USA: +1(669)289-8683 
Sign in
The CEO of High Stakes Entertainment has hired your consulting firm to produce a report on this possible breach of contract case, including recommendations. Use the report writing guide from the course website. In your analysis of this case include answers to the following questions:Q. 1. Did High Stakes Entertainment breach the 2020 contract with Seven Rays? Specifically, discuss whether the showing by a movie theater in Toronto, Canada constituted a violation of the High Stakes Entertainment and Seven Rays agreement.
Q. 2. Assuming the contract is valid, prepare the following financial analyses:
a. Prepare a budget of expected minimum revenues under the contract. Show the sources of revenues from the set of five films and the fee.b. How much revenue should High Stakes Entertainment recognize in 2020? Explain the rationale for your answer.c. For the year ending 12/31/2020, prepare a schedule that shows the cash flows received from Seven Rays from the contract.d. Why do cash flows and revenues recognized differ, if they differ under your calculations? HIGH STAKES ENTERTAINMENT
High Stakes Entertainment (HSE) is a producer and distributor of motion picture films. It specializes in
action-adventure films popular with males, mostly in the teen and young adult market. While it has only
been in business for seven years, it has produced several money-making hits as well as many more
minor “B” films that are shown on cable networks and through the Internet.
HSE has recently completed the production of five new films. This set of five films contains one film
(“Hero’s Revenge”) that marketing research indicates will be a top box office hit. The other four (HR II,
HR III, HR IV, HR V) are “filler” films that will be bundled with the hit and licensed to theaters for
exhibition. To receive access to the hit, theaters must agree to show all films a minimum number of
times.
In July 2020, High Stakes Entertainment entered into an exclusive contract with Seven Rays Theaters,
Inc. (Seven Rays), a large theater chain with approximately 465 theaters across the United States. This
contract is provided in part as follows:
Agreement: Seven Rays is granted the right, license, and permission to display the five films listed herein
during the contract period. In consideration of this contract, High Stakes Entertainment will receive:
1.
A contract (arrangement) fee of $4,000,000, payable $2,000,000 upon contract signature and
$2,000,000 on September 1, 2020.
2.
$475 for each film showing in each location.
Contract period: The contract period shall be six months commencing on September 1, 2020.
Limitation on screenings: Seven Rays agrees to show Hero’s Revenge no fewer than 40 times per theater
and the four accompanying films (HR II, HR III, HR IV and HR V) no fewer than 16 times each per theater.
Exclusivity: Seven Rays shall have exclusive screening rights during the contract period. High Stakes
Entertainment acknowledges that an integral inducement in consideration of the contract is Seven Rays’
interest in being the sole source, without competition from other theaters in the market, during the contract
period.
At the signing of the contract, Seven Rays paid $2,000,000 of the $4,000,000.
Seven Rays sent checks to High Stakes Entertainment for $2,000,000 on September 1, 2020, and
$6,266,675 January 20, 2021, along with an audited statement detailing the number of showings as of
December 31, 2020. The following is a summary of that information:
Film
Number of Showings
Amount Due
Hero’s Revenge
9,945
$4,723,875
HR II-V
3,248
1,542,800
13,193
$6,266,675
Page 1 of 6
In March 2021, High Stakes Entertainment received a demand notice from Seven Rays that all monies
previously paid were to be returned or they would file a lawsuit. In their letter, they enclosed a
newspaper clipping from a movie theater in Toronto, Canada that was advertising the set of five films for
showing the second week of February 2021.
Required
Write a report using the report writing guide from the course website.
In preparing your report, remember to review LDC financial accounting concept 8 (understanding the
timing of revenue recognition), and business law concept 1 (offer and acceptance of contracts;
enforcement of contracts: interpreting the parties’ intent).
Note: To the extent that you may recognize any antitrust issues (which we would not expect) please
ignore them for the purpose of this analysis.
Page 2 of 6
HIGH STAKES ENTERTAINMENT LIBRARY
Accounting Concepts Film Sales Financial Accounting Standards Board (FASB) – FASB
codification paragraph 926-605-25-1
An entity may enter into a sale agreement or licensing arrangement for a film. A sale occurs when the
entity transfers control of the master copy of a film and all of the associated rights that go along with it
(that is, an entity sells and gives up rights to a film). An entity shall recognize revenue from a sale or
licensing arrangement when all of the following conditions are met:
a. Persuasive evidence of a sale or licensing arrangement with a customer exists.
b. The film is complete, and in accordance with the terms of the arrangement, has been delivered
or is available for immediate and unconditional delivery.
c. The license period of the arrangement has begun and the customer can begin its exploitation,
exhibition, or sale.
d. The arrangement fee is fixed or determinable.
e. Collection of the arrangement fee is reasonably assured.
If an entity does not meet any one of the preceding conditions, the entity shall defer recognizing revenue
until all of the conditions are met.
Financial Accounting Standards Board (FASB) – FASB codification paragraph 926-605-25-19
Page 3 of 6
Business Law Concepts Interpretation of Contracts
General Rules of Construction
Courts look to contracts to determine the parties’ obligations. Most of this is based on the language of the
agreement, however sometimes there are issues not mentioned or ambiguously addressed in a contract.
What to do if there is a dispute about a topic not addressed (or ambiguously addressed) in the contract?
Courts follow general rules in construing contracts called “rules of construction.” Some of these rules are
articulated in cases, some are intuitive but few are codified in statute. It makes it difficult, sometimes, for
business people to make business decisions. The more you understand how courts tend to approach
contractual disputes, the more effective you will be at managing resources. Here are a few rules of
construction that may apply to High Stakes Entertainment. Think about how they affect your analysis of
the case. Use them (cite to specific sources) in your analysis of the case.
Courts Seek to Preserve, Not Invalidate Agreements
Courts in general try to preserve contracts, even if there is a flaw in the agreement. There are important
reasons for this: courts want parties to a contract to rely on the contract. Business would be harmed if
everyone who entered a contract thought that with a sharp enough lawyer they could find some defect
that would get the contract invalidated. Commerce relies on the premise that parties will do what they
have agreed to do and that if not, there will be some remedy at law. If you need an illustration of this
point, think of any country in which political power, wealth or corruption means that getting legal rights
enforced depends on your political clout rather than on the law. Look at how much foreign investment
gets made in such countries. Look at the overall wealth of the citizens of such countries. It is not hard to
conclude that the American legal system, despite its flaws, helps the economy by ensuring that the
judicial system enforces legal rights.
This brings up an important point with students studying business law: there is a tendency to seize on any
contractual defect and conclude that entire agreements are not binding. This is a serious error. For one
thing, it’s sloppy; sometimes students are concluding that contracts are not binding in order to avoid
completing their analysis (e.g. “They didn’t mention xxx! That’s wrong! There’s no contract!”). Some of it is
naïve: there are few contracts that do not have some ambiguities; invalidating all of them would mean that
there were virtually no legally binding agreements. Some of it is well-intentioned but overzealous: when
you first learn about business law even good students often want to apply it literally. Avoid this tendency
and recognize that only in cases where courts conclude that the parties never, truly, agreed will they
invalidate a contract based on missing or ambiguous contractual terms. Courts are not “contract police”
but rather “contract enforcers.”
Here are some references that should aid your analysis:
Page 4 of 6
In DeSantis v. Wackenhut Corp., 793 S.W.2d at p. 677, the court observed that “the most basic policy of
contract law . . . is the protection of the justified expectations of the parties. The parties’ understanding of
their respective contractual rights and obligations depends in part upon the certainty with which they may
predict how the law will interpret and enforce their agreement.”
“The law does not favor but leans against the destruction of contracts because of uncertainty; it will, if feasible, so
construe agreements as to carry into effect (the) reasonable intention of parties if that can be ascertained.” Bohman v
Berg (1960) 54 Cal 2d 787.
Courts Construe a Contract’s Meaning to be Consistent with the Parties’ Intention
The central rule of contractual analysis is to interpret based upon the parties’ intent on entering the
agreement. It is central to legal analysis to recognize that courts do not enforce agreements based upon
what the judge thinks is fairest, “right” or best. The judge was not a party to the agreement and his or her
opinion is irrelevant on this issue. Instead, interpret contracts to most consistently enforce the parties’
reasonable expectations. The judge’s job (and your job in this assignment) is to figure out what the
parties intended and to interpret the contract consistent with that intent.
Here is some authority for this proposition:
The contractual meaning “is determined by objective manifestations of the parties’ intent, including the
words used in the agreement, as well as extrinsic evidence of such objective matters as the surrounding
circumstances under which the parties negotiated or entered into the contract, the object, nature and
subject matter of the contract, and the subsequent conduct of the parties.” Morey v. Vannucci (1998) 64
Cal.App.4th 904, 912.)
“The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties.
The mutual intention to which the courts give effect is determined by objective manifestations of the
parties’ intent, including the words used in the agreement, as well as extrinsic evidence of such objective
matters as the surrounding circumstances under which the parties negotiated or entered into the contract;
the object, nature and subject matter of the contract; and the subsequent acts and conduct of the parties.”
1 Witkin Summary of Cal. Law, Contracts (9th ed. 1987) § 684, pp. 617-618.
“A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the
time of contracting, so far as the same is ascertainable and lawful.” Cal. Civ. Code § 1636.
Missing or Ambiguous Terms
Contracts are interpreted as they were apparently intended by the parties at the time the contract was
created. If the parties’ intent can be determined, courts will supply missing terms or clarify ambiguities.
They will not, however, insert terms to create an agreement where none, really, exists.
Here are some relevant references:
“A contract extends only to those things concerning which it appears the parties intended to contract. Our
function is to determine what, in terms and substance, is contained in the contract, not to insert what has
been omitted. We do not have the power to create for the parties a contract which they did not make and
cannot insert language which one party now wishes were there.” Levi Strauss & Co. v. Aetna Casualty &
Surety Co. (1986) 184 Cal. App. 3d 1479, 1485-1486.
“However broad may be the terms of a contract, it extends only to those things concerning which it
appears that the parties intended to contract.” Cal. Civ. Code § 1648.
Page 5 of 6
“If parties had concluded (a) transaction in which it appears they intend to make contract, (the) court
should not frustrate their intention, if it is possible to reach fair and just result, though this requires choice
among conflicting meanings and filling of some gaps left by parties.” Rivers v Beadle (1960) 183 Cal App
2d 691.
Plain Meaning
This is not a trick. It is just common sense. Interpret contractual language consistent with commonly
understood definitions and interpretations of its language.
Here is a source for this statement:
“The paramount consideration is the intention of the contracting parties’. . . as it existed at the time of
contracting, so far as the same is ascertainable and lawful.’ This intention must be ascertained from the
words used, after taking into consideration the entire contract and the circumstances under which it was
made. The words used in a contract must be given their ordinary meaning, unless there is evidence that
the parties intended to use them in a unique sense or to give the words some different meaning.” Moss
Development, 41 Cal.App.3d at p. 9.
Page 6 of 6
