8 December 2003
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18 February 2013
There is a degree of mystery around the complexities of film financing. Some of this is due to the short timelines in which most film financing transactions are conducted. Most film projects come together very quickly due to the availability of stars, directors, and the fact that decisions on the suitability of scripts and projects are made rapidly in order to accommodate them.
The essence of a film financing transaction is usually no more than a ‘factoring’ of the promise of distributors to pay advances upon delivery of the film. A funding entity will advance cash to a production against the security of the agreements that are assigned by the production company or the sales agent that the production company has appointed to sell the film on its own behalf.
Film financing lawyers need some knowledge of the way in which choses in action (ie debts) can be assigned and the security perfected, usually by notice to the third-party debtor. However, the promise to pay by that distributor, which repays the financiers’ cash advances, is subject to certain contractual conditions, all of which need to be fulfiled before that distributor can pay.
If a distributor is to take the completion and delivery of a film on trust, which itself is becoming increasingly rare, then it will wish to specify the kind of film that it is going to receive. The criteria range from such mundane matters as running times to more important matters such as cast and script. It is usual for a financier to ensure that if a specific member of the cast, such as a Hollywood star, is a prerequisite for a distributor to pay its advance, that star will be fully insured for the cost of the financier’s advances, with a payout if they become incapacitated or ill during production. Some Hollywood stars see the medical tests that are required to effect this kind of insurance as an invasion of their privacy.
Given the awe in which most film producers regard them, this can lead to some difficulties in effecting the right kind of insurance.
The specification of a particular numbered or dated script can also lead to problems, as the famous Mesmer case demonstrates. In that case, a particular distributor took issue with the fact that when a film was delivered to it, the order of scenes did not follow that of the script and certain changes (it alleged) had been made to the way in which characters were presented.
This is obviously a highly subjective view, although in the arbitration that ensued, the arbitrators found for the aggrieved distributor. It is up to those who monitor the production to ensure that if a specific script is included in the specification, it is followed, if not to the letter, then at least without changing the nature of the characters or the principal story line.
Another important specification for a distributor that wishes to order its exhibition of the film well in advance is the actual delivery date itself. If a film is not delivered on time, then a distributor is entitled to reject delivery and demand any deposits it has paid to be refunded – quite apart from the fact that it will then be entitled to refuse to pay the delivery payment, and therefore the security that has been offered to the financier disappears entirely. In addition, many distributors now have extremely stringent technical requirements for the actual materials and not all laboratories observe the most stringent quality controls that are required to meet these tests.
Most prudent and cautious film financiers ask for the completion and delivery of a film to be guaranteed by a completion guarantor. The two principal completion guarantors operating in the world are Film Finances Inc and International Film Guarantors. Because most completion guarantors take on 30 to 40 films a year, their financial worth and their ability to meet their obligations has to be underwritten by an independent guarantor. Most completion guarantors look to forms of underwriting and insurance arrangements to bolster their covenant to pay both excess costs or the repayment of film financing funds. These underwriting arrangements should be reviewed regularly by any potential financier seeking to rely on the worth of the completion guarantors.
The fact that insurers are involved leads to certain exclusions being imposed in respect of a completion guarantor’s obligations. Some of these are relatively unimportant, such as nuclear fission; others, such as terrorism, or even suspected acts of terrorism, are not.
Some of those exclusions, such as war or civil commotion, can be protected by insurance, while others can be deployed by utilising expert advice, such as the standard exclusion that completion guarantors insist on in relation to chain of title – a reason why traditionally media lawyers, rather than banking lawyers, who may be less familiar with the mysteries of copyright, have been involved in film financing.
In the old days, it was common for a bank to discount entirely one distributor’s commitment, which was equal to 100 per cent of the finance of a film. Indeed, those financiers fortunate enough to be dealing with Hollywood studios may still be able to avail themselves of that particular luxury. Closer to home, it is likely that a film is going to be financed from a variety of sources – public subsidy, tax shelter money, equity, as well as the straight discounting process described above. It is common for all funders of such a film to make an inter-party agreement, in which they pledge, notwithstanding the terms of their agreements with the producer, to fund the cash cost of production in any circumstances, unless the film is abandoned or if the completion guarantor so requests them not to.
The reason for this is that the principal condition precedent to the liability of a completion guarantor is that the cash cost of the film is made available to the production company before the completion guarantor meets its obligations. Because of this, the curious situation has arisen that a number of funding agreements with a production company will insist on all kinds of remedies against the producer, but which are agreed not to be invoked if the other parties live up to their obligations to fund. The same is true of a distributor – it may well insist on a huge number of delivery materials to be delivered to it, but by and large agrees to accept and pay on delivery of those items that a completion guarantor has agreed to deliver to it.
Some of the complexities of film financing arise, however, from the fact that however accommodating the financiers of a film may be in the inter-party agreement, they all seek to have securities against the production on their own account, so that if something goes wrong, they do have a place at the table where the resolution of those difficulties is assessed and debated. This leads to the almost absurd position of one film having more than five or six charges, which the financiers agree may rank pro rata pari passu to their advances towards the cash cost of production – an agreement which to the writer’s knowledge has never been tested in court or even against the liquidator of a production in question.
Whether such an agreement may be maintained successfully is possibly open to doubt, but until such time as a better way is discovered, this is the best way in which film financiers can find to protect themselves.
The above may seem comparatively technical compared with the more publicity-prone events associated with making a film – collapse, illness, or sheer bloody mindedness of stars and directors, and general lavish expenditure all round. But the fact that the film financing involves so many different varieties of law – contractual, insurance, intellectual property, employment and security law, to name but a few – is of continued fascination. That it is, on occasion, a minefield, is not open to dispute. It needs great dexterity to weave one’s way across that particular pasture without being blown up.
Nigel Palmer is a partner in the media and communications group at SJ Berwin