Andrea Wood is the head of Bennett Jones’ National Media and Entertainment Practice.

In this volatile economic environment, managing insolvency risk is crucial.

Most Canadian content creators and distributors have neither the time nor the inclination to become experts in this area of law, but there are three things that they can do to protect themselves without specialized knowledge.

1. First, enter every new commercial relationship with a clear picture of how the deal might be affected by an insolvency of your counterparty, and try to structure the deal to minimize the impact of any such insolvency.

Review default and termination provisions carefully, paying particular attention to what happens if a counterparty becomes insolvent.

For example, if the transaction involves a grant of rights, is there a reversion of rights that would be triggered by a counterparty insolvency? While a reversion of rights may not always be enforceable in an insolvency, it is still better to have a reversion clause than not.

Also keep in mind that, in many cases, there may be warning signs that predate formal insolvency proceedings, such as the failure of the counterparty to pay amounts due or to report in a timely fashion. Ensure that your contract contains events of default that would enable you to terminate the agreement once those warning signs start to manifest themselves.

One practical way to minimize risk for a party granting rights (the grantor) is to structure the deal so that the licence fee or distribution advance is payable as quickly as possible and ideally before any rights vest in the hands of the party taking rights (the grantee). If the grantor believes that there could be substantial ‘overages,’ he/she might consider taking a security interest in assets to secure the back-end payments and other obligations of the grantee.

For substantial exposures (or if there is a significant risk of a counterparty insolvency), consider seeking specialized legal advice. If the counterparty is incorporated outside Canada, this might mean seeking local legal advice in the jurisdiction of incorporation of the counterparty.

2. Second, be proactive in managing existing contractual relationships. This can be done in a number of ways, including monitoring revenue reporting and taking immediate action if a report does not arrive when due. Consider aggregate levels of financial exposure to any parties with which you regularly do business.

If you’ve got so much exposure to any given counterparty that its insolvency could represent a significant threat to your business, consider strategies for reducing that exposure. And conduct spot-check audits regularly and strategically.

3. Finally, at the first signs of real trouble, get help. In an insolvency situation, the race is often won by the swiftest. One reason for this is that once formal steps have been taken, unsecured creditors of the insolvent party may be prevented from enforcing debts.

Also, in some circumstances, a grantor of rights to intellectual property might be prevented from terminating the grant of rights even if the insolvent party has defaulted on its obligations to the grantor. Conversely, in some circumstances the courts have ruled that a grant of rights to intellectual property can be assigned or ‘disclaimed’ by a trustee or receiver of the licensor. The latter means that if your business has taken rights from an insolvent grantor, after formal insolvency proceedings have been taken, the grant of rights could be terminated by the grantor’s trustee or receiver.

While this economic climate brings its challenges, those able to effectively manage insolvency risk are more likely to survive and flourish in the coming months.