Kombar Rex: Adventure Film Producers

By Bell, Janice; Williams, Melanie Stallings | Journal of the International Academy for Case Studies, March 1, 2007 | Go to article overview

Kombar Rex: Adventure Film Producers


Bell, Janice, Williams, Melanie Stallings, Journal of the International Academy for Case Studies


CASE DESCRIPTION

The primary subject matter of this case concerns the interpretation of contracts and the calculation of revenue. Secondary issues examined include distinguishing cashflow vs. GAAP (Generally Accepted Accounting Principles) income, understanding the timing of revenue recognition and understanding how to budget revenue. The case has a difficulty level of three (appropriate for junior level). The case is designed to be taught in 1-1.5 class hours and is expected to require 3-5 hours of outside preparation by students.

CASE SYNOPSIS

In this case study, students must examine a film distribution agreement to determine its validity, scope and consequences. Adventure Film Producers entered a movie distribution agreement with a large movie theatre chain, Mammoth Theatres, Inc. One of Adventure's "hit" movies was bundled with four "filler" films, each requiring a certain number of screenings. Consideration for the contract was based partly on lump sum payments and partly on the number of screenings. In exchange, the distributor was given exclusive screening rights. After the distributor discovered that the films were being shown in Canada (where Mammoth had no theaters) they alleged that Adventure breached the agreement and demanded a return of all monies paid. Students must examine whether Adventure breached the exclusivity provision of the contract by allowing showings in Canada and must then perform the financial analyses to determine revenues. In order to analyze revenue, students must prepare a budget of expected minimum revenues, apply established revenue recognition criteria, and calculate the reportable revenue using GAAP principles. Students then prepare a schedule showing cashflow and distinguish that number from revenue.

INSTRUCTORS' NOTES

SUGGESTED SOLUTIONS

1. Did Adventure breach the contract? Specifically discuss whether the showing by a competitor movie chain in Toronto constituted a violation of the Adventure/Mammoth agreement.

The discussion should focus on the scope of the distribution agreement. Specifically looking at the Exclusivity paragraph of the contract, what was the geographic limitation of the agreement? If Mammoth was granted an exclusive license to distribute the Kombat Rex films anywhere in the world for the six month period, then Adventure Films' conduct of granting distribution rights of the movies to a theatre in Toronto would be In violation of that agreement. On the other hand, we need to look at what the parties intended. Since Mammoth had theaters located only in the U.S., is it reasonable to interpret the agreement as granting Mammoth exclusive distribution only in the U.S.?

Briefly, there should be a discussion of how, despite the ambiguity about the relevant territory, there is really no question that the parties intended a contract. There should be some reference to DeSantis or Bohman in the library materials to the effect that the parties reasonably intended to be bound (and base their business expectations) on the enforceability of the contract, and a court will enforce the contract with its interpretation of the parties' reasonable expectations.

Mammoth will argue that Adventure Films was barred from allowing the Toronto theater to screen the films. In support of that point, Mammoth can argue that the plain language of the contract contains no geographical limitation. Since an important purpose in entering the contract (and for which Mammoth presumably paid a premium) would be the sole right to screen the film, and since the plain language of the agreement contains no restriction on the geographical region, then Adventure Films breached the agreement by allowing a Canadian theater to screen the films. The Morey case and Witkin (from the Library materials) would be relevant in identifying that the objective manifestations of the parties' intent is to be used to interpret the contract.

Adventure Films would argue that since Mammoth had theaters only in the U. …

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