More Questions for Artists: Record Producer Agreements, Part 12: “Must Have” Indemnity Terms: The Four Horsemen of the Apocalypse

Please note: This is an installment in a multi-part post.  Each post has information relevant to prior posts, so until we get to the “Final” there will be more information to come. See also More Questions for Artists: Record Producer Agreements, Part 1, Part 2, Part 3, Part 4, Part 5. Part 6 , Part 7, Part 8 , Part 9, Part 10 and Part 11.  Watch this space for further installments, or subscribe to the RSS feed.  A post with all the current parts in one post is available here, and see also “Artist Management Agreements” on the Semaphore Music blog.

17.  “Must Have” Indemnity Terms: The Four Horsemen of the Apocalypse

Contracts have paragraphs that deal with what happens if it turns out that the contracting parties lied to each other, or lied a little bit, and the non-lying party suffered losses.  It also covers situations where one party breaches the agreement and the other has losses.  The non-breaching party is able to get back the amount of their losses from the breaching party.  The windup doll lawyer version of this story is that the breaching party only has to cough up the cash when the non-breaching party gets a final, non-appealable judgment or settles with the consent of the breaching party.

While no one can predict the future, statistically you will never in your life time have a final non-appealable judgment for anything.  Those are what happens with Google and [fill in the blank], because a “final nonappealable judgment” means that you have exhausted every possible appeal and that is a very expensive enterprise.

Settling with consent mean that you have to get the breaching party to agree that (a) they were wrong and (b) will pay you the amount of the settlement—plus your legal fees.

An indemnifying party not only picks up the tab for the actual settlement that is due to something they did, they also—should—pick up the rolling costs of your defense.  (Bearing in mind that these provisions tend to be mirror images of each other, so if you ask it of your producer you should expect to give the same promise to you producer.)

But what is more likely the key issue for artists is going to be when you can offset money that you otherwise have to pay the producer to cover your losses (including your attorneys’ fees).  And if you can’t offset these monies in the contract, then you are going to have to separately sue for the right to offset—another cost you will have to bear out of pocket.

There are four key points—what I call the Four Horsemen of the Apocalypse—that you want to have a clear right to offset in your producer agreement because you will feel absolutely nasty about having to pay the producer while you pay these costs and you wait for your final nonappealable judgment.  All of these claims should be immediately offset from “all monies” otherwise payable to the producer or the producer’s publisher—advances, royalties, mechanicals, the works.

(a)  Overbudget:  You need a clause in your agreement that makes your producer responsible for staying on budget, particularly in a recording fund situation.  If the producer goes overbudget, then the producer has to pay that overbudget amount, or you can deduct it from any money you otherwise have to pay the producer.  The producer’s lawyer will not like such a cut and dried overbudget definition, so there will be some back and forth about fault—but just remember that you don’t want to have to prove what someone’s mind set was at the time you went over budget.  But you can think of this as “unexcused overbudget”.

(b)  Union Penalties:  The producer is typically responsible for filing union session reports and paying (out of the budget) session fees, pension and welfare payments and other sums.  Those reports have to be filed within a certain time and if they are late you will have to pay a penalty.  Since the producer is responsible for filing the reports, the producer should be responsible for fees you incur because the producer filed late.

(c)   Uncleared Samples:  If the producer is responsible for clearing samples and fails to do so, then you should be able to offset losses from having to do it yourself.

(d)  Indemnity Claims:  If you are subject to an indemnity claim, and the producer fails to fulfill the indemnity obligations (especially to defend you), then you should be able to offset these costs against other payments to the producer.

If it turns out that you offset these sums incorrectly, then you should expect to have to recredit the producer’s account.

But here’s your guide:  First, would it make you sick to your stomach to have to pay the producer’s royalties when the producer was breaching their agreement with you?

Second, do you have an obligation to someone else—such as a record company or music publisher—that allows them to offset the same kind of sums from your monies in which the producer participates.  If you don’t have a mirror image off-set right against the producer that the source of these royalties has against you, you may find that you have to make a payment to the producer for which a share of these monies that you have not been paid due to the source offsetting against you a claim that ultimately comes down to the fault of the producer.

Because the source has a contract with you and you have a contract with the producer, the source does not have the ability to distinguish between your money and the producer’s share of your money so they will squeeze you.  If you get squeezed, you should be able to squeeze the cause of the problem, too.  Hence, the Four Horsemen of the Apocalypse.