5  The Interparty Agreement

An interparty is not an agreement, it's an excuse for lawyers to make money.

Producer's comment after being presented with legal bill from a bank's law firm

Introduction

The discounting of production receivables is the essence of all production financing. Whether for television or film, production receivables can include, among other things, licences to broadcasters, pre-sales or licences to distributors, negative pick-ups, equity investments, tax funds and grants or rebates made available by various institutions. The production receivables for a particular project are typically assigned to the bank by notice of assignment and the proceeds received are used to retire the loan. For significant licences or distribution agreements, where payments are contingent upon delivery, it is common for banks to require the implementation of multiparty agreements involving the producer, the completion guarantor, the bank and the licensee or distributor. This type of agreement is commonly referred to as the Interparty Agreement.

Although sometimes difficult to settle, the Interparty Agreement brings the pertinent parties together and provides the bank with significant comfort that it will receive the amounts owing under their loan, when due. The Interparty Agreement has the effect of modifying the terms of any pre-existing licence or distribution agreement and of accomplishing various matters that are of fundamental concern to a bank. The Interparty Agreement enables all parties to approve and consent to the bank's security interest and will usually have a list of parties in order of priority of their respective security.

The bank analyses the production receivables and determines the circumstances under which these payments must be made or potentially avoided. These circumstances need to be mitigated through the settlement of the Interparty Agreement. The agreement also serves the purpose of bringing the completion guarantor and licensee or distributor together on the issue of what constitutes delivery. The form of Interparty Agreement set out below is one that would primarily be used for a distributor or licensee where the licence fee or advance payable is due on delivery and represents a significant portion of the bank's source of repayment. This type of agreement would not be appropriate for minor licences or for transactions where the bank's advances are to be repaid by multiple sources. In these circumstances, notices of assignment and direction and the distributor's or licensee's acknowledgements may be more appropriate. The form of Interparty Agreement required by a bank will depend on various factors, including the terms of the financing; the amount of the receivables relative to the loan; the identity of the producer, the licensee, the distributor and their track records; the type and terms of the production receivables; and the timing of payments. The following agreement is in relation to a multiparty agreement.

Please note that this is only a sample of an Interparty Agreement. Interparty agreements should be negotiated according to the particular facts and circumstances of each transaction.

Film finance transactions with multiple sources of funds will always have a much more complex recoupment schedule and will generally take much longer to negotiate because of the number of parties to the agreement.

Sample Agreement

Preamble

The preamble introduces the parties and their relationship to each other and briefly describes the purpose for the Interparty Agreement.

THIS INTERPARTY AGREEMENT made the [ ] day of [ ] 200[ ] BETWEEN:
[ ] (hereinafter called the ‘PRODUCER’) and
[ ] (hereinafter called the ‘LICENSEE’) and
[ ] (hereinafter called the ‘BANK’)
[ ] (hereinafter called the ‘COMPLETION GUARANTOR’)

WHEREAS pursuant to the terms of a loan agreement between the Bank and the Producer dated [ ] (the ‘Loan Agreement’), the Bank has agreed to advance funds (the ‘Loan’) to the Producer for use in connection with the production of a film presently entitled [‘ ’] (the ‘Film’) in accordance with terms and conditions contained therein;

AND WHEREAS the Producer and the Licensee have entered into an agreement dated as of [ ] (the ‘Licence Agreement’), pursuant to which the Licensee will be granted the exclusive right to [DISTRIBUTE] the Film throughout [ ] (the ‘Territory’);

AND WHEREAS pursuant to the terms of the Loan Agreement, the Producer has provided the Bank with various security agreements including a copyright mortgage (collectively, the ‘Security’) over all of its right, title and interest and to all tangible and intangible elements comprising the Film (the ‘Collateral’);

AND WHEREAS pursuant to a completion guarantee agreement (‘Completion Guarantee’) between the Completion Guarantor and the Bank dated as of [ ] the Completion Guarantor has guaranteed to the Bank that the Film will be duly and timely completed and delivered to the Licensee in accordance with terms and conditions of the Licence Agreements;

AND WHEREAS pursuant to that certain agreement (the ‘Producer's Agreement’) between the Producer and the Completion Guarantor dated [ ] the Completion Guarantor has agreed to issue the Completion Guarantee;

AND WHEREAS the Producer has agreed to assign to the Bank all amounts payable to it by the Licensee pursuant to the Licence Agreement as security for and as a source of repayment of the Loan;

In consideration of these premises and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:

The first few provisions below are important for the Bank as they confirm that the Licence Agreement is in full force and effect and that the Licensee has approved all elements of the Film over which it has rights of approval.

The Bank is also assured that any conditions precedent to the Licensee's obligations under the Licence Agreement, other than delivery, have been met. Banks do not usually provide financing until all the conditions precedent have been satisfied. (See chapter four, term sheet/loan letter, for a full list of condition precedents.)

To the extent that any condition precedents have not been satisfied, the Bank may be asked to waive or take a commercial view on some of them.

Depending on the size of the transaction and the importance of the licence or distribution agreement to the financing, it is usually necessary to list the condition precedents in detail for certainty.

1. Matters pertaining to the licence agreement

1.1 The Producer and the Licensee each represent and warrant that, as of the date hereof, no default exists under the Licence Agreement, that the Licence Agreement is in full force and effect and that the Licence Fee (as hereinafter defined) shall be payable to the Bank in the manner set forth therein, as herein modified.

1.2 The Licensee hereby acknowledges, for the benefit of the Bank and the Completion Guarantor only, that it has approved all elements of the Film over which the Licensee has rights of approval (the ‘Elements').

1.3 The Licensee acknowledges that any conditions precedent to its obligations under the Licence Agreement (including, without limitation, each of the conditions precedent set forth in Paragraph [ ] of the Licence Agreement) have, as of the date hereof, either been satisfied, or are hereby waived by the Licensee as against the Bank (but not as against the Producer).

1.4 The Completion Guarantor and the Producer each acknowledge and agree that the budget for the Film dated [ ] (The ‘Budget’) presently provides for the production of any and all delivery requirements for the Film set out in the Licence Agreement.

If not otherwise clear in the Licence Agreement, it is important for the Bank to establish a mechanism by which the Licensee approves any ‘open elements' - or elements which must be replaced - and to clarify that the Licensee's obligations cannot be diminished or avoided as a result of its refusal to approve or select a replacement for a certain element in the Film such as cast or crew.

The Bank and the Completion Guarantor will also attempt to have the Licensee's rights extinguished if it does not exercise the same within a specific time period. Additional terms are required where essential elements are involved in the licence.

1.5 With respect to any Element of the Film (if any) which the Licensee has not approved as of the date hereof but has the right to approve under the Licence Agreement (‘Open Element’), the Licensee agrees to exercise such approval rights reasonably and in good faith so as not to frustrate the due and timely production, completion and delivery of the Film by the Delivery Date, or Outside Delivery Date, as applicable (as such terms are defined below), in a manner taking into account the allocation of funds in the Budget for such element and the Licensee hereby waives, as to the Bank only, the right to refuse to accept delivery of the Film by reason of the Licensee's failure to have approved any Open Element.

1.6 If any of the Elements (including any individual which has been specified in the Licence Agreement) must hereafter be replaced prior to the completion of principal photography by reason of death, incapacity or default or if the Completion Guarantor takes over the production of the Film and elects to replace any such element, because, in the Completion Guarantor's good faith reasonable opinion, such element is the cause of cost overruns or production delays which would result in the Completion Guarantor's increased liability under the Completion Guarantee, then the Licensee agrees to exercise its approval right with respect to any such replacement in good faith, and as expeditiously as possible so as not to frustrate the production and delivery of the Film (but consistent with the original allocation of funds in the Budget for such position, item or element and provided that such replacement is available and does not have a history of causing substantial costs overruns).

It is essential that the underlying Licence Agreement is not terminated or modified without the prior written consent of the Bank or the Completion Guarantor.

This type of clause is often negotiated so that amendments which are not material to the Bank or the Completion Guarantor may be completed without their involvement:

1.7 Until the Bank has been irrevocably and indefeasibly repaid all sums owing to it pursuant to the Loan Agreement (the ‘Obligations'), the Producer and the Licensee hereby agree that the Licence Agreement shall not be terminated, amended or modified or altered in any way without the prior written consent of the Bank and the Completion Guarantor.

The Completion Guarantor has to ensure that it does not have any responsibility for the performance of the obligations of any party under the Licence Agreement unless it has taken over the production of the Film:

1.8 It is expressly agreed by the parties hereto that notwithstanding anything herein to the contrary, the Producer shall remain responsible for the performance of all obligations under the Licence Agreement, and provided that the Bank has not foreclosed upon the Collateral or has not exercised its takeover rights under the Loan Agreement or the Security, neither the Bank nor the Completion Guarantor (provided it has not taken over production of the Film) shall have any obligation under the Licence Agreement by reason of or arising out of this Agreement, nor shall the Bank or the Completion Guarantor be required or obligated in any manner to perform any obligations of the Producer under or pursuant to the Licence Agreement, other than in the case of the Completion Guarantor, only to perform its obligations under the Completion Guarantee. The Bank shall not be required to present or file any claim or to take any other action as a condition to collecting or enforcing the payment of the Licence Fee.

The provisions below constitute notification and direction to the Licensee of the specific assignment by the Producer to the Bank of the Licence Fees payable.

2 Notice of assignment and acknowledgement

2.1

1. The Producer hereby notifies the Licensee that it has irrevocably assigned to the Bank and has granted the Bank a security interest in and to all right, title, and interest in and to the Film, the Producer's rights in and to and under the Licence Agreement, the licence fee payable to the producer in respect of the Film under Paragraph [ ] of the Licence Agreement in the amount of [£ ] (the ‘Licence Fee’) and any and all other sums (if any payable thereunder or hereunder (collectively, the ‘Bank's Assigned Receipts').
2. The Producer hereby authorizes and instructs the Licensee, and the Licensee hereby accepts and acknowledges the foregoing assignments and agrees:
   
   1. to make payment of the Licence Fee and any additional Bank's Assigned Receipts directly to the Bank, without deduction, set-off or withholding of any type, at the following address: [ ] Attention: [ ] (or such other address as the Bank may designate in writing);
   2. to send to the Bank and the Completion Guarantor duplicates of all notices furnished by the Licensee or the Producer under the Licence Agreement;
   3. to notify the Bank promptly of any conflicting notice received by the Licensee or of any claim by any third party that such third party is entitled to receive all or any portion of the Bank's Assigned Receipts; and
   4. that the authority, instructions, and directions contained in this Paragraph 2 are coupled with an interest and are in all respects irrevocable and without right of rescission or modification without the written consent of the Producer and the Bank.

The following provisions are added for the benefit of the Producer and the Licensee and require the Bank to release or subordinate its interest once the Licence Fees have been paid to the Bank. Whether a release or a subordination is appropriate depends on whether the receipt of the Licence Fees was sufficient to discharge the loan. Insuch case, the Bank would release its interest in the Film. If the funds received only represent partial repayment and the proceeds of other production receivables are necessary to fully repay the loan, the Bank can only subordinate or discharge its interest in the Licence Agreement and its rights in respect of the Film in the relevant territory.

3 Application on the assigned receipts

3.1 Upon receipt of the Bank's Assigned Receipts, the Bank shall be entitled to retain and shall immediately apply the same on account of the Obligations. Upon the indefeasible repayment of the Obligations in full, the Bank shall:

1. notify the Licensee, the Completion Guarantor, and the Producer thereof in writing (such notice being herein referred to as the Termination Notice') and thereupon the authority, instructions, and directions from the Producer to the Licensee under Paragraph 2 hereof shall terminate, and the Licensee shall thereafter be relieved of its obligations to the Bank under Paragraph 2 hereof; and
2. deliver to the Licensee, concurrently with the Termination Notice (with a copy to the Producer) any and all reasonable documents necessary to evidence the subordination of the Bank's interest in the Film in the Territory and the Licence Agreement.

The Bank must be certain as to the amount of the receivable it is entitled to. This provision ensures that the Bank receives the full amount of the Licence Fee without any set-off or reduction and reserves all of such rights of the Licensee as against the Producer only.

4 Payments to the bank and rights of offset

4.1 Subject to Mandatory Delivery (as hereinafter defined) being effected, the Licensee hereby agrees to make payment of the Licence Fee to the Bank as provided in Paragraph 2 hereof, in full, without offsets, withholdings, counterclaims or defences which the Licensee may have or claim against the Producer pursuant to the Licence Agreement (including without limitation, any right of cross-collateralization with respect to any other films or programmes), all of which are expressly reserved by the Licensee as against the Producer but only to the extent that the exercise of such rights does not alter, impair or derogate from the Bank's rights to receive timely payment of the Licence Fee in full hereunder. The Licensee shall have no claim against the Bank for return or refund of any funds paid to the Bank hereunder, such rights being reserved by the Licensee as against the Producer as provided elsewhere herein.

It is essential to the Bank that the Licensee's rights in the Film (including copyright) do not vest and that the Licensee does not become entitled to enjoy its rights in the Film until the License has been paid. It is imperative that the Bank (or the Producer on behalf of the Bank) is able to exercise its rights with respect to the Film and re-exploit the rights granted to the Licensee in the event that the Licensee does not pay for the Film. Depending on the jurisdiction, this type of clause is also important to overcome the claims of an administrator, receivers or trustees of a Licensee in circumstances of bankruptcy and insolvency. A provision is added for the benefit of and to comfort the Licensee which permits the Licensee to promote and market the programme prior to vesting. Terms have also been added to confirm the Bank's first priority security and to provide the Licensee with quiet enjoyment of its rights unless and until it defaults.

5 Vesting of rights - acknowledgements of priority

5.1 Notwithstanding anything to the contrary set forth in the Licence Agreement, the grant of all rights to the Licensee in respect of the Film (including, without limitation, the copyright interests therein) pursuant to the Licence Agreement or any security agreements or copyright assignments executed in connection therewith shall be subject in all events to the Licensee's indefeasible and irrevocable payment in full of the Licence Fee in accordance with the terms hereof, and the Licensee hereby acknowledges that payment of the Licence Fee in full hereunder is a condition precedent to the grant of rights to the Licensee in respect of the Film. Notwithstanding the foregoing, prior to the effectiveness of the grant of rights pursuant to the foregoing sentence, the Licensee may take such actions in respect of the Film, including, without limitation, promotion and marketing activities, as are customarily undertaken by the Licensees prior to the vesting of their rights, subject in all events to this Agreement.

5.2 Licensee hereby acknowledges and confirms that:

1. The Producer has granted to the Bank a first priority security interest in and to the Collateral including, but not limited to all of its right, title and interest in and to the Film and in, to and under the Licence Agreement. Until such time as the Licensee has paid the Licence Fee to the Bank, the Bank shall not exercise its rights as a secured party in a manner adversely affecting the rights of the Licensee under the Licence Agreement so long as the Licensee is not in material default of its obligations thereunder and hereunder and provided further that nothing herein shall be deemed to preclude the Bank from exercising its rights as against the Producer at any time. At such time as the Licence Fee is indefeasibly and irrevocably paid in full, the rights of the Bank in respect of the Film shall be subject and subordinate to the fully vested rights of the Licensee in respect of the Film in the Territory under the Licence Agreement, and thereafter notwithstanding any foreclosure or other action by the Bank against the Collateral, the Licensee shall be entitled to quiet enjoyment of its rights in and to the Film in the Territory under the Licence Agreement, subject to Paragraph 2 hereof:
2. Pursuant to the Producer's Agreement, the Producer has granted to the Completion Guarantor a security interest in and to the Film, including, without limitation, all of its right, title and interest under the Licence Agreement, which security interest is subject and subordinate to the Bank's rights and security interest hereunder and under and pursuant to the Loan Agreement and the Security; and
3. The security interests granted to the Licensee pursuant to the Licence Agreement shall, until the indefeasible payment of the Licence Fee in full to the Bank, be fully subordinate and junior to the liens of the Bank in and to the Collateral, and the Licensee shall execute subordinations and similar documents as the Bank may reasonably request to evidence such subordination.

The establishment of a delivery date (and an outside delivery date in the event of delays) is settled for the benefit of all parties. The elements which will constitute delivery for the purposes of the payment of the Licence Fee are also set out, notwithstanding the terms of the delivery requirements in the Licence Agreement. This provision and the schedule setting out the delivery items are usually settled between the Completion Guarantor and the Licensee with the Completion Guarantor attempting to dispense with as many non-essential items as possible. Banks will typically only finance production receivables contingent on delivery where all delivery items necessary for payment are bonded by the Completion Guarantor.

6. Delivery

6.1 Notwithstanding anything to the contrary in the Licence Agreement, the Licensee shall have the right to refuse to pay the Bank the Licence Fee only in the event that the Producer or the Completion Guarantor fail to make delivery to the Licensee on or before [ ], (‘Delivery Date’) (as same may be extended in the event of force majeure but in no event beyond [ ], (the ‘Outside Delivery Date’) of the items (‘Mandatory Delivery Items') referred to in the Delivery Schedule attached hereto as Schedule ‘ 1’. For the purposes hereof, Mandatory Delivery shall be deemed to have occurred when the Mandatory Delivery Items have been delivered to the Licensee.

6.2 Notwithstanding anything contained in the Licence Agreement to the contrary it is understood and agreed that the Film as delivered to the Licensee may include such minor variations from the approved screenplay as may be required by or as a result of on-set dialogue changes and/or production exigencies and/or such other minor changes, provided that none of the foregoing shall materially alter the story or characters. The Completion Guarantor expressly acknowledges and agrees for the Bank's benefit that Mandatory Delivery hereunder (and ‘Completion and Delivery’, as such term is defined in the Completion Guarantee) includes delivery of the Mandatory Delivery Items and delivery of the Film conforming to the approved screenplay, with only such minor changes as are contemplated by the foregoing.

These provisions assure quick resolution of any dispute between the parties to the Licence Agreement, including disputes concerning delivery and acceptance. The onus is on the Licensee to specify in detail why delivery is rejected and on the Producer and the Completion Guarantor to remedy any defects about which complaints have been made. If the parties continue to disagree, the issue is submitted to arbitration. The arbitrator must then decide if, in fact, delivery has occurred and whether and by whom funds are owing. Banks typically require quick resolutions to avoid the costly delays of litigation. These provisions will require alteration depending on the governing jurisdiction and the laws pertinent to arbitration in such jurisdiction.

7. Arbitration

7.1 Notwithstanding anything to the contrary in the Licence Agreement or elsewhere, the Licensee, the Producer and the Completion Guarantor and the Bank hereby agree that in the event any dispute, claim or controversy arises between any of the parties hereto with respect to this Agreement, whether in contract, tort, equity or otherwise or as to whether Mandatory Delivery has been made or whether any sums are owing pursuant to the Licence Agreement or the Completion Guarantee, the parties agree to submit such dispute for resolution by mandatory binding arbitration under the Arbitration Rules (the ‘Arbitration Rules'). Any of the parties may initiate such arbitration proceeding pursuant to the Arbitration Rules. The arbitration shall be held in [name of city]. The parties shall appoint a single arbitrator with expertise in the film industry and failing such agreement, the single arbitrator shall be determined in accordance with the Arbitration Rules. Each of the parties hereto agree that each will abide by any decision rendered in such arbitration and no right of appeal shall lie therefrom. Each of the parties further agrees that, in the event of a dispute relating to Mandatory Delivery, recourse shall not be had to the arbitration procedure herein until:

1. The Licensee has first given written notice to the Producer, the Bank, and the Completion Guarantor specifying with particularity and in detail the alleged defect or insufficiency in the delivery of the Film or the Mandatory Delivery Items; and
2. The Producer or the Completion Guarantor shall have had 10 business days after receipt of such written notice to cure the alleged defect or insufficiency complained of pursuant to Sub-Clause (a) above.
   In the event that the Licensee does not provide such written notice as aforesaid, within 10 business days ofreceipt of the Mandatory Delivery Items, or in the event that the Licensee does not provide written notice specifying any alleged defect or insufficiency in the delivery of the Film or the Mandatory Delivery Items which have been redelivered by the Producer or the Completion Guarantor within 5 business days of receipt of such re-delivery, then the Licensee shall be deemed, for all purposes, to have accepted delivery of the Film and shall be immediately responsible to pay the Licence Fee to the Bank.

7.2 The cost of the arbitration proceeding and any proceeding in court to confirm or to vacate any arbitration award, as applicable (including, without limitation, attorney's fees and costs), shall be borne by the unsuccessful party or at the discretion of the arbitrator, may be prorated between the parties in such proportion as the arbitrator determines to be equitable and shall be awarded as part of the award or judgment.

7.3 The parties agree that the arbitration as set forth above shall be the sole means of resolving any disputes, claims and controversies among them arising out of this Agreement.

7.4 Unless the issue(s) before the arbitrator do not include whether or not Mandatory Delivery was effected, the arbitration must result in either a finding that Mandatory Delivery has been effected or a finding that Mandatory Delivery has not been effected and the arbitrator shall promptly notify the Licensee, the Producer, the Completion Guarantor and the Bank in writing of the finding made. If it is found that Mandatory Delivery has been effected, the arbitrator shall issue an award against the Licensee requiring the immediate payment of the Licence Fee to the Bank. On the other hand, if it is found that Mandatory Delivery has not been effected, then the arbitrator shall issue an award against the Completion Guarantor requiring the Completion Guarantor to immediately pay the Bank an amount equal to the Licence Fee with accrued interest thereon. The Licensee shall immediately return to the Completion Guarantor, if the Completion Guarantor has paid the Bank, at the Completion Guarantor's expense, or the Bank, if the Completion Guarantor has not so paid the Bank, at the Producer's expense, all delivery items theretofore delivered to the Licensee.

8. Notices

8.1 All notices and copies thereof required to be given hereunder must be in writing and delivered by hand, by certified mail, return receipt requested, by telecopy, provided that a hard copy is mailed immediately thereafter and shall be deemed to have been given when received by the party to which sent. The address for notices to the Licensee, the Producer, the Completion Guarantor and the Bank are:
To the Licensee:
To the Producer:
To the Completion Guarantor:
To the Bank:

9. Waiver

9.1 Any waiver (whether express or implied) by any party hereto of any breach of any of the provisions hereof shall not be construed as a continuing waiver or consent to any subsequent breach on the part of any of the parties.

10. Further assurances

10.1 The parties hereto mutually agree and undertake to do and execute all such further acts, deeds and documents as may be reasonably required to give full further effect to the provisions of this Agreement.

11. Severability

11.1 If at any time any one or more of the provisions of this Agreement becomes invalid, illegal or unenforceable in any respect under any law, the validity legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby.

12. Validity of licence agreement

12.1 The terms of the Licence Agreement, except as modified by this Agreement, shall remain in full force and effect.

This provision ensures that the Licence Agreement is superseded by the terms of the Interparty Agreement, with the Licensee reserving all of its rights as against the Producer under the Licence Agreement.

13. Complete Agreement

13.1 The terms of this Agreement (and the exhibits hereto) constitute the entire agreement between the parties with respect to the matters contained herein and supersede any prior understandings or representations by the parties with respect to the terms hereof. This Agreement may be modified only by an agreement in writing by all the parties hereto. As among the Bank, the Completion Guarantor, and the Licensee, but not as between the Producer and the Licensee, in the event of any inconsistency between this Agreement and the Licence Agreement, the terms of this Agreement shall prevail and govern. Without limiting the generality of the foregoing, as between the Bank and the Completion Guarantor, in the event of any inconsistency between this Agreement and the Completion Guarantee, the terms of this Agreement shall govern.

14. Counterparts

14.1 This Agreement may be executed in one or more counterparts, all of which together shall constitute one and the same original.

Banks and Completion Guarantors usually require the interparty agreement to be governed by the laws of their own jurisdiction and not the jurisdiction of the Licensee, whereas the underlying Licence Agreements are often governed by the laws of the Licensee's jurisdiction. An example of such a clause is set out below.

Governing law

This Agreement shall be governed by the laws of [ ]. The parties hereto each hereby submit to the jurisdiction of the courts of [ ]. Notwithstanding the foregoing, the Bank may, at its option, bring suit or institute other judicial proceedings against the Producer or any of its assets in any state or federal court of the United States or any Province of Canada or in the United Kingdom of any country or place where the Producer or the Licensee or such assets may be found.

IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the date first above written.