| Case | PVR Pictures Limited V. Studio 18 |
| Court | The Delhi Court |
| Citation | 2009 (111) DRJ 436 / 2009 (41) PTC 70. |
| Judge | Justice S. Ravindra Bhat |
| Decided On | 9 July,2009 |
Introduction
Imagine two movie studios coming to a huge agreement to distribute five movies. After they sign a term sheet, get down to work, and release the four movies without any trouble, millions of dollars are exchanged and everything is going smoothly. The natural thing to expect would be that there wouldn’t be any doubt about the fifth movie deal, as it would be a mere formality.
However, when Studio 18 refused to deliver its fifth movie “Shortkut” to PVR Pictures for distribution, things turned from a smooth process to a complete disaster. Even though there was a huge amount of performance in the past and there was a written document, the court ruled that the term sheet that the two sides used was not really a license but only a “promise to negotiate” one.
PVR Pictures Ltd. v. Studio 18 2009, is an important cautionary lesson that must be remembered by all executives, entrepreneurs, and lawyers of the entertainment industry. The decision makes a very clear distinction between the “agreement to agree” concept and actual, enforceable rights transfer. What is more important, it shows how basic contractual rules can be turned inside out in the light of copyright licensing law.
Background Of the Facts
The Term Sheet Agreement (TSA) between PVR Pictures Ltd. and Studio 18 was signed in July 2008, whereby PVR was designated the exclusive distributor for five major movies – Kidnap, Golmaal Returns, Dil Kabaddi, Ghajini and Shortkut in the highly profitable East Punjab and Bangalore zones. This was the basic agreement that set out the release dates, joint marketing responsibilities and an extremely rigorous payment schedule which mandated that PVR will need to make 33% payment for each film in advance at least 21 days before the release of the film. For the first four films, while the TSA was in place, there was a separate and more detailed “License of Exploitation Rights” contract for each film. Far from being bureaucratic endorsements, these final agreements made considerable changes to the original terms set by the TSA, making geographical territory changes to two films and making substantial changes in the financial figures of others – specifically raising the advance from ₹2.5 crore to ₹4 crore for the big film Ghajini and also putting an advance of ₹25 lakh for Dil Kabaddi, which was originally stated as “nil.”
But, when it came to the distribution of the fifth and last film Shortkut, the process was brought to a halt due to the multiplex industry strike, and the licensing contract was never signed. In the end, PVR could not make the critical cut-off period and did not pay the advance amount of ₹90 lakh, resulting in Studio 18 treating the whole thing as not being concluded and retaining the prints of the film. With an imminent commercial lockdown looming ahead, PVR went up to the Delhi High Court and sought an immediate injunction against Studio 18 so that the latter does not get around PVR, claiming with great force that the original TSA is not a mere stepping-stone but a complete and valid license under Section 30 of the Copyright Act, which was established by their joint release of previous four movies.
Key Issues Involved
- Whether the Term Sheet Agreement by itself was a valid license under Section 30 of the Copyright Act, 1957 or just a preliminary understanding prior to entering into an agreement?
- Whether the document which should be in writing, according to Section 30 must necessarily be an agreement for grant of rights immediately, or is an agreement for future negotiations of the terms and conditions of the license sufficient?
- Whether PVR justified in seeking a specific performance and injunctive relief in view of the Specific Relief Act, 1963, especially when PVR had failed to satisfy a condition precedent?
- Whether a case made out by the plaint disclosing a triable cause of action, or whether the plaint was bound to be thrown out at the threshold stage under Order 7, Rule 11 of the Code of Civil Procedure?
Arguments by the Both Parties
PVR strongly contended that TSA was not a mere aspirational statement but a comprehensive, self-contained, and binding exclusive license agreement in terms of Section 30 of the Copyright Act, 1957. In support of this position, the lawyer for PVR emphasized that the agreement made it very clear about the exclusivity of the one-year term along with a strong negative covenant regarding its exclusive territoriality. Since all commercial details had been clearly agreed upon in the first place, PVR relied on the common law rule which said that a mere administrative clause referring to future agreement could not destroy the existing one.
In order to prevent the re-allocation of the film, PVR sought an ad-interim injunction, urgently, and relied directly on Section 42 of the Specific Relief Act, 1963, and the Supreme Court decision in Gujarat Bottling Co. Ltd. v. Coca-Cola Co. that that courts should strictly enforce negative covenants in order to prevent a breach of exclusivity. PVR held that Studio 18’s duty to deliver Shortkut had already become legally due. They claimed that by skipping them, irreversible, unfixable commercial damage would occur, as a distributor’s unique opportunity to exploit a film theatrically at the peak of its momentum can never be regained or accurately measured in monetary damages once lost.
Studio 18, on the other hand, argued the contrary, insisting that the TSA was at best a non-binding preliminary framework, a textbook “agreement to agree” but not a final, concluded copyright license. The parties’ prior conduct was their best argument: if the TSA was a total, comprehensive grant of rights under the Copyright Act, then there would have been no operational necessity for the parties to later negotiate and enter into completely different, all-encompassing ‘License of Exploitation Rights’ agreements with respect to the first four films. Studio 18 demonstrated that these separate contracts significantly outstripped the scope of the TSA and contained material overriding changes to both geographical boundaries and financial structures.
Studio 18 also noted a fatal flaw in PVR’s demand for equitable relief by invoking the proviso to Section 42 of the Specific Relief Act which says an injunction to enforce an exclusive covenant can be granted only if the plaintiff has fully performed his own part of the bargain. PVR committed a breach of a fundamental condition precedent as it failed to pay the required ₹90 lakh advance within the compulsory 21-day period prior to release. Studio 18 argued that PVR could not, as a matter of law, demand the performance of a print delivery obligation that they had failed to financially trigger.
Court’s Analysis and Reasoning
Justice S. Ravindra Bhat anchored the analysis in Section 30 of the Copyright Act, which allows a copyright owner to license its rights, but requires the license to be in writing. The Court reasoned that this writing requirement is not just a formality but must clearly show an intent to grant a licence *now*, not just to discuss granting one at some later time. If an agreement only states an intention to negotiate the terms of a future agreement, it should not be considered a licence binding in circumstances where the parties do not subsequently act cooperatively in respect of other similar transactions.
The Court found very instructive the way in which the parties normally dealt with each other. In fact, there were four films released, each with a separate formal agreement, and these agreements did not match the TSA on fundamental issues like territory and price. This proved that both sides viewed the TSA as a work in progress and not a stand-alone licence. The Court held that PVR’s argument that the absence of a formal contract in future cannot prevent the existence of a contract was not a reason to deviate from the normal business practice between the same parties.
The most important issue in this case was whether PVR was adhering to the terms and conditions of the contract. In the case, the Court has rejected the claim of the distributor about the existence of any right of non-payment of the share of expenses. According to the contract of the movie, “Shortkut”, it is mentioned that PVR shall make payment of Rs. 90 Lakhs within 21 days prior to the release of the movie. As per the Court, the parties cannot avail the protection of the contract if they are not following the terms and conditions of the contract. According to the Court, the parties cannot ask others to follow the terms and conditions of the contract if they themselves are not doing so. The contract has been examined by the Court and it has found that PVR was at fault. It means PVR has to adhere to the terms and conditions of the contract and if PVR wants to avail the benefit of the contract then he has to pay Rs. 90 Lakhs to Shortkut.
As the Court determined that there was no existing licensing agreement, it came to the conclusion that PVR’s suit for specific performance and injunction based on the Specific Relief Act would not hold water since both require a contract.
Final Judgement
The Delhi High Court, therefore, came to the conclusion that due to the fluid language contained in the Term Sheet Agreement, there was no valid copyright license agreement with respect to Shortkut which could be made enforceable in law under Section 30 of the Copyright Act. The Court found that there were no immutable commercial terms which would make it possible to arrive at the conclusion that there was a concluded agreement due to the lack of essential elements of a contract. The Court, therefore, went beyond denying relief on a provisional basis and proceeded to examine whether the case presented by the plaintiff was founded on absolute defects as required by Order 7, Rule 11 of CPC. The Court found that the entire case of the plaintiff was based on a nonexistent right and, therefore, it did not have a cause of action and it dismissed the interim injunction petition.
Key Take ways and Implications
- Term sheets are not legally binding contracts, in case of mentioning that a more elaborate contract would follow the document, the court would treat it as an unenforceable “agreement to agree.” In order for the preliminary contract to secure a transaction, it should indicate that it is binding as of now.
- The law on IP is Very Rigid, oral agreements or informal email exchanges cannot assign IP rights. According to section 30 of the Copyright Act, a license should be in writing and demonstrate an unequivocal intention to grant the license. Otherwise, you will have no control over the asset.
- Prior conduct determines the course of future action, the court takes into account the conduct that took place in the past. As for the previous four contracts, the parties showed that they understood that a term sheet was not sufficient. Having set a precedent of formalizing the deals, you cannot use it when a deal goes wrong.
- Failure of payment wrecks any legal claims, contract works both ways; since PVR did not make their payments in line with what was stipulated before release, they have failed to honor the condition precedent. You can’t ignore your contractual financial responsibilities and then sue for the court to compel others to comply.
- No clean contract, no court intervention, should the business partner decide to leave, you cannot seek for the court to issue an order stopping them if your contractual agreements are sloppy. According to Order 7, Rule 11 of the CPC, the case will be thrown out by the courts if the contract is poorly drawn up.
Call to Action
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About the Author
Priya Dutta is a B.A. LL.B. student at Sister Nivedita University. This article was drafted during her Summer Internship at Origiin IP Solutions, where she worked on legal research and intellectual property law, including case law analysis and IP-related legal content.
