TYGlobe

2024 marks a critical year for the micro-short drama industry as it enters the 2.0 era. According to statistics, 12,000 enterprises engaged in micro-short drama-related businesses were registered in the Chinese mainland in 2020. As of November 2024, the number of newly registered micro-short drama enterprises in China has reached 16,100. Apart from the growth in the number of micro-short drama enterprises, the user scale of micro-short dramas has expanded at an even faster rate. According to the statistical data of the *2024 White Paper on the Development of China's Micro-Short Drama Industry*, in the first half of 2024 alone, the number of micro-short drama users in China has reached 576 million, accounting for 52.4% of the total Internet users, which exceeds the number of users of other online cultural and social services. In 2024, regions including Beijing, Shanghai, Zhejiang and Henan have issued a variety of supporting policies for micro-short dramas, which demonstrates the state's emphasis on the cultural industry of micro-short dramas. Accordingly, we hold the view that the micro-short drama industry will achieve more vigorous development in 2025 and attract more investors to enter the market.

By searching for relevant cases involving short web dramas in the past three years with the keyword "short web drama", the author finds that at least 70% of short web drama disputes are investment-related contract disputes, most of which arise from the failure of invested projects to achieve expected returns or pass the record-filing review. Therefore, for both the traditional film and television industry and new business forms such as short web dramas, notwithstanding the temptation of high profits, investment failures occur frequently. After conducting research on various pitfalls and cases of investment failures in the short web drama industry, the author summarizes the scenarios where disputes are prone to occur in short web drama investment as follows, to provide guidance for investors who intend to enter the short web drama investment field in 2025.

I. Pre-investment Project Due Diligence Is the Key

It is advisable for investors to entrust professionals to investigate the authenticity of target investment projects prior to making investments, so as to avoid falling victim to scams peddling the claim of "low investment and high returns on film and television dramas". On the basis of confirming that a project is authentic and feasible, investors shall conduct investigations on the production team including core members such as the director and producer. In the meantime, investors may review short dramas previously produced and launched by the aforesaid production team, to confirm the professionalism and credibility of the counterparty, as well as its capability to ultimately complete the examination and approval procedures and officially launch the short dramas.

Conduct sufficient due diligence on the project and production team prior to signing the contract and disbursing the investment funds. Otherwise, if you refuse to pay the agreed investment funds after discovering problems with the investee during the performance of the contract, such act violates the stipulations of the contract and constitutes a breach of contract. You will not only be unable to claim investment dividends, but also be liable to pay high liquidated damages.

Case 1:

Cao Moumou entered into an investment and production contract for micro-short dramas with a Beijing-based company, which stipulated that Cao Moumou would invest RMB 100,000 and pay the sum to the account of the aforesaid Beijing-based company in two installments, otherwise Cao Moumou shall pay liquidated damages. After the conclusion of the contract, Cao Moumou paid RMB 70,000 in accordance with the contract, but refused to pay the remaining RMB 30,000 on the grounds that the Beijing-based company had defaulted on employees' salaries and conducted bad-faith acts. The Beijing-based company subsequently filed a lawsuit with the people's court, demanding that Cao Moumou pay the liquidated damages. The court finally held that the investment contract signed between Cao Moumou and the Beijing-based company was valid, and Cao Moumou's refusal to perform his contractual obligations constituted a breach of contract, for which he shall bear the liability for breach of contract. The court eventually rendered a judgment ordering Cao Moumou to pay the liquidated damages.

II. Investment contracts shall be clear, explicit and consistent, and shall be free from conflicting provisions.

The content of an investment contract shall be clear and explicit. Execution of multiple contracts shall be avoided, and it is advisable to have the contract drafted by professionals. Where multiple contracts are executed without vetting by professional legal practitioners, not only may each contract fall under different legal relationships, but there may also be conflicts between contractual stipulations, such as inconsistent stipulations on jurisdiction clauses, conflicting stipulations on default clauses, or other discrepant stipulations. This will eventually lead to divergent interpretations of the contract clauses between the two parties and frequent disputes that cannot be resolved in the same litigation, thus increasing litigation costs, and the expected litigation outcome may not be achieved.

Case 2:

On August 16, 2022, the plaintiff, a company domiciled in Dongyang, concluded the *Entrusted Production Agreement for Online Micro-short Drama Ruffian in the Old Street* with the defendant, a company domiciled in Jiaxing. On September 30 of the same year, the plaintiff submitted the full episodes of *Ruffian in the Old Street* via a WeChat group, and mailed the invoice for the balance payment on October 4. On October 18, 2022, the plaintiff submitted the revised full episodes of *Ruffian in the Old Street*, while the defendant failed to respond with any handling opinions. On October 19, 2022, the defendant uploaded and broadcast the aforesaid drama on the Jiuzhou Counterattack Theater channel of Youku, but still failed to disburse the balance payment.

The defendant argues in its answer that the plaintiff failed to revise the online short drama in accordance with the defendant's opinions. The *Investment Agreement on Dongyang Yixiangtiankai Film Co., Ltd.*, *Framework Agreement for Commissioned Production of Online Short Dramas* and *Commissioned Production Agreement for the Online Short Drama "Ruffian in the Old Street"* signed by the plaintiff and the defendant successively fall under different legal relationships. The defendant contends that its failure to pay the final payment under the involved agreement is caused by the plaintiff's breach of contract in the overall cooperation.

The court ultimately rejected the defendant's defense arguments and rendered a judgment ordering the said party to pay the defendant the outstanding payment, liquidated damages, attorneys' fees and other expenses for protecting legitimate rights.

III. Key contents of the contract shall be explicitly stipulated in the investment contract, including the nature of the contract, clauses on breach of contract, clauses on rights and obligations, etc. The details are as follows:

1. The nature of the investment contract shall be explicitly stipulated: Is it joint production or partnership? Is it pure investment or cooperative filming? Is it investment contribution or loan? Where the nature of the investment contract is ambiguous and the two parties hold different understandings thereof, different litigation outcomes may arise in the event of a dispute.

2. Default Clauses shall be explicit: for example, how shall the production team bear the liability for breach of contract if it fails to complete the shooting? How shall the liability for breach of contract be borne if the short-form drama fails to pass the examination, complete the record-filing and be launched?

The author hereby specially reminds that clauses related to examination and filing shall be stipulated as first-priority key clauses. Following the explosive growth of mini-series in the past two years, China has issued a series of regulatory policies, making the examination and filing of mini-series a mandatory procedure. Therefore, investors shall pay special attention to the clauses on examination and filing to ensure that the mini-series they invest in can be successfully launched online, and shall include provisions clarifying the liability for breach of contract to be borne by the production team if the mini-series fails to be launched, so as to address potential legal risks.

Case 3:

On December 22, 2021, the plaintiff Dong Moumou (Party B to the contract) and the defendant Mengxin Film and Television Company (Party A to the contract) entered into the *Short Drama Cooperation Agreement for "I Can't See That I Love You"*. The signature column for Party A was signed by Zong Moumou, and the signature column for Party B was signed by the plaintiff. The contract stipulates as follows: (5) Party A shall produce the film in accordance with Class A rating standards. If the film is downgraded due to production-related reasons of Party A, Party A shall bear full liability. ... Subsequently, as the film failed to pass the filing and examination procedure, the plaintiff requested to terminate the contract and refund the investment funds.

The defendant pleaded that it and the plaintiff were parties to a joint production cooperation. As the initiating entity of the project, the plaintiff provided the script and handled the project planning and filing formalities. The defendant, Mengxin Film and Television Co., Ltd., contracted for the filming and production work. Party A shall carry out the filming and production work upon receipt of the production and filming fees paid by Party B. The defendant alleged that it had completed the corresponding work and should not refund the relevant fees. Furthermore, the defendant denied that Jing Run, a key person of the project, was its employee, and contended that the expression of intent made by Jing Run shall not represent the defendant.

After trial, the court holds that: First, although the contract specifies that the short drama involved is jointly shot and produced by the plaintiff and the defendant, other clauses of the contract indicate that defendant Mengxin Film and Television Co., Ltd. is responsible for the entire filming, production and distribution of the said short drama, and the plaintiff only acts as the capital contributor. Second, defendant Mengxin Film and Television Co., Ltd. claims that third party Jing Run is not its staff, and the expression of intent of Jing Run cannot represent the company. However, the chat records of the work group of the plaintiff and the defendant show that third party Jing Run uploaded the budget statement of the involved short drama *Invisible Love for You* and the investment and production contract for *Invisible Love for You* in the group, and explained the filming budget arrangement and some clauses of the cooperation agreement in the group. Defendant Zong Moumou replied in the group: "Yes, yes", which indicates that the expression of intent made by third party Jing Run in the group has been recognized by defendant Mengxin Film and Television Co., Ltd. Third, as an enterprise specialized in film and television production, defendant Mengxin Film and Television Co., Ltd. assumes a higher examination obligation for the selection of the involved script and whether the subsequent finished drama can pass the record-filing review. Fourth, the purpose of the plaintiff's investment in the involved online short drama is to obtain proceeds from the release of the said drama on video platforms. Therefore, the contract explicitly stipulates the assumption of liability for failure to pass the review due to the defendant's production reasons, as well as the assumption of liability related to the defendant's obligation to produce the involved drama in accordance with the Class A rating standard.

Finally, the court rendered a judgment that the defendant, Mengxin Film and Television Co., Ltd., shall return the investment sum of RMB 588,000 to the plaintiff, bear the corresponding liability for breach of contract, and pay the liquidated damages.

IV. The identities of participants in micro-short dramas shall be clearly defined.

During the production of domestic films and television dramas, the parties concerned usually communicate via WeChat groups. Investors generally do not proactively inquire about the identity of any participant, and deem them to be members of the production team by default. However, in fact, many of such participants do not have a legally established labor relationship with the film and television company or the production team. In the event of a dispute, the production team or the film and television company may refuse to acknowledge the identity of the aforesaid person, and further deny the contents previously confirmed by the aforesaid person, which may lead to the investor losing the lawsuit. Therefore, the identities of relevant personnel must be explicitly clarified. If such clarification cannot be set out in the contract, the identities of relevant personnel shall also be explicitly confirmed by way of inquiry in WeChat chat records, so as to mitigate relevant risks.

Case 4:

On June 18, 2022, the plaintiff and the defendant concluded the *Online Micro Short Drama Investment and Production Agreement* (hereinafter referred to as the "Investment and Production Agreement"). The Agreement stipulates that the plaintiff shall undertake the production of the disputed short drama, and be responsible for all relevant work including creation, shooting, post-editing and production, among others. As a joint investor, the defendant shall contribute a capital of RMB 810,000. During the cooperation period, the plaintiff fulfilled its production obligations under the disputed Agreement. The defendant has confirmed more than 30 episodes of finalized scripts of the disputed short drama submitted by the plaintiff, yet the defendant failed to pay any investment funds as contracted. The grounds for the defendant's refusal of payment are as follows: The Investment and Production Agreement is a partnership agreement in nature, and it is a partnership for an indefinite term, so the defendant is entitled to terminate it at any time. As Tong Rui, a former employee of the defendant (also the core personnel for the cooperation between the two parties), resigned on June 30, 2022, coupled with the impact of the COVID-19 pandemic, it has been difficult for the plaintiff and the defendant to continue their cooperation, and continued performance of the Investment and Production Agreement will incur losses to both parties. In addition, given that the plaintiff has committed a breach of contract, the defendant is not liable for compensating the plaintiff for any losses.

The Court holds that: Although the defendant argues that the investment and production agreement is a partnership contract, the name of the disputed investment and production agreement, the contents of the rights and obligations of both parties, and the clause "agree to jointly invest in the production" in Article 1 of the agreement all indicate that the plaintiff and the defendant are co-investors engaged in joint investment rather than partners. Secondly, the disputed investment and production agreement does not explicitly stipulate partnership matters such as admission to partnership, withdrawal from partnership, termination of partnership, and assumption of joint and several liability for partnership debts, which does not conform to the legal characteristics of a partnership contract. Article 17 of the investment and production agreement stipulates that "Nothing contained in this contract shall constitute or be deemed to constitute partnership operation between the parties...", which also explicitly denies the existence of a partnership contractual relationship between the two parties. Therefore, the defendant does not enjoy the right to rescind the disputed agreement at any time.

The above are the common legal risks encountered by micro-drama investors. The author hereby further reminds investors intending to enter the micro-drama investment sector that micro-drama investment involves risks, and you shall never enter the market blindly. When signing an investment contract, you must retain professionals to conduct due review, so as to avoid total loss of capital resulting from investment failure.