They didn't actually sign one from what I've seen the companies came to a basic agreement with a contact pending Sony later then took the contract to Nintendo who threw it out leading to a stalled situation as neither company wanted to budge but Sony were confident the deal would go through Nintendo just went with Phillips instead, Sega also threw out the same proposal. You missed the point on the employees part as well he's going on about karma but a whole entire team from SE is now at Nintendo those same employees left SE because their own work was cut down in favour of FFVII.

I think it is hardly probable that they had a working prototype without any kind of deal signed, they would have in the least a DOA or something of sort even more because Sony was touching Nintendo IPs (not games necessarily) to do it.

Have this whole team of SE left the company and joined Nintendo at the time of FFVII? Or are you talking something much more recent?

The was a partnership in place which is different from a signed deal as a partnership is when two or more entities come together on a business venture a partnership can be agreed but doesn't exactly have to be seen through which is common. The partnership here clearly had the intent of a cd based platform but no contract was in place for the actual product itself when it came into being.

Monolith are a former SE team they did Xenogears, at the time of FFVII Square put a lot of their focus on VII over other projects and even pulled people from other teams to work on it one of the teams who got hit hard was the Xenogears team this left the game in an inconsistent state (elements of that were even used in VII) when released and to make things worse Square began focusing less on non FF projects due to VII's success so the full vision and planned future installment were put on hold which prompted the team lead by Takahasi and his wife to leave in 1999 and form their own studio. They had a stint with Namco before being bought by Nintendo in the tail end of the Gamecube era Monolith are now Nintendo's current top first party team outside of the internal EPD units.

Xenogears began as Final Fantasy VII but SE felt it was too dark. Cut their budget but still let them make the game but were unable to fully finish the game.  That talent worked on SNES FF games and the Chrono series and left to what would become Monolith and develop the Xenosaga series. No, they didn't just jump to Nintendo. However they were unhappy at Namco I believe and somehow met with Nintendo and liked working with them with Gamecube and DS.

For a formal partnership to exist there will exist at least a MOU signed after the DOA already being signed. So thanks to agree that there were already signed deal between parties.

Thanks for the story on Monolith. Because my memory of it was that it was much more recent than FF7 time.

I would imagine seeing the stories from first party and some major publishers it is much better to work at first party studios.

Ahh ... in business it happens quite a lot actually.  Partnerships years in the making stand even when a vendor offers a slightly better price.  Knowing what to expect from a vendor is hard to quantify but definitely part of the equation.  Loyalty is a thing, after all businesses are run by people.

I'm not saying that always happens but you seem to think that because the grass may seem greener on the other side that businesses always jump pastures.

In regards to the argument about companies going to where the deal is better I want to throw my two cents in. Somebody said that Sony offered a better deal so Square just took the chance and went there. I work in a company that offers products which are quite more expensive than our comepetition. Yet we still sell our stuff. If the argument is made that the customer only goes where the deal is better I'd lose my job, obviously.

The logic that only the best deal is considered is something we all learn in business 101 as the model of demand and offer but in reality it is just that, a model. Long term relationships are often more valuable than simple price and cost factors. How does my company still sell stuff? Because our customers know us and rely on our expertise, and they even know that we are more expensive yet still want to work with us. So ultimately the argument that Square just took the better deal should be doubted, especially in the light of how uch of a partner Nintendo and Square used to be.

Well it's not a better deal, but at least in the end Square sacrifice are pay off . In Business there is no rule of thumb or general theory like scientific fact. It's a matter of chance and possibility. It's like gambling. The problem is not whether it's wrong or right,  the problem is the attitude of Nintendo and Square. Both were childish. 

It's been 25 years and no one knows for sure except those in on those meetings. So what use is it to argue over who did what?