"Famous Last Words"

Dire Consequences for Developer Breach (May 2004)

Dear Jim,

We started work on our new project two months ago and are just getting around to reading the publisher's contract that arrived two weeks ago.

There is a section that says:

"In the event of termination of this Agreement by Publisher as a result of breach by Developer, Developer will, within ninety (90) days of the date of such termination, return to Publisher all amounts previously paid to Developer under this Agreement."

That money will have been paid out to cover overhead, salaries, equipment, and other expenses incurred in doing the work. It's not like it's stashed in our bank accounts somewhere.

Can they do this? Should we object?

Dear Working Hard:

I believe you are very wise to be concerned about that language.

Here are a couple of things to consider.

1. If your contract is typical of development agreements issued by publishers, there are many ways you can go into breach that are pretty much beyond your control. Failure to strictly meet milestone deadlines could be at the top of the list (is there a "time is of the essence" clause in your contract relating to developer's performance? If so, as soon as you are one day late delivering even one milestone, no matter the reason, you are in material breach).
2. While most contracts provide a brief "cure period" in which developer (or publisher) can remedy a default, some contracts set certain defaults that are, by definition in the contract, not capable of remedy. Any default not cured within the "cure period" becomes a breach. Any incurable default is a breach as soon as it happens.

Requiring repayment of all advances gives a publisher one more tool to protect its interests. This tool can be used in the event the publisher decides it really is not interested in your project, and wants to find a way out that will make it whole. Since it is not difficult to find a developer in technical breach, the publisher can demand a refund and point to the agreement as the basis for this right.

While it sounds simple, this clause may in the end not be enforceable.

In the second release of the IGDA Contract Walk-Through, I wrote an article on the subject of breach and damages. Contract law provides that the only monetary remedy for a contract breach is damages. Damages are generally limited to the actual monetary loss that was foreseeable at the time the contract was entered into, and is suffered by a party as a result of a breach. Under the first scenario painted above, delivery of a milestone one day late may be a breach, and in some contracts, a material breach (where "time is of the essence"), but is unlikely to result in damages to the publisher equal to the amount of the advance paid to date.

Contract law (and this is a big generalization in an area that is enormously complicated) also does not permit the enforcement of penalties in a contract, where the amount of the penalty is not related to actual damages suffered by a non-breaching party. The remedy for contract breach is damages, not a penalty.

I would argue that return of all amounts paid upon termination for breach is nothing more than a penalty, and that the publisher's proper remedy is an action for damages against the developer for breach of contract.

The threat of demanding full repayment is one more club that a publisher can use to thump a wayward developer into submission. In the end, it may not be enforceable; but it would take expensive litigation to finally resolve that issue.

A better approach would be to remind the publisher that it has the remedy of an action for damages, contest the clause in your negotiation and do your best to get it removed.