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Notices and Audits

This article examines a few of the more mundane, yet very important provisions found in many contracts. These include proper notice, audit rights and payment.

Remember, this article is merely intended as a primer to give you, whether artist or business executive, a finer understanding of the language contained in many agreements. It is by no means a comprehensive review. Any doubts or questions should be addressed to your personal business attorney.

The importance of proper notice should not be underestimated. Most fully negotiated, contracts that we have reviewed contain a “Notice” provision similar to the following:

All notices hereunder shall be in writing and shall be given by registered or certified mail, return receipt requested, or by telex or telegraph (prepaid), at the respective addresses herein above set forth, or such other address or addresses as may be designated by either Party. Such notices shall be deemed given when mailed or telexed or delivered to a telegraph office, except a notice of change of address shall be effective only from the date of its receipt. A courtesy copy of all notices given by Artist to Company shall be sent to Bruce Colfin Law, P.C., Attorneys, 1178 Broadway,  New York, New York, 10001

Why is notice so important? In contracts, there are a number of different conditions that are triggered by one party giving and/or receiving “Notice”. These include: notice that the company wishes to exercise or decline its option for additional years or subsequent product; notice of a party’s intent to suspend the term of the agreement; notice of intent to audit the books and records of the company; as well as, notice by one party that the other has breached the contract.

What happens if you are entitled to, but haven’t received, a statement (or payment, if due you) from the company? It is a similar concern if you are a company and have not received a statement or payment from a distributor or licensee.

We’ve had a number of clients, ask us: “We called the other party (or wrote them), notified them of their breach of the contract, and they ignored us. What do we do now?”

Our next questions are generally asked in order to determine if the means of notifying the other party were in compliance with the contractual conditions which are usually similar to the previously quoted clause. Many times, after a quick review of the contract and the facts, we find that our client (or potential client) had not complied with the contractual terms and provisions. In these circumstances, the receiving party may possibly be contractually entitled to ignore the improper notice. Many well written contracts also contain language which states that prior to any party asserting that the other has defaulted (or breached) in performing its contractual obligations, the party alleging the default must give the other party written notice of the specifics of the alleged default. After receipt of this notice, the receiving party is generally given a specific amount of time, during which they are permitted to cure the default by performing the specific obligations. This time period may vary from thirty (30) to ninety (90) days.

It can be very frustrating for an aggrieved party to give what it thinks is notice to the other party, only to find out later that the other party did not have a contractual obligation to respond because the notification was defective. Notice must be properly given. Its importance is not exaggerated. Improper notice can cost you money in addition to time.

Quite often, a party will receive a statement, with or without payment, which is disputed. Sending proper notice of the dispute to the party submitting the statement is essential. Many contracts include a provision similar to the following:

Unless notice shall have been given to company as provided herein, Artist shall be foreclosed from maintaining any action, against Company with respect to any statement or accounting rendered hereunder unless such action is commenced against Company within two (2) years after Artist’s receipt of such statement or accounting. Unless notice shall have been given to Company as provided hereof, each royalty statement rendered shall be final, conclusive and binding on Artist.

 The term “Artist” can be substituted by any party obligated to give notice. In essence, unless the company receives proper notice regarding a dispute on any statement, within the time mentioned, then the statement is considered final and conclusive. In such circumstances, your failure to make a timely objection may result in the waiver of your right to dispute the accounting. The company usually seeks a one year term for objection to be made to an accounting. We usually insist that the time be at least two years. Frequently, it may take some time to realize that an accounting is suspect. It should be crystal clear how important proper notice is.

If a party believes that the numbers reflected in an accounting statement (or in payment) are inaccurate, or if no statement has been received, an audit may be necessary. The right to audit the books and records of a company is a significant right which is exercised by giving the company written notice prior to the desired audit.

This is one of the only means in which a party entitled to a royalty or percentage of sales and/or income can determine if the payments made to it by the company obligated to make such payments are accurate. The contract may specify an amount of time for conducting the audit, such as one month or two weeks, or it may be stated to be a “reasonable” time. It is better to be specific. Just what is considered to be “reasonable” may oftentimes have to be determined by a judge or jury.

Companies do not like to be audited and will generally restrict the audit to only the specific books or records pertaining to the auditing party’s account. The right to audit may be restricted. It is commonplace in the entertainment business for audits to be permitted no more frequently than once a year. The auditor will seek to investigate as large a period as possible during the audit due to the obvious financial considerations. The audited company will seek to permit audits to be conducted during business hours at the company’s offices by a certified public accountant at the party’s sole cost and expense. An auditor may, by contract, be restricted as well. The company will usually seek to have an auditor disqualified if the same person audited the books of the company for a different party. There may also be contractual provisions that provide a point after which the audited company may be responsible to pay the costs and expenses of the audit in the event the audit reveals substantial underpayment of royalties.

Finally, the subject of this article might be about the boring part of contracts, but it is no less important than the money provisions. Your interest in these provisions should be similar to your interest in being paid.

By: Bruce E. Colfin and Jeffrey E. Jacobson

© 2005 Jacobson & Colfin, PC

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