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TERMINATION CLAUSES

IGDA Business Committee – Contract Walkthrough

Termination Clauses
(rev. 0.1 – 6/15/2003)
by Thomas H. Buscaglia, Esquire

Introduction

The termination clauses in a typical Developer/Publisher Agreement relate to the various procedures and assignments of rights between the parties if that Agreement ends prior to the normal completion of all conditions of that contract. Generally there are two types of termination that can occur by either the Publisher or the Developer; terminations for convenience and terminations for cause. A termination for convenience is just that, a termination of a contract by one or both of the parties not because of a fault by the other party by merely because they desire to end the contractual relationship. A termination for cause, on the other hand, is a termination when one of the parties has failed to meet their contractual obligations and the other party has elected to exercise their right to end the relationship as a result.

Sample Clause

The termination provisions, as do most other provisions in any Developer/Publisher Agreement, vary a great deal based on the relative bargaining power of the Developer. With that in mind, let's take a look at what would be the termination provisions might look like:

Termination

  1. PUBLISHER will have the right at any time to terminate this Agreement upon ten days advance written notice from PUBLISHER to DEVELOPER, with or without cause, it being the intention of the parties to permit PUBLISHER to terminate further Software Development if PUBLISHER, for whatever reason, determines that further Software Development is not advisable or in the best interests of PUBLISHER.

  2. In the event that the Agreement is terminated by PUBLISHER without cause, or by DEVELOPER with cause, all rights of ownership that have been granted, transferred or assigned to PUBLISHER by DEVELOPER under the terms of this Agreement will return to DEVELOPER immediately. PUBLISHER also agrees to pay DEVELOPER the Advance Payment corresponding to the Milestone Deliverable that the DEVELOPER is currently working on and the next following Advance Payment. PUBLISHER shall not be liable for any other claim or damage of any kind, including without limitation any expectation or compensatory damages. If DEVELOPER subsequently sells the Game to another publisher, all Advance Payments shall promptly be refunded to PUBLISHER.

  3. In the event that the Agreement is terminated by PUBLISHER with cause, that is, if DEVELOPER defaults in a material way in the observance or performance of any of its obligations under this Agreement and such default remains un-remedied thirty (30) days after written notice requiring such default to be remedied, all Intellectual Property that has been transferred or assigned to PUBLISHER by DEVELOPER under the terms of this Agreement will remain the exclusive property of PUBLISHER. PUBLISHER shall have the right to retain a third party to complete the Program for the purpose of commercial release and to otherwise fully exploit PUBLISHER'S rights pursuant to this Agreement, without further payment of any kind to DEVELOPER. Except as otherwise provided in Section 9(b), below, PUBLISHER shall have no other claim against DEVELOPER for any damage or loss of any kind, either in contract, tort, equity, by statute or otherwise.

  4. In the event that PUBLISHER defaults in any payment after acceptance of any Milestone Deliverable, DEVELOPER will have the right to terminate this Agreement if PUBLISHER has not remedied the default within thirty (30) days following written notification thereof. Termination of this Agreement due to PUBLISHER's failure to cure such default will be deemed a termination for cause.

  5. If, prior to the commercial release of the Game, if PUBLISHER or DEVELOPER (1.) become the subject of a voluntary petition in bankruptcy or any voluntary proceeding related to insolvency, receivership, liquidation or comparable proceeding or any assignment for the benefit of creditors, or (2.) become the subject of an involuntary petition in bankruptcy or any involuntary proceeding related to insolvency, receivership, liquidation or comparable proceeding or any assignment for the benefit of creditors which is not dismissed within sixty (60) days, (the”Bankrupt”) then the other party to this Agreement (the “Non-Bankrupt”) shall have the right to terminate this Agreement. A termination under his provision will be deemed a termination for Cause.

  6. The parties shall have the right to terminate this Agreement at any time upon mutual consent, and on such terms as the parties may agree to in writing.

Discussion

The termination clause sets out ways that the contract can be terminated and what occurs. Clauses relating to a termination for convenience will attempt to put the non-terminating party in the same position that he would have been in had the contract not been terminated. Similarly, terminations for cause tend to seek to place the non-breaching party in the same position they would be in had the other party not breached the contract. This way the party that causes to the termination bears the responsibility for it. So, the consequences of a termination for convenience by the Publisher or for cause by the Developer have the same or very similar result. And the consequences of a termination for convenience by the Developer or for cause by the Publisher have the same or very similar result.

Termination for Convenience By Publisher

The Publisher may wish to terminate a Developer contract based on business reasons that have nothing to do with the Developer or the game that it is working on. Unfortunately, few developers simultaneously work on multiple games, so the loss of the game results an immediate loss of a cash flow and can have disastrous economic consequences on the Developer. As a result of the potential financial hardship on the developers, publishers will generally agree to contract terms that will help lessen the detrimental economic impact on the Developer if they terminate the development contract for convenience. Some of the provisions that should be included in a termination for convenience by the Publisher include the following:

  1. The reversion of any and all intellectual property rights from the Publisher back to the Developer (if they have been conveyed); and,

  2. Payment for both the then current milestone and the next pending milestone advances to help lessen the detrimental economic impact on the Developer.

  3. In the event the Developer enters into a contract with another publisher to publish the game, all advances are repaid to the Publisher.

In this way the Developer gets his game back and will have enough money to cover their overhead and retain their full staff until they can locate another publisher interested in their property. And since the terminating Publisher will recover its advances if a new publisher picks up the game, this becomes a potential “win-win” situation.

Termination for Cause by the Developer

The most obvious reason for a Developer to wish to terminate for cause is for a non-payment of advances. However, there may also be other situations that would result in a termination for cause. For example, a Publisher's failure to meet other contractual obligations related to the promotion or marketing of the game, or the Publisher filing or being forced into Bankruptcy, could also trigger a termination for cause. Usually a termination for cause provision will include a “cure” period in which, after a breach has been declared, the breaching party has a specific period of time within which to cure the breach prior to the termination clause becoming effective. Once effective, termination for cause by the Developer would have similar provisions to a termination for convenience by the Publisher in that the intellectual property, if assigned, reverts back to the Developer. There may also be additional compensation due under the Agreement equal to the amount of the next due advance.

Termination for Cause by the Publisher

Termination of cause by the Publisher occurs when the Developer fails to meet its obligations under the Agreement. This would usually be as a result of a severe slippage or the inability of the Developer to deliver a product of sufficient quality to obtain the Publisher's approval of a deliverable. Just as with the termination for cause by the Developer, there will usually be a cure period. If the declared deficiency is not cured within that period, the Developer would suffer the loss of all rights in the project and also lose any further payments under the Agreement. However, a Developer could retain a percentage of their royalties based on the pro-rata completion stage of the game upon termination, if the Publisher ultimately releases the title.

Conclusion

Understanding the different results attached to the various scenarios that could result in the early termination of the Developer/Publisher Agreement is an important step for any Developer in understanding their rights and obligations under that Agreement. I hope this helps.

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