Samuel (Professionally Known As Seal) v Wadlow

The appellant is a singer and songwriter known professionally as Seal. The song which first made his name was “Killer”, which he produced in collaboration with the artist “Adamski” in 1989. It was released in April 1990 and went to the top of the UK singles chart. The respondent, Mr Wadlow, is the appellant’s former manager.

Mr Wadlow’s management was brought to an end by a settlement agreement dated 31 March 1995. The dispute is about whether Mr Wadlow is entitled to continuing commission on income from the exploitation of two albums referred to in the settlement agreement as the first album and the second album.

The parties met in 1987 when the appellant was aged 24. The respondent was then a partner with Mr Julian Spicer in a recording studio business known as Beethoven Street Studios (“BSM”). They let the appellant have free studio time, and the respondent began to perform what might loosely be described as managerial services for the appellant. He tried to promote the appellant’s music to record companies, but at that time without success.

On 9 May 1988 the appellant and Beethoven Street Music (“BSM”), which was a partnership between Mr Wadlow and Mr Spicer formed for the purpose, entered into a written publishing agreement. Before doing so the appellant received legal advice from Ms Helen Searle, a specialist music lawyer. By the terms of the agreement the appellant assigned to BSM the publishing rights in all compositions written by him during the period of the agreement in return for a right to royalties, which were broadly to be split 70/30 between the appellant and BSM. The agreement was to run until 22 February 1991, with an option for BSM to extend it for a further two years.

The respondent continued to provide managerial services for the appellant, which after “Killer” took up more of his time. He negotiated for the appellant a 50% share of the copyright in “Killer” and he advised on the contracts which followed.

On 17 July 1990 the appellant entered into a recording agreement with ZTT Records Limited. This entitled ZTT to record a maximum of five albums and committed it to record one album and two singles.

On 1 September 1990 the parties entered into a written management agreement. The terms of the management agreement and the settlement agreement are central to the dispute.

On 18 January 1991 BSM entered into an administration agreement with Perfect Songs Limited (ZTT’s sister publishing company). Copyright in the appellant’s compositions was licensed to Perfect Songs in return for royalties payable to BSM at the rate of 65% of income received, and BSM’s publishing obligations to the appellant were subcontracted to Perfect Songs. The term of the administration agreement was to be co-extensive with the recording agreement. On the same day the publishing agreement between the parties was varied to make it co-extensive with the term of the recording agreement and the administration agreement. The variation to the publishing agreement also contained provision about the royalties to be paid by BSM to the appellant in respect of the first and second albums to be released by ZTT under the recording agreement.

In May 1991 the appellant’s first album, entitled “Seal”, was released by ZTT and went to the top of the UK charts. In the same month the parties engaged a company called Direct Management Group Inc as the appellant’s North American manager. That arrangement did not prove to be satisfactory, and in June 1993 the appellant’s North American management was taken over by Mr Bob Cavallo of Roven Cavallo Entertainment Inc.

In May 1994 the appellant’s second album, entitled “Seal II”, was released and again went to the top of the UK charts.

The appellant became more impressed by Mr Cavallo than by the respondent, and in early 1995 the appellant told the respondent that he wanted to terminate his management and publishing relationship with the respondent and BSM. After discussions, the appellant, the respondent and BSM entered into the settlement agreement, which terminated both the publishing and management agreements.

The appellant continued to pay commission to the respondent in respect of earnings on the first and second albums until the end of 2000.

Another payment was made in 2001 but otherwise there were no further payments.

On 2 June 2005 the respondent began the present action, claiming an account and damages for breach of the management and/or settlement agreements. The respondent subsequently amended his pleadings to base his case on the settlement agreement alone.

The appellant’s grounds of defence as advanced at the trial were the following:

The claim to rescind the agreements for undue influence was introduced by amendment about 2 weeks before the start of the trial.

By a reserved judgment dated 22 June 2006, Gray J held that the respondent was entitled to continuing commission on the appellant’s earnings from the albums and ordered an account. He made the following findings:

The appellant advanced the following grounds:

It is logical to consider first the construction issues, then undue influence and finally laches and acquiescence.

Clause 1 provided that:

By clause 3 the respondent undertook to use his best endeavours to advance and promote the interests of the appellant in all branches of the entertainment industry and to procure and obtain suitable and proper agreements, engagements and bookings for him.

The critical clause is clause 7. This provided:

The first and second albums were recordings made during the management agreement and therefore appear to fall within clause 7(c). However, Mr George argued on behalf of the appellant that nothing can fall within clause 7(c) which is not first within clause 7(a), and that monies arising from the first and second albums did not fall within clause 7(a). This was because the first part of 7(a), down to the words “during the Term hereof”, was confined to commission on earnings paid or payable during the period of the agreement, and the second part was confined to earnings from agreements, etc., negotiated during the period of the agreement. Although the albums were recorded during the period of the agreement, this resulted from the recording agreement with ZTT, which pre-dated the management agreement.

I would read clause 7(a) as follows:

In other words, the respondent would be entitled to commission on the appellant’s earnings if they resulted from his musical activities during the period of the agreement or if they resulted from agreements negotiated during the period of the agreement.

That construction makes commercial sense, particularly in the context that the respondent had recently negotiated the ZTT recording agreement under which it was expected that the first of five possible albums would shortly be made. The construction also avoids any tension between 7(a) and 7(c). The function of the words “including without prejudice to the foregoing…to the Artist or to anyone on his behalf” is to make it clear that the expression “gross total earnings of the artist from the activities” is not intended to be confined to money received, but includes money or any pecuniary consideration paid or payable to the appellant or anyone on his behalf.

Mr George submitted that there was too big a gap between the words “total earnings of the Artist from the activities” and the words “during the Term” for this to be an acceptable interpretation, and that the words “during the Term” must be read as limiting the words “paid or payable…to the Artist or to anyone on his behalf”. I am unpersuaded by that argument. I am more impressed, as was the judge, by the fact that the recording agreement had been negotiated by the respondent as the appellant’s de facto manager at the same time as the management agreement was being negotiated, and that it appears to have been fortuitous that the recording agreement was concluded first by a margin of a few weeks. It would be surprising if the respondent’s commission was not intended to include commission on earnings from albums made during the management agreement.

For those reasons I agree with Gray J that the management agreement entitled the respondent to commission on the appellant’s earnings, both during and after it, from the first and second albums.

The settlement agreement provided, among other things, as follows:

By clause 9(c) the respondent surrendered to the appellant his 50% interest in the share of publishing income payable to BSM from Perfect Songs for the second album.

Mr George’s argument that the settlement agreement did not entitle the respondent to continuing commission in respect of the first and second albums, despite the parties’ expressed intention in clause 2(a) that the respondent should be entitled to such commission, depended on his argument about the proper construction of the management agreement, which I have rejected. The point is therefore academic, but I would have also rejected it in any event. His argument was as follows:

This highly legalistic approach would produce a result opposite to that which the parties as commercial people plainly intended.

If, as I consider, the plain commercial intention of the parties by clause 2 of the settlement agreement was that the respondent should have continuing commission in respect of the first and second albums, but no other continuing commission, the court can and should construe the agreement so as to give effect to that intention.

The sole reason for this issue being debated was because of its possible relevance in relation to undue influence.

The chapter in Chitty on Contracts, 29^th Ed (2004), on discharge by agreement begins by stating (at para 22-001) that the discharge of a contract by agreement is a subject of considerable artificiality and refinement, and that the niceties of legal reasoning which appear in this branch of the law are not easy to justify.

The case law on the subject has mainly arisen from the Statute of Frauds and similar statutory provisions. A good example is United Dominions Corporation (Jamaica) Limited v Shoucair [1969] 1 AC 340. The case arose from a Commonwealth statute based on section 6 of the UK Moneylenders Act 1927, which made unenforceable any contract for the payment of interest on money lent, and any security given by the borrower in respect of any such contract, unless it was supported by a note or memorandum signed by the borrower and containing all the terms of the contract. A lender advanced money to a borrower on mortgage at an interest rate of 9%. Later the rate of interest was varied to 11%. The original contract was supported by a note which complied with the statutory requirements, but the variation was not. The lender sought to enforce the contract at the original rate. The question was whether the variation, itself unenforceable, made the prior agreement also unenforceable.

Lord Devlin, at pages 347-349, set out the possible approaches to the problem:

The Privy Council chose the latter course.

However, it may not be easy to determine whether the parties “intended” that the original contract should continue to exist as a matter of legal analysis but in varied form, or whether as a matter of legal analysis it was intended to be discharged and replaced, since the distinction is one of legal theory which might have little commercial meaning for the parties.

In the present case it is plain what the parties intended to be the effect of the settlement agreement in terms of their ongoing financial rights and obligations; but to ascribe to them an intention to achieve that result by variation of the management agreement, as distinct from its replacement by the settlement agreement, or vice versa, is artificial. From a practical viewpoint it is a distinction without a difference.

In Morris v Baron the House of Lords used a variety of expressions to formulate a test. In British and Benningtons Limited v NW Cachar Tea Company Limited Lord Sumner, at 67, collected the various phrases used and said that the question was whether the common intention of the parties was to abrogate, rescind, supersede or extinguish the old contract by a substitution of a completely new self-contained or self-subsisting agreement, containing as an entirety the old terms, together with and as modified by the new terms.

In this case the settlement agreement was plainly intended in a broad sense to supersede the management agreement and the publishing agreement, but whether it was intended to extinguish the prior agreements is more debatable. The settlement agreement dealt comprehensively with the parties’ continuing obligations, but it did so in language which imported parts of the management agreement.

Mr George submitted rightly that the management agreement could be terminated without being discharged (that is, ceasing to have any legal effect). If the management agreement had been terminated in accordance with the notice provisions in that agreement, the post-termination provisions would continue to have legal force, because the contract would continue to have validity although the term of the management contract would have expired. Similarly, he submitted, the termination of the agreement by the settlement agreement did not extinguish the contract as an entirety. He pointed to expressions in the settlement agreement such as “subject as hereinafter appearing [the parties] agree to release each other from their respective obligations under and the further performance of the terms of the Management Agreement” and “notwithstanding the termination of the Management Agreement [the respondent] shall be entitled to his commission entitlement as defined in clause 7 of the Management Agreement” and “[the appellant] agrees pursuant to clause 5(c) of the Management Agreement that he will use his reasonable endeavours…” as showing that the management agreement was not being entirely extinguished.

The respondent argued that the continuing obligations took their force only from the terms of the settlement agreement and that the reference, for example, to him being “entitled to his commission entitlement as defined in clause 7 of the Management Agreement” was merely a convenient way of identifying his rights.

It is a fine question. I consider that it is also a sterile question. The law about undue influence is based on broader concepts and I do not believe that its application to the present case should be affected by whether technically the settlement agreement discharged the management agreement.

The principle in Morris v Baron was brought into existence in order to deal with the technical problems produced by legislation analogous to the Statute of Frauds. The less that it is brought into other parts of the law to deal with problems of a different nature which do not require a formalistic approach, the better.

Contract law is built on the principle that bargains freely entered into should be enforced. The cardinal principle of autonomy also has another side. In circumstances where one party has taken improper advantage of the other, so that the agreement cannot fairly be regarded as an exercise of free will, rules have been developed to protect the vulnerable party. The rules relating to misrepresentation, duress and undue influence share in this respect a common objective.

In Royal Bank of Scotland PLC v Etridge (No 2) [2001] UKHL 44, [2002] 2 AC 773, Lord Nicholls went back to first principles in analysing the modern law of undue influence. He expressed the founding principle developed by the courts of equity as a court of conscience as follows (at para 7):

If two parties enter into an agreement which is voidable for undue influence, and the same parties later enter into a related agreement but without any additional undue influence, in my opinion Lord Nicholls’ guiding principle must apply to the question of the validity of the second agreement, whether or not the second agreement was technically intended to discharge the first agreement. The court must look at the full circumstances (which may vary infinitely from one case to another) in order to determine whether the second agreement ought fairly to be treated as the expression of free will of the person later seeking to challenge it.

That the doctrine of undue influence may apply in such circumstances was established by the decision of this court in Yorkshire Bank PLC v Tinsley[2004] EWCA Civ 816[2004] 1 WLR 2380. Gray J distinguished the decision on the facts. Mr George submitted that he was wrong to do so.

Mrs Tinsley and her husband jointly executed two mortgages over their home as security for the husband’s current and future business debts. Mrs Tinsley acted under the undue influence of her husband, of which the bank had constructive knowledge. The bank’s security over the home was therefore unenforceable against her. Sometime later the marriage broke down. It was arranged that the matrimonial home would be sold and part of the proceeds used to buy a smaller property for Mrs Tinsley. The bank insisted on her signing a new mortgage in its favour over the new property as a condition of its agreement to discharge the mortgages on the matrimonial home. Mrs Tinsley did so. The court held that the bank’s mortgage over her new property was no more enforceable against her than its mortgages over the matrimonial home. The undue influence which affected the earlier had also affected the later.

The leading judgment was given by Longmore LJ. Two passages from his judgment gave rise to debate in the present case as to their proper interpretation. The first was this, at para 18:

It was suggested in argument that Longmore LJ was there seeking to lay down a principle of law that a contract which is “a true substitute” of an earlier contract voidable for undue influence will be automatically unenforceable, subject to laches or the like. That suggestion led to rather unsatisfactory attempts to formulate definitive tests of what would amount to “a true substitute”. That trail leads quickly back to the sort of problems already looked at when considering whether the second agreement involved a discharge or variation of the first.

As I read the passage, Longmore LJ was not seeking to create such a test. Rather, he was drawing a distinction between the type of case which the court was considering (a case of the simple substitution of one mortgage for another at the insistence of the bank) and other possible cases where there might be material differences between the first and second agreements in their content or in their factual context. He went on in the next sentence to say that whether the new contract would be as open to attack as the old one would be partly a question of construction, implying that the court needs to look at what the parties have agreed as well as at the factual context in order to decide whether the second agreement was open to the same attack as the first.

There was also some debate about para 19 of the judgment of Longmore LJ in which he said:

The debate was about the meaning of the words “even if undue influence is not operative at the time of such replacement”.

I would not read that as meaning “even if the original undue influence has ceased to be operative”, but rather as “even if there is no fresh undue influence”. I say that for two reasons. First, that reading is consistent with the judgments of the other two members of the court. Secondly, it would be inconsistent with the fundamental notion of undue influence to set aside an agreement which was not entered into under the continuing effect of undue influence but as a true exercise of free will.

Peter Gibson LJ took as his starting point that the conscience of the bank had been affected during the subsistence of the prior mortgages because it had constructive knowledge of the equitable wrong done to Mrs Tinsley by her husband, and he asked rhetorically at para 32:

Peter Gibson LJ also considered, at para 35, how a lender could protect himself against the risk of earlier undue influence affecting a later transaction. He said that he could see no reason why a lender should not be able to do so, in much the same way as the law requires lenders to do in order to avoid being on constructive notice of an equitable wrong to a wife, by taking steps to ensure that the wife received independent advice on the transaction into which she was to enter with the lender. Those observations are relevant in this case, because the appellant had independent legal advice at the time of the settlement agreement, although as a result of a combination of lapse of time, faulty memories and loss of documents it was not altogether clear what advice he received.

Rix LJ in a short judgment emphasised, in para 39 that the new mortgage was inseparably connected with the previous mortgages and that there was nothing to cause the earlier undue influence to have ceased to be operative in connection with the new mortgage. As a result, the mere fact that there was no additional undue influence was not determinative.

Gray J considered that the present case was very different on its facts from Yorkshire Bank plc v Tinsley, and he found that the settlement agreement was not procured by undue influence. He listed a number of considerations which led him to this conclusion. By the time of the settlement agreement, the relationship between the parties had ceased to be one of trust and confidence. The appellant had already effectively replaced the respondent as his manager by Mr Cavallo. He received independent legal advice from Ms Searle in relation to the settlement agreement. The factual context in which the settlement agreement came into existence was fundamentally different from the factual context of the management agreement. The settlement agreement terminated not only the management agreement but also the publishing agreement, the validity of which had not been questioned. The terms agreed were not unreasonable or oppressive from the appellant’s viewpoint. The continuing obligation to pay post-termination commission had to be taken in conjunction with other provisions of the agreement, which included significant concessions by the respondent.

The concessions were indeed significant. The publishing agreement, as amended, entitled BSM to rights in up to five albums. At the date of the settlement agreement, only two albums had been released. BSM gave up its rights in respect of the further albums. This enabled the appellant to enter into an agreement in the next year with Perfect Songs, under which he received £2million as an advance. BSM’s term of exploitation would have lasted for 5 years after the fifth album. The period was greatly reduced. The respondent’s ongoing commission was limited to the first and second album notwithstanding that there was a substantial volume of other material recorded by the appellant prior to the settlement agreement. Further, the appellant’s share of the proceeds from the first and second albums was increased.

In my judgment the judge was entitled to conclude that the settlement agreement was properly to be regarded as an exercise of the appellant’s free will and was therefore enforceable.

The judge dealt with this issue briefly, because it was academic on his conclusions as to the construction of the agreements and undue influence. Since I would uphold his conclusions, I will be similarly brief on this issue.

The appellant’s claim to rescind the management agreement and the settlement agreement came very late. It was more than 15 years after the management agreement and more than 11 years after the settlement agreement. Much water had flowed under the bridge. Looking backwards, it is noteworthy that the respondent failed on the issue of undue influence in relation to the management agreement because of his inability to rebut a presumption. Part of the respondent’s difficulty related to unearthing the legal advice which the appellant had received as a result of the many years which had passed before the issue was raised. Looking forwards, the consequences of rescission so long after the contracts would be highly problematic. On the face of things, the appellant would be entitled to repayment of all sums under the management agreement and the settlement agreement. The court would have jurisdiction to make an allowance to the respondent for his labour and expenses on the appellant’s behalf, but the respondent would face the problem of having to provide a basis for their quantification many years after the event. The rescission of the settlement agreement would also, on its face, revive retrospectively the publishing agreement. However, under the settlement agreement BSM had forgone rights and re-assigned copyrights which had in turn been assigned to third parties.

Mr George emphasised that there was no evidence that the appellant had actual knowledge of a right to rescind either the management agreement or the settlement agreement for undue influence before the point was finally raised. That was a relevant factor, but there is no hard and fast rule that ignorance of a legal right is a bar to laches or acquiescence. The authorities show that ultimately the court has to look at the whole of the circumstances and decide whether on balance it is just that the agreement should be set aside: see John v James[1991] FSR 397, 459 (Nicholls J) and Goldsworthy v Brickell [1987] Ch 378, 411-412 (Nourse LJ) and 416-417 (Parker LJ).

The judge inferred that it was likely that Ms Searle would have advised the appellant about the possibility of raising undue influence at the time when the settlement agreement was being negotiated. Mr George submitted that this inference could not properly be drawn from the evidence. I do not think that it is necessary to examine the evidence in detail on that point, because that was not the sole factor which influenced the judge. Leaving that matter aside, I would have considered it surprising in any event if the judge had concluded that it was equitable to set aside the management agreement or the settlement agreement having regard to the very considerable passage of time and its effects.

I would dismiss the appeal.

I agree.

I also agree.