Into the Dark, a horror anthology series created by Kevin Balmore and produced by Blumhouse Television . When the casting process began, actors who auditioned for a role were made to understand that the pay-or-play structure would be used by the studio. Conventional industry wisdom tells us that actors are usually not paid for their work unless there is a production in which to include them. The elimination of the pay-or-play contracts would reduce the number of roles that actors would be considered for.
Further, for actors and the respective guilds, limiting the number of roles available renders full-time employment infeasible. Therefore, actors are incentivized to take on as many roles in as many shows or films as they can given the shorter seasons of streaming platforms, while still adhering to their contract. Conversely, studios also benefit from an increased supply of actors who will likely work under their terms. In this way, pay-or-play contracts tend to benefit both actors and studios, while also enabling the actor to audition for more roles in more productions.
With that said, the pay-or-play contract is still defined by its original purpose: to hold an actor or producer dedicated to one film or television show. Inherent within the creative nature of the industry, where collaborations and shared networks abound, pay-or-play contracts will continue to be useful in securing a creatively free and financially viable project.