Navigating The "Pay Or Play" Minefield


Periodical: The Business Of Film

Date: October - November 1997

The notion or "pay or play" is so ingrained in the entertainment business that one would be hard pressed to find an entertainment lawyer, talent agent or studio executive who does not have at least some understanding of this term.  Because this phrase is so basic to Hollywood's lexicon of deal points that use of the term is second nature to many industry dealmakers, it is not uncommon or them to assume that the parties with whom they are negotiating share the same assumptions about the way in which a "pay or play" clause operates in all situations. 

Such assumptions can be dangerous.  Although most knowledgeable insiders probably would agree on a basic definition of "pay or play," their differing assumptions about its conceptual underpinning sometimes lead them to conflicting conclusions about whether a studio should be considered to have made a legally enforceable "pay or play" commitment or whether the "pay or play" rights of an artist have been triggered so as to entitle that artist to full compensation.  Such disagreements are most apt to arise when, as frequently occurs in Hollywood, the studio and the artist do not finalize a written contract and the parties disagree about whether a binding oral agreement was ever reached and/or what its terms are. 

A Basic Definition of "Pay or Play" 

Most Hollywood dealmakers would embrace a standard definition of "pay or play" as an obligation to pay money whether not services are used. For example performer has become "pay or play" in connection with a particular project, the studio or production company is required to utilize the artist's services, but is required to pay him or even if it elects to proceed with a different actor or not to produce the project at all. 

This definition is consistent with general descriptions of "pay or play" clauses found in the few reported court decisions that have analyzed such provisions.  In one case, a New York court ruled that, assuming an alleged contract between a television network and an actor was valid, the effect of its "pay or play" clause would be to require the network to pay the actor "irrespective of whether movie was ever made." In another relating to the termination of an actress from a motion picture, a California court similarly noted that under the standard "pay or play" clause in the artist's contract, "the studio could terminate [her] from the film at any time, but was obliged to pay her the full contract price, unless she failed to fulfill her contractual obligations." And just recently, another California court described a "pay or play" directing deal "giv[ing] the studio a choice: it can or 'play' the director by using the director's services, or pay the director his or her fee."

These judicial statements reflect widespread agreement that once an artist has become "pay or play," compensation is generally required even if the project is abandoned or the artist's services are terminated, unless the artist is in material default. But the usefulness of these cases is limited precisely because of the assumption on which their reason is based - that the artists in those cases had become "pay or play" in the sense that their contracts had been finalized  - and their "pay or play" rights had been triggered.

Courts have offered little or no guidance, however, about how to resolve conflicts about whether an artist is entitled to compensation in those situation in which the parties have agreed that the artist’s deal will be "pay or play" but have not reached agreement on other issues and have not signed a contract.  Under these circumstances - which are not uncommon in the entertainment industry, particularly the high-end motion picture community - if the artist withdraws or is terminated from the project before performing, the dispute may focus on whether the "pay or play" commitment was binding absent an overall agreement.  Alternatively, if the parties agree that a binding contract was formed, they may still differ over whether the artist’s "pay or play" rights were triggered if the artist has failed to exercise approvals or has withdrawn from the project for some reason that is within the artist’s control but does not constitute a material default.

When An Artist's "Pay Play" Status Is Triggered

A "pay or play" agreement with a studio provides an artist with the security of knowing that the studio will not reserve the artist's time or utilize his services without compensation.  But what happens when a studio agrees to make an artist "pay or play" before the artist is legally bound to perform in a project?  Can the studio be required pay the artist if the artist is not required to perform?

Take this example: A studio is in negotiations to secure the services of an actor in an upcoming motion picture.  After the parties agree on the amount of the actor's fixed compensation, the studio agrees to make the actor "pay or play" with respect to that fixed compensation.  But despite their best attempts, the parties cannot reach agreement on many important terms of the actor’s contract, including credits; the extent of the actor's approval rights with respect to the director, the cast and the screenplay; and a number of perks. The actor refuses to perform under these circumstances, but demands his fixed compensation because he was made "pay or play."

Is the actor entitled to be paid?  The answer depends on how the "pay or play" commitment is viewed in legal terms.  Some experts consider the "pay or play" commitments be an enforceable agreement on its own, regardless of whether an enforceable agreement is ever reached with respect to the actor’s services.  According to that view, the studio may be bound to pay the actor even though the actor did not perform in the picture and was never even committed to perform in it.  (I say may be bound because there may be other grounds for studio to refuse payment.)  Other industry experts, however, consider "pay or play" to be merely one term in the overall agreement. Such people would construe the studio's agreement to make artist "pay or play" as a commitment that, if a legally enforceable agreement were ever reached with respect to the various material deal points, that agreement would be on a "pay or play" basis.  But because the parties never finalized such agreement, they would say that the "pay or play" commitment never became binding on the studio. 

Now assume the same general set of facts as those described above but with following twist: Rather than failing reach an ultimate agreement, the parties eventually do agree on all deal points, including the actor's approval rights over the female lead. The actor indicates a willingness to approve three specific actresses for the female lead, but none of them is available. The studio proposes several other names, but the actor disapproves of them all.  With the date for principal photography quickly approaching, the studio proceeds to cast an actress of whom the actor disapproves.  Citing his right of approval, the actor drops out of the picture and demands that he be fully compensated because he was "pay or play."  Who wins? 

In this situation, the question is not whether the actor was "pay or play" - clearly he was, whether the "pay or play" commitment is considered to be a separate contract or merely a term of the overall deal. Rather, the question is whether all conditions to the triggering of the actor's "pay or play" rights were met.  Some would say yes, the actor is entitled to his compensation as soon as he becomes "pay or play," regardless of what happens later.  The proponents of this position would argue that: (1) the actor did not default and would have performed in the picture had the studio engaged the services of a leading actress of whom he approved; and (2) the studio's "pay or play" agreement was not expressly conditioned on his prior exercise of his contractual right of approval. The contrary viewpoint would hold, however, that the actor is not entitled to compensation - or, to put it another way, his "pay or play" status is not triggered - until he has done everything within his power to be legally committed to appear in the project.  According to this perspective, the "pay or play" commitment should be understood as having been conditioned on the actor's approval of a female lead and any other events that stand in the way of the actor being firmly committed to perform in the picture.  The reasoning would be that the purpose of a "pay or play" agreement is to give the actor security that he will be paid whether or not the studio elects to utilize his services - not whether or not the actor elects to perform.  According to this view, because the actor was not ready, willing and able to perform in the picture for reasons that were within his control, the "pay or play" commitment was never activated. 

Now consider one final scenario that may arise from the use of "pay or play" language in entertainment deals.  Assume that a director enters into a written contract with a studio that states that the director will be "pay or play" for a motion picture when an actor is made male lead in that picture. The contract is silent, however, with respect to whether there are any conditions triggering of the actor's "pay or play" status. The studio then proceeds to engage an actor for the role of the male lead on a prior "pay or play" basis subject to the express prior condition that the actor his exercise right to approve the screenplay.  When the actor and writer have creative differences, the actor does not approve the script, withdraws from the project, and agrees that he is not  entitled to be paid.  Nonetheless, the director demands to based on the "pay or play" language in her agreement. 

In this last scenario, common sense suggests that the actor should be considered "pay or play" for purposes of the director's compensation if a "pay or play" for purposes of his own compensation.  Yet that could be the finding of a jury if this dispute ever went to trial. The director would argue that her "pay or play" language was triggered when the studio agreed to make the actor "pay or play," and that her agreement didn't condition her "pay or play" rights on the actor’s exercise of his screenplay approval.  Further, to the extent that the director's agreement were found to be unclear on this point, the ambiguity may have been construed against the party that the drafted contract - most often the studio.

Suggestions To Avoid  Disputes 

The hypothetical cases above are offered to illustrate some of the latent ambiguities that may lurk in "pay or play" language and the conflicts that may arise as a result of them.  Although disputes over whether a "pay or play" commitment is a free-standing contract or merely one of many terms in the artist's overall agreement do not arise every day, the stakes when they do arise may be enormous.  It is therefore critical that the lawyers and agents who negotiate "pay or play" deals be sensitive to these issues and that they not merely assume that their counterparts - or the entertainment industry as whole - share their assumptions about nuances of "pay or play" language or application to particular situations. 

Furthermore, it is generally prudent for most for most parties - studios and talent alike - to try to be specific about the way "pay or play" language in an agreement or correspondence is meant operate in particular situations.  This approach is certainly the one most likely reduce misunderstandings that can lead to litigation if the parties reach an impasse or a project is canceled. Even those dealmakers who perceive some advantage in leaving the "pay or play" language in a deal vague rather than clarifying terms in such a way that they are plainly to their clients' disadvantage or limit their options should carefully examine the potential consequences of high-risk strategies if they have misjudged the issues. Because of the absence of any consensus about some of nuances and legal implications of "pay or play" language, even the most skillful negotiators who carefully conduct negotiations to exploit its ambiguities see such a strategy backfire.

Assume, for example, that a talent lawyer desires both to maximize an artist's chances of being compensated simultaneously retain the artist's flexibility to walk away from the project.  In  order to achieve these goals, the lawyer seeks to have the client made "pay or play" before a contract is finalized and before the artist has made a final decision about whether to proceed with the project, then delays in finalizing the terms of the artist's agreement until the artist is certain that she wants to proceed.  The idea would be that, depending on the ultimate outcome if the negotiations and the status of the project, the artist may want to argue either that she was "pay or play" (if she is terminated or the project falls apart) or that she was never legally committed to the project (if the project is going forward but she wants out of it).  This strategy may yield big dividends.  But what if the talent lawyer has miscalculated and the artist withdraws from the project based on a mistaken belief that a court will share her understanding of "pay or play" and will agree with her position that she was never legally bound to perform?  If a court were to interpret the "pay or play" commitment as a legally binding contract on its own, the studio could prevail in a lawsuit against the artist and force the artist to pay substantial damages. 

This specter of having a client end up at the wrong end of a lawsuit suggests that most dealmakers will want to eschew the bold strategy of trying to exploit the ambiguities in "pay or play" language in favor of an approach designed to reduce the risk of confusion from such terms.  One way to do this is to avoid using the term "pay or play" (or related terms such as "pay and play" and unconditionally "pay or play") when possible and instead to describe in plain English how the parties intend the arrangement to work - particularly what conditions, such as the signing of a contract or exercising approvals, the parties intend there to be to the triggering of the artist's right to guaranteed compensation. Another suggestion is that, if the term "pay or play" is in an agreement, it should be a defined term.  The definition should any conditions that there are to the triggering of the "pay or play" commitment, and should state whether the artist entitled to any payment if those conditions are not met.  Similarly, if the term "pay or play" is used in a letter, the author should be clear and specific about how it is being interpreted.  For example, a studio may want to create a record even though it has agreed to make an artist "pay or play," the artist will not be guaranteed any compensation unless and until she delivers a signed written agreement.  Alternatively, a talent lawyer whose client has "pay or play" rights that are linked to those of another artist may want to make clear that the client’s entitlement to compensation is not conditioned on the other artist's exercise of any approvals. 

Conclusion

In sum, far from a self-defining term or a concept whose applications are universally recognized in all situations, "pay or play" is actually a complex and surprising controversial notion, presenting traps for the unwary and the potential for contentious disputes.  A little clarity now may insure against a lot of attorneys' fees later. 

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