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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
Big Games v TroVrai
Thierry Garby
General Information
TroVrai is a company based in France which created a computer programme to take any image (drawing, painting, photo, video still, etc.) and animate it as the user wishes. This software also allows interaction with the user. TroVrai is about to launch a 3D version of its programme.
There are many possible applications for this software: entertainment (creating movies and video clips), military (simulating combat and various actions), medical (teaching surgery and training surgeons), sports training and video games, to name but a few.
For video games, TroVrai granted an exclusive worldwide licence to the US-based Big Games company. Big Games, under the contract, is given the right to create video games in which the player can use pictures of family members, friends, celebrities, etc. to create the characters.
Big Games has developed some great games that both children and adults love. Until recently, Big Games created new games on a regular basis. Business has developed steadily and Big Games is selling approximately one million TroVrai software-based games per year. Each game is sold for US$50. Those sales represent almost Big Games’s entire business.
Dominique Duval, the CEO of TroVrai, and Leslie Smith, Big Games’s CEO, have a very friendly relationship. They went skiing together and each has had the other’s child at his/her home as an exchange student. The children of both families have a great time together when they meet.
The contract was signed for seven years and renews automatically for the same period. It is presently running for four more years. The royalty to be paid by Big Games to TroVrai was agreed to be €10 per game. At the time of signing of the contract, the euro was worth US$0.65.At the time of this dispute the €/US$ exchange rate is US$1.30 for €1. Big Games thus initially paid US$6.50 per game sold and now must pay twice as much. Big Games currently sells one million games per year.
Leslie Smith has warned Dominique Duval several times that this situation was creating heavy losses for Big Games. S/he expressed the need to renegotiate the royalty but never received any official answer. Informally, TroVrai’s officers explained that currency fluctuations are normal and were foreseeable when the contract was signed. On the other hand, Big Games should simply sell in euro rather than in dollars to avoid any difficulties with the exchange rate. This suggestion cannot be followed by Big Games in the short term as most sales are made in the United States and in the NAFTA zone.
Three weeks ago, TroVrai sent a registered letter to Big Games demanding the immediate payment of overdue royalties for the last three months. TroVrai, in the absence of any statement of accounts by Big Games for this period, estimates the royalties at US$3.5 million. The letter clearly states that according to the contract, TroVrai will have the right to terminate the contract without further notice if the payment is not made within 30 days.
Leslie has consulted with his/her lawyer and has sent a formal letter to Dominique personally stating that Big Games was not in a position to make the requested payment and that s/he believed that the termination of the contract would be detrimental to both parties. Leslie also made it clear that, failing an agreement before the end of the month, Big Games would hold TroVrai liable for the losses suffered during the period. TroVrai has not answered Big Games’s request for renegotiation of the contract.
In accordance with the dispute resolution clause contained in the contract, Big Games has requested mediation according to the ICC Mediation Rules. The letter also contained a first-class airline ticket to come and mediate in San Francisco. Dominique adores San Francisco and is happy to have a break there to be able to reconsider the matter quietly. Both parties have full settlement authority and will be accompanied by their lawyers.
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Confidential Information for Big Games (Leslie Smith)
Requesting Party
You feel so frustrated: you have developed great products and they are selling very well, but the more you sell, the more you lose.
You resent your European business partner telling you to start selling in new territories. You are now losing so much money on this contract that you simply cannot afford to establish new markets, though you accept that doing so would significantly improve the situation. The investment you would need to ma e would of course depend on the number of European countries you would decide to enter (in order to be paid in euro) but the translation/ adaptation costs plus purely commercial costs would be in the range of US$2 million to ensure significant results.
In order to remain profitable in the US market, the licence should not cost you more than US$10 per game. You are presently losing US$3 on each game sold, and thus you are losing US$3 million a year on this contract. There is no way you can increase the prices of your games. They are already very high. The market accepts your prices because you are the only one to offer the TroVrai technology but, if they were higher, your sales would collapse.
As a wise business person, you have looked for an alternative.
A company from the Far East has offered to create software performing the same functions. They have announced that they could deliver the software in six months. The cost would be US$1.5 million.
Choosing this alternative would mean:
After all the losses made so far, your company is completely unable to finance this investment even if the return on your investment were immediate. You have talked to your bank. It is not willing to support you, as you are unable to show future profits with sufficient certainty.
You have talked to your minority shareholders. They are willing to contribute more capital to the company, but in exchange they demand that their share of the company be increased to 70% from 30%, with your share consequently decrease from 70% to 30%.
In light of this need for capital, your own position in the company is at risk. Though your shareholders do respect your technical and commercial abilities, they are critical of your management of the relationship with TroVrai and question your personal relationship with Dominique. You should consider the possibility that they would dismiss you if they were to acquire a majority share in the company.
You do not believe that Dominique is aware of this situation but you have been unable to personally reach him/her. There is always someone at TroVrai to explain that Dominique is either too busy, or who provides you with an irrelevant answer. You have been required to bring matters to a head by not paying the royalties due under the contract to finally succeed in getting Dominique’s attention.
Your lawyer has advised you that you have no serious ground for termination though, from an economic perspective, you would have no other choice but to terminate the contract if you cannot renegotiate and obtain an acceptable reduction of the royalty payments.
Your lawyer has asked the opinion of a French lawyer about the possibility of holding TroVrai liable for the losses suffered and on the damages you could recover. The opinion received was rather positive in principle, but the amount of damages to be expected would likely be small and take a considerable time to obtain.
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Confidential Information for TroVrai (Dominique Duval)
Responding Party
Your company is doing very well in all the different fields of application of your software. You have a great team of IT developers who constantly improve the product and add new features to it and your profitability is superb. The company has €10 million in cash and its bank offers it any kind of loan that it may wish to obtain.
You have mixed feelings about the contract with Big Games. On the one hand, you are very happy with the developments that Big Games has made; their games are outstanding. You are also very happy with their sales in those markets in which Big Games operates. On the other hand, you are frustrated that you gave them a worldwide licence and that they are only selling in a limited part of the world. If they were really selling worldwide, their sales would be greater and the currency problem would not exist or would be substantially mitigated.
There is no disagreement that the evolution of the euro/dollar exchange rate has been very detrimental to Big Games, considering the locations of their sales. From what Leslie said and from your own inquiries, Big Games seems to be losing money due to this circumstance. You understand that this cannot go on and you are glad that the dispute resolution clause provides for mediation to find an acceptable settlement.
But you are under severe constraints: you have decided to be listed on the stock exchange as soon as possible. You therefore have started to communicate with the press. If you were to lose such a contract or make any amendment to it that would require disclosure of anticipated reduction in your turnover, your credibility in the market would be ruined and you would have to wait for many years before you could make another attempt.
The termination of the contract would have the same consequences and it would take you a long time to find one or more new partners and before these partners could develop new games. Furthermore, it is very uncertain how these games would compare with those of Big Games.
You need an agreement that guarantees the amount of royalties to be received over the next year to be no less than in the last year (€10 million) and does not endanger this figure thereafter.
Your lawyer has advised you that your legal position is strong and that the contract offers you full protection, as you are not asking for anything other than the fulfilment of Big Games’s obligations.
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Colin J Wall
Case Analysis
This is difficult mediation, in the sense that TroVrai has a very strong contractual case for holding Big Games to the original agreement to pay royalties of €10 per game, the equivalent to US$13. However, if it does so, Big Games will be unable to pay the royalties due and Leslie Smith may well lose his/her job as Big Games’s CEO. While it makes business sense for TroVrai to renegotiate the existing contract in the mediation, stock exchange listing provision restrictions make this difficult. If TroVrai does agree to new terms, it would need some benefits in return; otherwise Dominique Duval will face a difficult time with TroVrai’s shareholders. While TroVrai does not want to lose Big Games as its worldwide distributor, it is limited in the help that it can offer in these difficult circumstances. This therefore requires “thinking outside the box” in terms of a mediated solution.
The fact that Leslie Smith and Dominique Duval are close friends should make the conduct of the mediation easier, especially if the mediator asks them to concentrate on how to resolve the current difficulties between the respective companies. This is an ideal situation for brainstorming ideas and generating options for resolution once both parties and the mediator have gained a much better understanding of the parties’ respective difficulties, wants and desires. As always, the parties and the mediator should not comment on the efficacy of any ideas until the brainstorming session is completed and then the parties can reality test which options might help move the mediation towards settlement.
The fact pattern notes that TroVrai is about to launch a 3D version of its programme, so entering into a different sales and royalty agreement with Big Games for this new contract might ease the current dire financial situation of Big Games. Big Games could also consider expanding its sales into European markets, where most but not all of the sales would be made in euro, thereby avoiding the current currency exchange rate problem. However Big Games has no money to finance a new market entry, unless Leslie Smith sells his/her majority shareholding to the minority shareholders and thus risks being removed from office. The answer to this problem would perhaps seem to be that TroVrai, which is cash rich, directly invests in Big Games. Or, perhaps more likely, a separate joint venture company could be formed to exploit both parties’ interests, including expanding the current market. If this were discussed and agreed it would also allow Big Games to reveal that it is in contact with a company from the Far East which could conceivably produce software performing the same function at a lesser price. This would be to the mutual benefit of both parties.
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Greg Bond
Commentary for Training
A Tough Mediation between Friends
Leslie Smith and Dominique Duval are friends and their families know each other well. This may or may not make this mediation easier, and whether it does or not will depend on the mediator’s skills and on the parties’ abilities to stay focused on what matters. Their present situation is far from pleasant, and in this mediation they will have to be careful that their relationship and their business issues are kept separate. Friends or not, the two of them face a tough negotiation that they would be well advised to prepare thoroughly. They are not just friends, but are representing companies whose shareholders expect results. For both of them, their company’s future and their own reputation and jobs are at stake.
For students and trainers, this role-play is an opportunity to practice separating the people from the problem, staying tough on the latter while showing respect and understanding in the relationship. If discussion gets tense, the mediator can defuse the situation by empathetically working on understanding why the situation is difficult. If the mediator gains an understanding of one party, the other party will be listening and can better understand as well. Then the mediator can devote attention to the other party, with the same aim in mind. There is plenty of opportunity here for mutual empathy, facilitated by the mediator, particularly if Leslie and Dominique are able to be candid about the threats to their own positions in their companies should this dispute fail to be resolved. If they are able to talk about their personal interests as well as their business interests, and to show real appreciation of each other’s situation, then the hard talk on financial claims and renegotiating the contract may be easier to manage. This role-play is a good example of a key feature of all negotiation and mediation in business: the fact that in every case the negotiating parties have two simultaneous roles — as agents representing a company and as individuals representing themselves. In preparation, it makes sense to identify which interests are primarily company interests, and which are personal, and to analyse where they match and where they might complement each other or differ.
The numbers remain a challenge. Big Games are taking heavy losses on this contract, while TroVrai is demanding a large outstanding payment. The case contains solution options, but there are not so many of them. For mediation training, it might pay to encourage students and the mediator to work carefully on realism here. The case notes do not say how Big Games can raise the money it owes TroVrai without Leslie Smith risking his/her own shareholding and losing his/her job. TroVrai has plenty of cash reserves and a bank willing to loan it money, but it is not made clear how these resources can be used in the present dispute, while at the same time there is no flexibility on the €10 million royalties that any renegotiated contract must earn. In debriefing, a trainer can work with students to check any agreement closely against the parties’ interests. This is a tough mediation.
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