More Questions for Artists: Record Producer Agreements, Part 7: Accountings and Producer Letters of Direction

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, Part 11, Part 12 and Part 13  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.

12.  Accounting and Letters of Direction

Producers (especially for major or indie label releases) will not want to rely on the artist for payment.  But because of the semi-fiction that the producer is hired by the artist, the agreement technically does not bind the label to pay the producer directly.  So the producer will try to come as closely as possible to forcing the artist to make the label pay them directly (which the artist usually would love to do), but as the artist cannot usually force the label to do anything, this effort usually begins and ends with the artist agreeing to ask/really try hard to ask/try exceedingly hard to ask—but still just ask—the label to do what it does anyway according to the terms they do anyway and are going to do anyway regardless of what the artist has committed to in the producer agreement.  And the producer will not sue for a breach of that provision.

However, the artist still has to go on the hook for accounting and paying the producer directly.  This is truly a pain for the average artist to accomplish, but it is part of the cost of doing business.  We will come back to this issue in the section on independent artists hiring producers.  These provisions should be drafted carefully so that the artist is only obligated to pay if the artist gets paid (see above regarding paying the producer royalty regardless of whether the artist is recouped), provides that the artist can rely 100% on the statements from the labels, and if audited all the artist has to do is provide the producer’s royalty auditor with copies of the statements to the artist.

If the artist is directly accounting to the producer, the artist should be careful that the artist only has to account to the producer a reasonable period of time after the artist receives statements and payments from the record company (or distributor).  “A reasonable period of time” is usually 45 to 90 days.  This may seem like a long time, but unless the artist has a business manager or book keeper who can spit out producer statements, it’s actually not all that long.  The producer will complain that if the artist gets paid semiannually 90 days after the close of the period and then has another 90 days to account and pay the producer for a total of six months after the close of the period, the answer is that is why they have letters of direction.

It is rare for a producer to audit an artist, largely because an audit is viewed as something of a hostile act and the artist wants to preserve the relationship with the producer and vice versa.  The more typical result is that if the artist audits the label, the producer will participate prorata in the recovery, if any, payable for the producer’s masters.

There is a lot of energy expended by lawyers negotiating these clauses and it’s really not worth it.  If two lawyers spend a lot of time negotiating these clauses, they will probably bill their clients more than will ever be made as a result of their work.  Obviously, for superstar artists and producers this is not the case, but even then it is rare for a producer to actually audit an artist.  For those contracts, it is my view that it is more important for the artist to know that the artist can lay off part of the cost of the audit onto the producer’s recovery, and for the producer to be sure that if he produced the only hit the artist ever had that he’s not in effect bearing the cost of auditing 5 LPs when there was only one that made any money.  It’s also well to remember that the producer’s royalties (and so audit recovery) are not cross-collateralized across albums even if the producer produces several for the same artist.

From the producer’s point of view, she does not want to create a de facto cross-collateralization through the audit clause.