The recording contract series; (part 2) The term (period) of the agreement

Most recording agreements will provide for an initial period to run from the date of signature. This is called the Principal Term. In the sixties, the principal term often used to be one year but in the nineties, three years increasingly became the norm. Some contracts have a principal term of five years and even longer. But the norm for established artists seems to have become three years (while new artists seldom get more than one-year principal term).

From the artist's perspective, there are both advantages and disadvantages to the three-year period. Clearly, the longer an artist is signed to a stable and reputable company that is doing a good job, the better. But the opposite might be true where the company is risky and unstable, or the artist becomes unhappy with that label for whatever reason.

If the relationship is likely to be a good one and the artist feels that this label will treat him fairly, will market him well and will develop his career, it is obviously better to negotiate a longer principal term, because the longer the label's commitment to the artist, the more likely it is to invest more in his career.

On the other hand, if there is a risk that the label will achieve very little for the artist, or even slow his career down, a long principal term can be a very bad thing, because (most record contracts being exclusive) it might stall the artist's career for a long period by preventing him from signing with anyone else. Obviously, a long principal term is less risky if the contract has reasonable release clauses and some type of "opt-out" clause for the artist (unlikely for newcomers).

So whether a three-year principal term is a good or bad thing depends on which label you are signing with, and it also depends on what else is in the contract. The principal term should be read together with the product commitment clause, because it has become practice to link each one year period to an album release.

The record company will usually be granted a number of options. As you will recall from the article series on General Principles of Contract, an option is a second offer that keeps the main offer open for a period of time. Used as a music industry term, "option" has a more specific industry meaning. It is the right for one party to renew the initial agreement for a further period.

Often you will find a recording contract with a three-year principal term and five or six one-year options. This means that, after the initial three-year term has expired, the record company gets the choice/right to renew the agreement for a further one-year period. Then, at the end of the fourth year, the company can choose to renew for a fifth year, and so on, either until all the options have run out, or the company decides, in one year, not to exercise the option for that year.

Only when the company decides, in one year, not to exercise the option for that year. Only when the company decides not to renew an option or the terms and options have all run their course, does the contract come to an end (unless the artist has an opt-out clause of some type - again, this is unlikely). These days, contracts with a three-year term often come with five, six or seven one-year options, meaning that the record company's commitment at signature is three years, but the artist's commitment may be as long as ten years (and even more), and he does not even get to know whether he will continue to be committed to the company until the company excercises or declines its option every year.

Talk about uncertainty for the artist. Options are a usual, but rather one-sided term - new artists have very little choice to accept them. The artist, of course, is usually not given the same unilateral options - after three years he is just left twisting in the wind until the option is exercised, at the company's whim. Three years might mean ten years, and it's the company that gets to choose. And it gets worse:

In many cases, the reality is not even as simple as that, because of another nasty little thing called the automatic extension clause. When you see this little clause run a mile. The theory behind the clause is this: before being obliged to exercise any option (i.e. in deciding whether to continue the relationship or to terminate it), the record company likes to give itself some time to "assess the quality or marketability of the previous period's recordings." Now, for most record companies, the only test of "quality" is whether or not the previous album has sold in sufficient quantities to justify the company continuing to make (possibly substantial) investments in the Artist's future.

So they put an automatic extension clause in. This clause says that each one-year option period will be automatically extended until either:

1. A specified number of days (anything from ninety to two hundred and ten days) following the completion of recording the preceding album; or

2. A specified number of days (anything from sixty to two hundred and ten days) following the release of the preceding album (this one is more common).

What the company is saying by inserting an automatic extension clause is that it needs six months to review the sales of the last album, total up the numbers, look at the profitability of the artist as a product, and then decide whether it wants to exercise the next option. So, because of these "automatic extension" provisions, each individual option period can last anything from (usually) eighteen months to thirty months (remember, they get six months from the last album release, which could be well after expiry of the principal term or last option), to decide, and only then have to exercise the option or not. Consequently, what on the face of it may seem to be a three-year agreement (ten with options), could last for twenty years or even longer. This is very scary.

Recording contracts may include "opt-out clauses" for the label (usually applicable when the Artist's popularity dips or he releases a non-hit album under the deal or, in some cases just as when the company feels like it). But such clauses for the artist are rare, unless the artist has extremely strong bargaining power