The video games industry has become a lucrative business with an expected market value of about $150 billion in 2019. As more and more companies enter the co-dev space, having a good contract in place is key to success in the world of business. In the case of external development for AAA games, we deal with ideas, creative content, and digital products. Since these goods and services are intangible, it can be very tricky to get contracts in place that are fair to all parties.
Good relationships and long-term partnerships don’t just happen, they take a lot of effort and communication from both parties, which is why it’s important to spend the time to put a comprehensive contract in place. That way, both parties are protected in case any conflicts or disputes arise. Here are some important concepts and terms to pay attention to when negotiating your contracts:
- Type of Contract: Is your contract resource based or asset based?
Both contracts have their advantages and disadvantages. Personally, I prefer resource based contracts where a team of artists/programmers/designers are essentially kept on retainer. The benefit of this, especially in the games industry, is that it allows for flexibility of work without needing to go back to the agreement. Game development is an iterative process and teams are going to need to be flexible in order to succeed.
Asset based agreements are a more traditional form of art-outsourcing (order X number of clearly defined assets to be delivered by Y date). The advantage of these kind of agreements is that they are very clear cut in terms of what needs to be delivered. However, there is no flexibility to deal with changes in priority or scope of work. Also, delays in the approval and acceptance process will end up causing payment delays.
- Ownership of Content: When do clients take ownership of content produced?
It is important to establish if the ownership of the content being created (3D assets, concept images, voice recordings, animations, etc.) is transferred upon payment or upon creation. No one wants to end up in a payment dispute with their client after the ownership transfer. As with physical goods, it doesn’t make sense for a vendor to hand over goods before receiving payment. So, best practice is to have ownership transfer upon payment. To keep things fair, payments should also be made contingent on the acceptance of said goods or services by the buyer. Nothing is worse than having to pay for something you aren’t happy with. For these reasons, it is important that both parties set clear expectations on the deliverables and the respective payments tied to each delivery.
- Limitation of Liability: Should you put a cap on damages?
You should always include in your contract a Limitation of Liability clause with an established maximum liability that both parties will be liable for in case there is a claim. This is important as no contract should have uncapped damages - it would be impossible to insure for and can lead to companies being bankrupted.
A good benchmark for a liability cap is to allocate a project’s risk in proportion to the profits you will be getting out of this deal. In simple words - cap liability to the total value of the contract itself. If you are being paid $500,000 to get a project done, liabilities should be capped at $500,000.
- Self-Promotion: How do you make sure your work can be promoted?
In our industry, everyone wants to be able to show off their contribution to games and products. However, it is important that the right content is shown at the right time. No one wants to have their carefully crafted marketing campaign thrown into disarray by someone showing content before they should. Nor do they want to show off their work years after a game has been released and it has faded into obscurity, or worse, never be able to show it off at all.
To make sure both parties are protected, it is best to discuss what kind of limits there may be on self-promotion ahead of time and include it in the contract. In general, some fair terms would be that the service provider will be able to show off the work that they did with approval from their customer (so long as it meets certain quality or time constraints). However, approval should not be unreasonably withheld either.
- Terminations: What do you do when you need to terminate?Termination clauses are another key component of agreements that are meant to protect both parties. No one wants their outsourcer bailing while halfway through a critical milestone or vice versa.
If termination is not adequately addressed, it may cause a lot of disputes between the parties, which is why termination clauses will generally cover two scenarios:
a. Termination with cause: used when either party is in breach of their contractual obligations (such as delivering work late, failing to make payments in a timely manner, sharing confidential information). It is standard practice that parties are given a grace period of 15 to 30 days to attempt to cure the breach.
b. Termination for convenience: this clause covers situations where either party may want to end a contract without any breach having taken place. This could be for situations where a game is cancelled and a team needs to be reallocated to another project. Ask for a notice period of 30 days together with a cancellation fee as a compensation for the sudden disruption of the project as it would affect you financially. From experience, we have seen this range from 15%-20% of the remaining value of the contract. At Streamline we generally do not allow the service provider (in most cases it is ourselves) to terminate for convenience as it would be unfair for our clients if we could just drop them if something more interesting or better paying comes along.
- Late Payment Fees: How do you make sure clients pay on time?
We’ve all probably been on the receiving end of being owed money and told that they would pay us “soon”. As annoying as that is on a personal level, it is even worse when it happens between companies. Late payments are no laughing matter, the livelihoods of tens to hundreds of employees are put at risk. While each country will have differing standards, a good rule of thumb is a 2% late payment fee for every 15 days a payment is past due and suspension of services after payments are 30 days past due (or sooner). It is important that both parties are clear about the fees going into an agreement.
Having said all that, the most important thing is that both parties are willing to negotiate. If either side is inflexible or unwilling to negotiate (things we’ve heard are, “our contract is not changeable”; “other have signed this”; “it’s our standard policy”) it may be better to not have a deal than to have a bad one.
The information provided in this article does not, and is not intended to, constitute legal advice. I am not a lawyer and Streamline Studios does not provide legal services, please consult a lawyer to obtain advice with respect to your specific legal matters.