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April/May 2016

by David McLaughlin

The Lawful Truth: Payment Provisions

by David McLaughlin

The Lawful Truth: Payment Provisions

It doesn’t matter how great a recording or publishing deal you think you might have been offered, getting paid is undoubtedly one of the most important aspects of any deal you’re going to enter into. In this Lawful Truth column we’re going to take a careful look at some of the key issues you need to be aware of whenever you’re negotiating payment provisions in music industry contracts.

First up, the timing of when payments will actually be made to you absolutely needs careful attention. You would be amazed how often contracts are either silent or just unclear on this issue. Make sure there is no doubt when you will actually receive your money, and remember, it always pays to negotiate as short timeframes as possible between payments. After all it is much better to have any money due sitting in your bank account earning interest rather than sitting in someone else’s.

How taxes impact on any money due to you is also very important to consider. Is the amount stated in a contract inclusive or exclusive of GST? The presumption in law is that if it is not otherwise stated, a quoted amount is deemed to be GST inclusive. You also need to consider if withholding tax is to be deducted from any amount due to you as this can of course make a big difference to the amount you actually receive in your hand.

Many of the contracts that you see in the music industry, like recording and publishing agreements, also provide for payment to be made by way of ‘royalties’. Royalties are basically just a percentage share of the overall income received in any particular case. As well as certain standard issues, such as timing of payments, when it comes to royalties there are a whole range of other issues that also need to be carefully considered.

One of the first issues you need to be aware of is that what is an appropriate royalty rate can differ a lot from one type of contract to another. A standard royalty rate in a publishing agreement can be four times as much as a standard royalty rate in a recording agreement for example. So in each different case you do need to have a good understanding for what the current market royalty rate is for the type of contract in question.

You also need to be very conscious that royalty rates in the music industry not only differ between different types of contracts, they also often differ in respect of different sources of income received under a particular contract. For example, under a recording agreement you can expect to receive a much higher royalty rate for income received from use of your songs in film and TV shows compared to the royalty you will receive on CDs sold or digital stream that is licensed. Once again to make sure you get the best deal you need to do as much research as you can on what the going royalty rates are for the different sources of income in question.

One of the most important points to remember is to always be very careful in determining exactly what income the royalty is being paid on. Is your royalty being paid off of all income that is received under the contract, or is the other party entitled to deduct a certain amount from the total income first, and apply your royalty rate only to what is left?

Some recording agreements still provide for a certain amount to be deducted from the income received from each CD sold to help offset packaging costs, before you are paid your royalty on the remaining income. As with all other aspects of contracts, the devil is very much in the detail, and whether or not amounts are to be deducted from the income received before your royalty is applied can make a huge difference to the actual cash you receive for your music.

In any contract where you are being paid by way of a royalty you also want to make sure that you have specific rights to audit the financial records of the other party to make sure you have been correctly paid. As royalty calculations are often quite complicated in recording or publishing agreements, you need to be sure you are never short changed due to some simple accounting errors.

Audit provisions in music industry contracts are usually based around the same general principals. For example your right to audit will typically only be able to be exercised once a year, and you will also have to provide a reasonable amount of notice to the other party before you can commence your audit. On a positive note, it is also common for the other party to have to reimburse you a certain amount of your audit costs if a notably large underpayment owing to you is identified.

Although in music industry contracts people often just focus on the cash amount or the basic royalty rate being paid, as you will now see, being aware of the other kinds of issues that impact on the amount you will actually receive is definitely just as important.

David McLaughlin is a specialist music lawyer with Auckland law firm McLaughlin Law (www.mclaughlinlaw.co.nz). He can be contacted by email at david@mclaughlinlaw.co.nz or on 09 282 4599.

Disclaimer: This article is intended to provide a general outline of the law on the subject matter. Further professional advice should be sought before any action is taken in relation to the matters described in the article.