Morse v Eaglemoss Publications Ltd

This is a claim by Mr Stanley Morse (“the claimant”) as the assignee of Bright Star Publishing Limited (“Bright Star”) and Midsummer Books Limited (“Midsummer”) against Eaglemoss Publications Limited (“the defendant”). The claimant has some 40 years experience in publishing; he set up and was the chief executive officer of Bright Star and Midsummer until they went into administration after commencement of these proceedings.

The defendant has had a long relationship with him. The claimant was on very close terms with the defendant’s founder, Mr Patrick Cavendish, and was also friendly with Mr Mark Stanley, the defendant’s chief executive officer. This action is therefore particularly sad, especially as, whatever the outcome of these proceedings, the claimant will retain the unshakeable belief that the defendant (in practice Mr Stanley) has been guilty of sharp practice. In a business based on trust, the close relationship between the claimant and the defendant has been destroyed forever.

The action relates to a series continuity publication known as Wildlife Watch which was published by Reader’s Digest Association Limited (“Reader’s Digest”), packaged by the defendant, and through Bright Star re-used some of Midsummer’s copyrighted material in an earlier partworks publication Wildlife of Britain.

Three fundamental issues arise in this case, relating to:

Disclosure by the defendant of royalty statements and of the contracts between the defendant and Reader’s Digest shows that the defendant received a total of some £545,000 from Reader’s Digest of which the claimant alleges that Bright Star should have received up to 60%, namely £327,000. The sum which Bright Star actually received from the defendant was £73,819.07. The claimant therefore seeks the difference between £327,000 and £73,819.07 (after deduction of appropriate picture costs) and/or a proper account of the sums that are payable to Bright Star under the November Licence.

The claimant seeks relief under one or more of the following heads:

Bright Star, Midsummer and the defendant were all in the publishing business, trading in illustrated publications known as partworks. Following Bright Star’s incorporation in 1997 it was licensed to use some of Midsummer’s copyrighted material so that it might in turn grant such a licence to the defendant. Bright Star and Midsummer had from 1977 created and sold a number of partworks under the title Wildlife of Britain, comprising 135 issues which readers collected periodically to make up a collection relating to wildlife in Great Britain.

Between 1997 and 1999 the defendant lent Bright Star some £1m on terms that entitled the defendant to monthly interest (“the Loan”). The basic terms of the Loan are set out in Heads of Agreement dated 17 November 1997 (“the 1997 Heads of Agreement”) between Bright Star, the defendant and Mr Morse. As part of the arrangement the defendant took a 49% shareholding in Bright Star, took operational control of Bright Star’s financial accounts and set up a new account (the “Assignment Account”) on behalf of Bright Star to facilitate repayment of the Loan out of income earned by Bright Star and Midsummer. The documentation was prepared by Bretherton Price Elgoods, solicitors. Again as part of the arrangement, Mr Stanley and Mr Stephen Rose, two of the defendant’s directors at the time, were appointed to the board of directors of Bright Star. The 1997 Heads of Agreement also contained a publishing agreement.

From 1998 onwards there were negotiations between (1) the defendant and Bright Star/Midsummer and (2) the defendant and Reader’s Digest which led to the following written agreements (“the Agreements”):

In these arrangements the defendant acted as packager. For present purposes the role of the packager is to provide the publisher with complete laid out pages of text and photographs ready for printing in the publication. It must also ensure that all picture rights have been bought and are properly credited in the publication. Where the publisher does not own the copyright to a photograph that is used in the relevant publication a fee (“picture costs”) is paid to the third party owner of this copyright and the owner of the photograph is credited in the publication.

The effect of the Agreements was that the defendant made use of Midsummer’s published work Wildlife of Britain to package a series for licensed publication and sale by Reader’s Digest in their mail order market. As part of the arrangements with Reader’s Digest the defendant was originally to provide a plastic figurine with each book that was published, but this did not in the event happen.

Although the original projections by Reader’s Digest for the Wildlife Watch publication were substantially higher, it appears that some 265,000 books were sold at the price of £16.99 each.

In about 2007 the Loan came to an end although there is a dispute between the parties (referred to below) as to whether some of the interest on the Loan was written off or whether it was repaid in its entirety. In 2007 the defendant sold back its shareholding in Bright Star and Mr Rose and Mr Stanley resigned from the board of directors of Bright Star.

The claimant gave evidence that in early October 1998, that is to say before any of the Agreements were entered into, he had a telephone conversation with Ms Judy Sibley, the commercial director of the defendant at the time, to discuss the possibility of the defendant promoting certain of Midsummer’s copyright in a portfolio of publications including the Wildlife in Britain series, dividing the profits as to 60% to Bright Star/Midsummer and 40% to the defendant. The claimant then had a meeting with Ms Sibley over lunch in late October 1998. His evidence described it as a celebratory lunch, marking a deal between Bright Star/Midsummer and the defendant. He said there was,

“a general conversation about this new element of cooperation. There was no conflict of interest and we were of the same mind.”

On 26 October 1998 Ms Sibley faxed a letter to the claimant beginning:

“Many thanks for lunch the other day... I confirm below what we discussed”.

The letter went on:

“1.

Eaglemoss will package and sell books from the following partworks: Wildlife of Britain, Inside the Human Body, essential superbike and essentials of science. We were wondering if Hitler however would sit better with Amber Books’ military and aircraft brief. Stasz may well have the contacts to sell this material, in which case we’d be happy to relinquish it.

2.

For deals where the film [a printing term] is licensed and the publisher puts together the books, Eaglemoss will receive 28% of the profits, Bright Star 72%.

3.

For continuity series that we package for a publisher, Eaglemoss will receive 40% of the profits, Bright Star 60%.

4.

For trade, catalogue or promotional books that we package for a third party, Eaglemoss and Bright Star will split the profits equally.

We will pull material directly from your archives…We will also need to confirm the picture rights situation with the editor of each partwork.

I think that is all for now except to tell you we have a meeting with Reader’s Digest about Wildlife on November 11^th and will keep you informed…”

There was then a hiatus in the correspondence until 13 February 2003 (although it appears from for example recital (F) to the November Licence that there were intermediate agreements) when Mr Stanley wrote to the claimant in the following terms:

“I would also just like to clarify some points [from] Judy’s letter to you of 26 October 1998. Paragraph 3 of that letter states that for continuity series that we package for another publisher (such as Reader’s Digest) Eaglemoss will receive 40% of the profit and Bright Star 60%...

As part of the selling price will be represented by the figurine we will need to come to an agreement with you about the split in value between the figurine and the book. I suggest we discuss this when we know what the final deal with Reader’s Digest looks like and what their retail selling price is likely to be.

The project is about to go out to research…

If it does launch, the Reader’s Digest will want their Direct mail rights to be exclusive. Will this be a problem with IMP? Do they have any plans for the Wildlife of Britain material?”

On 20 March 2003 Mr Rose (who was Eaglemoss’s Financial Director) wrote to Bright Star about the terms on which the claimant and Mr Rose on behalf of the defendant were to postpone the crystallisation and payment of the Assignment Account. Mr Rose said:

“60% of the net profits that would have been due to Midsummer, will now be paid to Bright Star and again credited to the Assignment account”.

Mr Stanley wrote to the claimant again on 30 April 2003 in the following terms:

“I thought it would be helpful to set out the areas that need agreement between us on this book and figurine series...

Readers Digest will most likely pay a royalty of 4% net of VAT.

In return for this royalty and in view of the potential sales (Reader’s Digest are projecting up to 3 million units) they will want to receive the figurines at cost and the books redesigned with picture rights paid...

I suggest we proceed as follows:

1.

Development of the books will be done by us. We have already agreed to share the royalty on the book element 60%/40% in your favour. I feel that the picture payments should come out of the total royalties paid by the Digest for the books element...

3.

We, therefore, need to split the RSP net of VAT between the book element and the figurine, and allocate the royalty paid accordingly. I suggest 60% for the book and 40% for the figurines. We keep 100% of the royalty attributable to the figurine and the royalty on the book is dealt with in point 1 above.”

I note that at this point Mr Stanley specifically used the term ‘royalty’ rather than ‘profit’. The claimant wrote back to Mr Stanley on the same day on Midsummer paper, saying:

“Thank you for your letter of 30^th April. We agree to the terms set out therein.”

The claimant’s case is that the meeting and Ms Sibley’s faxed letter of 26 October 1998 gave rise to a binding agreement between the parties. This was, he said, evident from the final letter in the sequence in which he finally agreed terms.

Mr Darton asserts that the communications during October 1998 were the basis of a joint venture agreement between the parties that was intended to apply to all future arrangements between the parties and acted as an overarching contract for the exploitation of Bright Star/Midsummer’s material under which they would both share in the profits generated from this venture. He put forward the close relationship between the parties and the extent that the defendant controlled Bright Star/Midsummer’s accounts and had two of its directors on the board of Bright Star as further evidence of a joint venture.

Therefore the first question to consider is whether any of the events of October 1998 gave rise to a binding agreement between Bright Star/Midsummer and the defendant.

The defendant denies that there was any binding agreement between the parties before the November Licence. Mr Stanley’s evidence was that it would have been open to either party to withdraw from the proposed deal, although he accepted that he did not expect the claimant to do so. The recitals to the November Licence set out the relevant history of the dealings between the parties, and recitals (E) and (G) refer to specific letters between the parties dated 20 November 2003. As Mr Chapple pointed out, if there had been an existing agreement between the parties comprised in the previous correspondence one would have expected that also to have been referred to in the recitals contained in the November Licence.

Further the wording of Ms Sibley’s fax is in my judgment inconsistent with the existence of an agreement. It begins, “I confirm below what we discussed” and does not purport to be a record of an agreement or even of heads of agreement. It is rather a set of provisional intentions and cannot be construed contractually.

Although the later letters do contain words of agreement the claimant is here faced with a difficulty. The terms of the letter to which the claimant agreed refer specifically to a royalty and not to profits. Mr Darton appeared to concede that “royalty” is a term which has a technical and narrower meaning. He therefore relied principally on Ms Sibley’s letter rather than on the later correspondence.

I should say at this juncture that I was taken to the dictionary definition of royalty and indeed Mr Chapple said (and I was so struck by this contention in the context of these proceedings in which the meaning is very much in issue that I wrote it down) that “‘royalties’ is a simple English word”.

The evidence of Mr Stanley and Mr Rose was that there was never any question that profit meant anything other than royalty in the strict sense and that in the context of licensing partworks they saw no distinction between the two concepts.

The 2003 Reader’s Digest Contract (entered into almost two months before the November Licence) obliged the defendant to package Wildlife Watch for Reader’s Digest and recorded in the recitals that the defendant had:

“procured the rights to repackage and sublicense a weekly guide in partwork form entitled “Wildlife of Britain” which consists of 135 parts containing 40 pages each plus two cover pages”.

Clause 1 of the same contract defined the rights granted as,

“the sole and exclusive direct marketing volume rights in all issues of the Partwork”.

At clause 14(a) the defendant warranted that it,

“has full right power and authority to enter into the Agreement, to grant all the rights granted hereunder and to perform its obligation hereunder”.

As the November Licence had not yet been entered into, the claimant contends that if the defendant had procured these rights, as it said it had, it could only have been as a result of some pre-existing agreement. On the defendant’s case, until 27 November 2003 the defendant had been granted no form of licence to print, manufacture or publish Wildlife of Britain through direct marketing or otherwise. Therefore the question arises why the defendant would have said it had rights in the partworks and expended efforts to sell those rights before the November Licence unless there was already an agreement in place. Mr Darton submitted that it is clear that Ms Sibley’s letter of 26 October 1998 gave the defendant sufficient comfort to sell Bright Star’s copyright and gave Bright Star and Midsummer enough comfort not to interfere with negotiations and not to try to sell the copyright themselves.

In evidence Mr Stanley explained the particular difficulties of obtaining a continuity series deal with Reader’s Digest, thus again raising the question why the defendant would expend so much effort if there was no binding agreement with Bright Star and Midsummer enabling Bright Star/Midsummer to walk away from the arrangement.

During cross-examination I put to Mr Rose the question of whether it was open to the defendant or to Bright Star to say that they were not bound notwithstanding that the defendant had incurred costs. He answered that this would indeed have been possible. The claimant was not bound to allow the Wildlife Watch deal to go ahead although there was never any doubt in Mr Rose’s mind that the claimant would in fact do so, partly in his own interests and partly because the industry works on the basis of trust. Reneging on such understandings would affect future dealings between the parties.

I am satisfied on the evidence that the parties were negotiating contemporaneously and operated on this basis of trust and informality. Accordingly the defendant here was taking a risk, but one which, owing to the history of its relationship with the claimant, it considered justified. I accept Mr Stanley’s evidence that quite often the defendant entered into such arrangements without actually having contracts in place for the underlying rights, on the basis of the assumption that the other party would not prevent the arrangements from going ahead. I am therefore satisfied that the defendant entered into the 2003 Reader’s Digest Contract despite believing that Bright Star and Midsummer were not technically bound to the proposal.

The defendant’s characterisation of the 1998 phone call, meeting and fax between Ms Sibley and the claimant as “no more than an intention to collaborate in the future on terms to be agreed” must be correct. There was no intention to create legal relations at a time when a formal contract was contemplated which would deal with all outstanding matters in detail. In my judgment there was no binding contract between the parties until 27 November 2003 when the November Licence was entered into. There was certainly no such agreement as a result of Ms Sibley’s letter of 26 October 1998. As there was no binding contract there was perforce no Joint Venture Agreement.

Clause 11 of the 2003 Reader’s Digest Contract provided for the defendant to be paid:

“a royalty of 5% (five percent) of net revenue sales...calculated on the set selling price of £17.49”.

It also provided for the defendant to receive additional remuneration in the form of (a) £18,200 per test volume for editorial costs and (b) £1,750 for the creation of a new 6 page article for inclusion in Volume 2. The editorial costs are outlined more specifically as:

“Consultant, design, editing proof reading, picture rights (excluding those detailed in Schedule 1), picture credits, indexing”.

Schedule 1 of the 2003 Reader’s Digest Contract contained the book and sculpture specifications for Wildlife Watch but did not explicitly set out which were to be the picture rights excluded for the purposes of clause 11.

The 2004 Reader’s Digest Contract superseded the 2003 Reader’s Digest Contract. Clause 2 of the 2004 Reader’s Digest Contract stated that the parties agreed to produce 15 volumes of Wildlife Watch.

Under the heading “Editorial and Sculpture Payments, Royalty Payments and Inventory Accounting”, clauses 9 to 15 of the 2004 Reader’s Digest Contract included updated provisions about payment to the defendant by Reader’s Digest for the Wildlife Watch project.

Clause 9 of the 2004 Reader’s Digest Contract provided:

“In consideration of the Licensor producing the Work to RDA’s satisfaction, RDA hereby agrees to pay the Licensor £18,200 (eighteen thousand and two hundred pounds) per Volume on delivery of the material on CD-Rom for editorial costs as follows:

a Consultant, design, editing, proof-reading, picture rights (excluding those detailed in Schedule 2), picture credits, indexing.”

Schedule 2 to the 2004 Reader’s Digest Contract contained updated book and sculpture specifications for Wildlife Watch but again did not explicitly set out which were to be the picture rights excluded for the purposes of clause 9 a.

Clause 10 of the 2004 Reader’s Digest Contract provided:

“In addition, RDA agrees to pay the Licensor up to a maximum of £21,000 (twenty one thousand pounds) for the creation of new articles, as agreed, for inclusion in Volumes. This additional sum is to cover:

a New text, artwork, picture rights, design and editing.”

Clause 12 provided:

“RDA agrees to pay a royalty of 5% (five percent) of net revenue, being net sales (sales paid for in full excluding returns) calculated on the net selling price of £16.99 per Volume [a decrease in the selling price of £17.49 envisaged in the 2003 Reader’s Digest Contract].”

The November Licence permitted the defendant to re-package (“to publish and procure the publication of”) the Reader’s Digest book edition of Wildlife of Britain. The November Licence was drafted in-house by Mr Robert Morgan, Midsummer’s Operations Manager at the time, and Mr Soph Moeng, Midsummer’s Rights Manager at the time. Mr Moeng gave evidence that the November Licence was drafted on instructions received from the claimant and on the basis of the terms contained in Mr Stanley’s letter of 30 April 2003.

Clause 2 (a) of the November Licence provided that:

“…Eaglemoss shall at its own expense be responsible for any action or expense required by it in order to publish the Readers Digest Book Edition in a form suitable for its client RD, including the Picture Costs and all other third party costs.”

In clause 2 (b) ‘picture costs’ were defined:

“Without limiting the generality of the preceding sub-clause, Eaglemoss shall be liable for all costs involved in the clearing and paying of all picture rights (in respect of those images used in the Work or otherwise) for the Readers Digest Book Edition (‘the Picture Costs’).”

Under the heading “Royalties and Payment” Clause 5 defined the payments to be made by Eaglemoss to Bright Star in the following terms:

“(a)

Each volume of the Readers Digest Book Edition is expected to be sold with a model bird or similar gift. The net selling price for the combined book/gift product is expected to be £17.49, subject to further negotiation (“S”).

(b)

The split of royalties between the components of the combined book/gift product has been agreed as follows:

(i)

Readers Digest Book Edition= 60% (‘=0.6’)

(ii)

Model bird (sourced independently by Eaglemoss and therefore outside of any royalty arrangement with Bright Star) = 40%

(c)

The royalty rate, applicable to the combined product, at which Eaglemoss receives royalties from RD is expected to be 5%, subject to further negotiation (“R”).

(d)

Eaglemoss’s Net Book Receipts are defined as:

Eaglemoss’s Net Book Receipts = (0.6 x S x R) – P

where:

P= the Picture Costs

(e)

Eaglemoss shall pay Bright Star (to the credit of the Assignment Account) 60% of the Eaglemoss’s Net Book Receipts in respect of each copy of the Readers Digest Book Edition sold by or under the authority of Eaglemoss.

(f)

Eaglemoss (or RD) shall be responsible for payment of all direct costs related to the creation and production of the Readers Digest Book Edition. Such costs shall include, but are not necessarily limited to, the following:

(i)

supply of electronic files under clause 2(c);

(ii)

any further editorial costs incurred;

(iii)

printing and delivery of finished books.

(g)

For avoidance of doubt no royalties shall be paid by Eaglemoss to Bright Star on any sales of model birds (or similar gift) sold in association with copies of the Readers Digest Edition.”

In clause 7(a) of the November Licence the defendant undertook and agreed:

“to clear and pay for all necessary picture rights for use in the Readers Digest Book Edition”.

Clause 8 placed an obligation on the defendant in the following terms:

“Eaglemoss shall keep accurate accounts and records (together with all supporting vouchers) in respect of its exploitation of the rights granted to it hereunder including details of Picture Costs expended and shall if so required make such records, accounts and vouchers available to Bright Star or its authorised representatives.”

Clause 9 provided:

“On receipt of royalty payments from RD Eaglemoss shall within fourteen days pay to Bright Star (to the credit of the Assignment Account) the sums due to it under clause 5 hereof”.

As a matter of construction of the November Licence, I find that ‘R’ in the formula therein contained was the royalty strictly so called, that is to say the royalty payable under Clause 12 of the 2004 Reader’s Digest Contract, and did not include the other elements payable under Clause 9 of that Agreement.

There is no express term within the November Licence which provided that for the purposes of the formula in clause 5(d) picture costs should be considered to be zero when paid by Reader’s Digest rather than the defendant.

The claimant’s case is that the picture rights referred to in clause 11 were only those to which Mr Stanley had referred in his letter of 30 April 2003. He had there said that Reader’s Digest,

“will want…the books redesigned with picture rights paid” and that “I feel that the picture payments should come out of the total royalties paid by the Digest for the books element”.

Mr Chapple cited Mir Steel UK Limited v Morris [2012] EWCA Civ 1397 applying Investors Compensation Scheme v West Bromwich Building Society [1998] UKHL 6. The court must ascertain what meaning the November Licence would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the specific and admissible commercial context in which the contract was executed.

Mr Stanley and Mr Rose put forward the explanation that the claimant’s main concern in negotiations was ensuring that Bright Star/Midsummer were not liable for any of the costs. Mr Rose said in his witness statement:

“To state that had he known that Eaglemoss would recover these costs he would not have agreed to the formula as set out in the Agreement ignores the fact that Mr Morse, through all his experience and long involvement in the industry, would almost certainly have known that Eaglemoss would have sought to recover Picture Costs alongside all other Costs that would be incurred in order to create the books for Reader’s Digest.”

The method of calculation of payments contained in the November Licence is a purely mathematical prescriptive formula. I do not consider that this can be altered to exclude picture costs in fact borne by Reader’s Digest.

There was an obligation on the defendant, as between Bright Star and the defendant, to ensure that the picture costs were paid, but the defendant could discharge this obligation by having Reader’s Digest pay the picture costs. The parties to the November Licence were only Bright Star and the defendant and did not include Reader’s Digest. I note that the claimant’s concern in ensuring that costs were not incurred by Bright Star/Midsummer is demonstrated by clause 5(f) of the November Licence which says:

“Eaglemoss (or RD) shall be responsible for payment of all direct costs related to the creation and production of the Readers Digest Book Edition”.

I therefore find that on the true construction of the November Licence, the defendant was entitled to deduct an amount equivalent to the picture costs from the royalty payments.

I therefore agree with Mr Rose that in seeking for the November Licence to be construed so that ‘P’ only means picture costs paid by the defendant and not reimbursed by Reader’s Digest the claimant:

“is trying to retrospectively change the contract to reflect what he wishes the position to be”.

It is common ground that the total of £73,800 paid by the defendant to Bright Star was paid in three tranches: £35,676.72 in December 2005, £26,901.39 in February 2007 and £11,240.96 in December 2009. The first two payments were made applying a percentage of 36% (on the erroneous basis that the books had been sold with figurines) and were made without deducting picture costs. However it is accepted by the claimant that the third payment represented the balance owing to Bright Star for the missing 24%, but that this was after deducting the total picture costs.

The defendant’s evidence is that the sum of £102,246.20 was paid to third parties in respect of picture costs for the Wildlife Watch project. The claimant accepts that £102,246.20 was spent but does not accept that it had (until recently) been shown any documents proving what it was spent on. Mr Darton submitted that clause 8 of the November Licence was breached by the defendant by reason of the defendant’s failure to provide the claimant with accurate accounts of its receipts from Reader’s Digest and of expenditure on picture costs.

It is not suggested that the claimant or Bright Star/Midsummer asked for disclosure under this clause before the Loan was repaid in 2007. However there is a plain request in the letter from the solicitors to Midsummer and Bright Star dated 9 April 2010. I am told that in addition to this letter there was also an application for specific disclosure, culminating in an order, for details of the defendant’s expenditure on picture costs. The defendant was unable to (or at any rate did not) comply with this order or with the earlier request until the trial itself. I am therefore persuaded both that the claimant was unable to particularise its objections to the sum of picture costs claimed and also that there was a breach of Clause 8 of the November Licence. On that basis the claimant is entitled to an account of the sums said to have been expended on picture costs. While I agree with Mr Chapple that the costs of an account are likely to be disproportionate to the sums at stake that cannot be a reason in the circumstances for depriving the claimant of its remedy. I can only hope that the matter can be resolved in correspondence without the necessity of recourse to the Master.

Mr Darton seeks to get round the express terms of the November Licence in a number of further ways with which I propose to deal in turn:

The claimant seeks rectification of the November Licence for unilateral mistake on the basis that the defendant knew that Bright Star was signing the November Licence under a mistake as to its terms and effect which it had induced by its earlier correspondence and by its failure to disclose the fact of the fixed payments from Reader’s Digest over and above the royalty.

The claimant’s case is that due to the disparity between the terms of the November Licence and the understanding contained in the preceding correspondence between the defendant and Bright Star/Midsummer, the claimant is now entitled as assignee to claim rectification of the November Licence which was entered into by Bright Star under a unilateral mistake induced by and/or to the knowledge of the defendant.

Mr Darton placed heavy reliance on an email dated 2 August 2007 from Nina Hathway, the defendant’s then publishing manager, in which she reports to Mr Jarvis her negotiations to reduce Bright Star’s share of the “split” to 50%, saying,

“Couldn’t get it any lower as frankly we didn’t have a leg to stand on-the original agreement between Mark and Stan Morse Bright Star in this manner (why oh why? I will always wonder)”.

He says that this email is a fair indication that the defendant had no intention of disclosing the fixed payments and knew that the claimant was misled. However I do not read the email in this way. Once figures have been mentioned it is always difficult to negotiate upwards.

I observed Mr Stanley and Mr Rose in oral evidence and I accept that they acted in good faith. There is thus no cogent evidence that the defendant was aware of any mistake on the part of the claimant, let alone that it recognised and suppressed such knowledge.

Accordingly the claimant can only rely on common mistake. The court was referred to Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 at [48] (Lord Hoffmann):

“The last point is whether, if Chartbrook’s interpretation of the agreement had been correct, it should have been rectified to accord with Persimmon’s interpretation. The requirements for rectification were succinctly summarized by Peter Gibson LJ in Swainland Builders Ltd v Freehold Properties Ltd [2002] 2 EGLR 71, 74, paragraph 33:

“The party seeking rectification must show that:

(1)

the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified;

(2)

there was an outward expression of accord;

(3)

the intention continued at the time of the execution of the instrument sought to be rectified;

(4)

by mistake, the instrument did not reflect that common intention.””

The claimant contends that before the November Licence was signed by the parties they had an agreement or understanding as recorded in the letters of 26 October 1998, 13 February 2003 and 30 April 2003 and that to the objective observer these documents recorded an outward intention or agreement for the defendant and Bright Star to share the whole of the monies paid by Reader’s Digest under a 60/40 split, after deduction of picture costs and the agreed percentage for any figurines sold with the books.

The claimant does not need to establish that there was an agreement between the parties in February or April 2003, but only an outward objective expression of accord. Mr Darton asserts that the outward expression of accord was that the defendant and Bright Star were going to share the profits of the Reader’s Digest Wildlife Watch deal 60%/40% in Bright Star’s favour.

However, when considering the exchange of letters between the claimant and Mr Stanley on 30 April 2003, the outward expression of accord was that contained in Mr Stanley’s letter, “to share the royalty on the book element 60%/40% in Bright Star’s favour”, to which the claimant replied “we agree”. As I have said, Mr Darton accepted that “royalty” has a limited technical meaning. The issue is therefore whether on the facts of this case and in the events which happened both sides did in truth believe the expression royalty to include all profits payable to the defendant or whether the switch from use of the word ‘profits’ to use of the word ‘royalty’ was deliberately misleading.

The claimant contends that the other elements included in editorial costs were part of the services that a packager ordinarily delivered and were a substantial part of the work for which the defendant was to receive 40% of the royalties, as opposed to the 28% which was the percentage set out in paragraph 2 of Ms Sibley’s letter for deals where the packaging had not been carried out by the defendant.

Thus it follows, says the claimant, that the extra 12% as between paragraph 2 and paragraph 3 of Ms Sibley’s letter represents the costs attributable to packaging. It follows from this that if the defendant was being remunerated separately by Reader’s Digest by way of the fixed payments then this would have an effect on the royalty rate. Mr Rose, whom I believe to be an entirely honest witness, accepted in answer to a question from the court that in negotiations of this kind, the royalty rate would not be entirely independent from the fixed editorial payments, that there would be “some interrelation”, a “degree of relationship”, to the extent that accepting lower editorial payments would mean the publisher would be more likely to be prepared to offer a higher royalty rate.

However Mr Chapple asserted that there is nothing wrong with receiving royalty payments as well as a fixed packaging fee because they are for different parts of the work which the defendant carried out. The defendant’s case is that the 40% includes a finder’s fee, given the fact that Bright Star would not (he submitted) have been able to obtain a contract with Reader’s Digest directly. In other words, it was only the defendant’s contacts which obtained the Wildlife of Britain deal with Readers’ Digest at all.

The evidence of Mr Rose was that the fixed payments were only covering costs and the defendant did not make a profit on this element. He also said that the defendant had taken on a risk because it was receiving a fixed income from Reader’s Digest in respect of the editorial costs while facing an unknown development cost, owing to the fact that the packager cannot know in advance how extensively the publisher will require amendments. He said that while the defendant knew that a significant amount of costs would arise, it did not know exactly what they would be. Mr Chapple made the point that Reader’s Digest would have driven down the price of packaging owing to the fact that it would have had in–house capability to carry this out.

Accordingly I cannot find an outward expression of accord, a common continuing intention or indeed an intention by the defendant to take advantage of a known mistake made by the claimant or his companies. To put the matter at its highest in favour of the claimant, it seems that the parties were always at cross-purposes.

The claimant contends that as a result of the alleged joint venture agreement and the defendant’s management of the Assignment Account, the relationship between the defendant and Bright Star/ Midsummer was such that the defendant owed them fiduciary duties and therefore that the defendant should have disclosed the fact that it would be receiving fixed payments from Reader’s Digest separate to the royalty payments.

Where a fiduciary duty arises the fiduciary owes his beneficiary a duty of fair dealing which obliges him to make full disclosure in all transactions where a conflict of interest might arise. Without such disclosure the beneficiary cannot give informed consent and therefore the fiduciary will be in breach of duty.

Mr Darton relied on the following facts to assert that the relationship between the defendant and Bright Star/Midsummer was such that a fiduciary duty arose:

The claimant contends that the content of the fiduciary duty owed to Bright Star and Midsummer was such that the defendant was obliged to:

Mr Chapple referred the court to Ross River Ltd v Waveley Commercial Ltd [2012] EWHC 81 (Ch) at paragraphs 235 to 255 where Morgan J outlined the law in relation to fiduciary obligations. This includes at paragraph 236 the principle that:

“Fiduciary relationships do not commonly arise in a commercial setting outside the settled categories of fiduciary relationship. This is because it is normally inappropriate to expect a commercial party to subordinate its own interests to those of another commercial party.”

Mr Chapple took me to the 1997 Heads of Agreement for the terms of the loan facility between the defendant and Bright Star. It is in terms an agreement to lend money and purchase shares. The arrangement is properly characterised as one at arms’ length between parties with comparable bargaining power. I agree that there is nothing for a fiduciary duty to bite on. Clause 8 of the November Licence imposes an obligation to keep proper accounts and that in my view defines the extent of any fiduciary obligation owed by Eaglemoss to Bright Star. There is no pleading of how the alleged fiduciary duty is said to have arisen. It is not clear how a fiduciary duty other than a duty to keep proper accounts is to be imposed in relation to the general business relationship between the parties.

Mr Chapple also referred to Briggs J’s decision in Ross River Ltd v Cambridge City Football Club Ltd [2008] 1 All ER 1004 (Ch) at [197],

“In relationships falling short of partnership, but having in them elements of joint enterprise or joint venture, there is no hard and fast rule as to the existence or otherwise either of a duty of good faith, a fiduciary duty or a duty of disclosure. Each case will turn on its own facts, but if the relationship is regulated by a contract, then the terms of that contract will be of primary importance, and wider duties will not lightly be implied, in particular in commercial contracts negotiated at arms' length between parties with comparable bargaining power, and all the more so where the contract in question sets out in detail the extent, for example, of a party's disclosure obligations.”

Mr Chapple thus contends that even if there had been a joint venture agreement, the situation would fall within the above paragraph from Ross River and therefore the November Licence would be of primary importance. Duties wider than those expressed in the November Licence should not be implied.

I find that there was no wider fiduciary duty owed by the defendant to Bright Star/Midsummer so that there is accordingly no need to consider whether one has been breached.

Where a party has been induced to enter into a contract as a result of a misrepresentation the provisions of the Misrepresentation Act 1967 will apply so that in certain circumstances damages may be available. Section 2(1) of the Misrepresentation Act 1967 provides:

“Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made the facts represented were true.”

The claimant’s case is that by Mr Stanley’s letter of 13 February 2003 the defendant represented that Bright Star would receive 60% of all the profits earned by the defendant in its arrangements with Reader’s Digest in respect of Wildlife Watch after deduction of an agreed percentage for the revenue attributable to the figurines, and deduction of picture costs.

The key question is again what is meant, and what the defendant intended the claimant to understand, by the term ‘royalty’ or ‘royalties’, the terms used in clause 5 of the November Licence. The claimant avers that royalties must include the fixed payments received by the defendant from Reader’s Digest in addition to the 5% royalty payments, such that the representation was that Bright Star would receive 60% of the total amount (minus cost properly deducted) received by the defendant from Reader’s Digest.

It was the claimant’s case that if the defendant had disclosed the fact of the fixed payments by Reader’s Digest the same terms would not have been negotiated between the parties to the November Licence. Mr Darton submitted that the claimant would have argued that the terms of Ms Sibley’s letter should apply. However, owing to the defendant’s non-disclosure, Bright Star lost the opportunity to renegotiate the contract such that damages should put the claimant, as assignee of Bright Star and Midsummer, in the position that they would have been in had the tortious misrepresentation not been made. Therefore one must consider the contract that the parties would have made had disclosure taken place.

Bright Star only received 60% of the 5% royalty payments. Therefore Mr Darton submitted that the letter of 13 February 2003 contained a misrepresentation. The claimant’s case is that notwithstanding that the misrepresentation was not made fraudulently, the defendant is liable to pay damages to the claimant because it has not been established that the defendant had reasonable ground to believe and did believe up to the time the contract was made (27 November 2003) that Bright Star would receive 60% of all amounts received by the defendant in respect of Wildlife Watch (minus costs), rather than 60% of the 5% royalty payments.

Mr Darton said that this amounted to a promise to pay 36% of the money received from Reader’s Digest (or 60% if figurines were not sold with the books) into the Assignment Account and that Bright Star accepted this promise by executing the November Licence such that the representation became a collateral term to the November Licence or a collateral contract, which (given that the figurines were not sold) obliged the defendant to pay 60% of the “fixed payments” received from Reader’s Digest as well as 60% of the net book receipts into the Assignment Account.

There was no expert evidence from either side of the record as to standard industry practice. Instead Mr Chapple submitted that the claimant would have known that arrangements would be in place obliging Reader’s Digest to make fixed payments as a packaging fee to the defendant. Again it was said that without the defendant’s contacts and relationship with Reader’s Digest, the Wildlife of Britain deal would not have been possible. In argument Mr Chapple described the defendant as a middleman or an introducer and stated that this was a distinct role from that of packager. He compared the defendant to a wholesaler who is allowed to seek a deal at both ends of the chain; wholesalers do not have to open their books to retailers or suppliers because then their profit would disappear.

In answer to the question of what was represented by the extra 12% due to the defendant for its obligations under paragraph 3 of the letter of 30 April 2003 as compared to paragraph 2, Mr Stanley maintained that this was because paragraph 3 relates to continuity series which are more difficult to sell rather than a single book deal as covered by paragraph 2. As such the defendant contends that the 12% difference does not relate to its additional role as packager and therefore does not affect the fixed payments.

Mr Stanley gave evidence that:

“ ...to Eaglemoss the reference to ‘profits’ is no more than an intention that there be a royalty share on that basis if the material is licensed on a royalty basis... Eaglemoss entered into the Licence Agreement in the belief it reflected what had been agreed between the parties”.

Thus the defendant’s case is that the payment from Reader’s Digest to the defendant for additional services to be provided to Reader’s Digest was not part of the profit sharing agreement in relation to the royalties. There was nothing in the letters of 13 February 2003 and 30 April 2003 to say that the defendant was not receiving fixed editorial payments from Reader’s Digest. The term ‘profit’ in the earlier correspondence did not mean anything other than royalties and Bright Star did receive 60% of the royalties.

Again, the question is the fundamental one of what the parties believed was meant by ‘profit’ and ‘royalties’. Having heard all the evidence it seems to me that the defendant is right and that the claimant’s real grievance stems from his dissatisfaction after the event with the money actually made by the defendant from the arrangements with Reader’s Digest.

Therefore I do not find that there was a misrepresentation by the defendant and as such the claimant is not entitled to damages on this ground either.

Mr Darton on behalf of the claimant submitted (and Mr Chapple on behalf of the defendant denied) that although Midsummer was not a party to the November Licence, its consent had been required for the agreement set out in the letters of 30 April as they provided for sums which might otherwise be due on the exploitation of the copyright in Wildlife of Britain to be paid into the Assignment Account, and this consent was given pursuant to an agreement which was collateral to the November Licence. He said that this collateral agreement was only entered into by Midsummer as a consequence of the defendant’s misrepresentations.

As I am not persuaded that there was any such misrepresentation as alleged I also find that there was no such collateral contract.

The claimant argues for an order for interest on the monies which were paid belatedly into the Assignment Account. Clause 9 of the November Licence required the defendant to pay Bright Star the sums due to it under clause 5 of the November Licence within 14 days of receipt of royalty payments from Reader’s Digest.

The amended particulars of claim allege that as Bright Star agreed to pay the defendant interest at 2.5% above base rate on part of the Loan and 15% on the relevant part the claimant would have saved interest charged to this assignment account up to 7 February 2007. The claimant asserts that if all payments had been made by the defendant within 14 days of receipt of the royalty payments Bright Star would have saved some £18,436 in interest which the defendant charged to the Assignment Account. Thereafter the claimant seeks interest pursuant to statute or equity.

The defendant says that it has no liability for interest since (a) interest on the Loan was not paid in full. It was invoiced to Bright Star until September 2004 and paid or offset against royalties but thereafter no invoices were rendered in respect of interest. It is said that interest of £106,665.54 was written off on repayment of the Loan. It is also said that (b) in any event, the claimant has not explained how interest claimed is calculated.

Mr Morgan’s account is (see his email to Mr Jarvis of the defendant of 10^th September 2009) as follows:

“It looks like the reason you don’t have a record of interest being charged after a certain date is that it was calculated separately but not accrued until we acquired Eaglemoss’s shares in Bright Star in 2007, at which point the outstanding interest was deducted pro rata and net of tax when calculating the share purchase price.

I am writing to the lawyer who acted for Eaglemoss at that point for clarification of this, and collating the paperwork for your information. I should be back to you early next week. I think once you have these documents it will all make good sense (even if the above is not clear).”

On 29 September 2009 Mr Jarvis replied,

“I have heard nothing yet re the resolution of the final interest payment. It would be very useful to have his clarification that the unpaid interest was dealt with at the time of the settlement as it is not apparent from the documentation we have…”

He chased in similar terms on 21 October 2009. Then on 2 December 2009 he wrote to Mr Morgan as follows:

“Further to discussions with Richard Bretherton and the receipt of various documents I agree that there is no outstanding interest unpaid against the Settlement Account.”

It therefore looks as if it was accepted that there was no interest outstanding, but it is still not at all clear whether late payment of the royalties was also taken into account on the share acquisition in 2007. It seems that there may have been some sort of overall settlement in relation to interest at that stage.

The only other assistance I have been able to glean is a note of how the share price was calculated contained in a draft letter from Bright Star’s solicitors to Midsummer’s solicitors of 24 January 2007. However that letter is of very limited assistance, if any.

I have found it impossible to get to the bottom of the interest question because I have not been taken through the accounts in sufficient detail and I suspect that it would in any event have been disproportionate for counsel to have done so. Accordingly I cannot award interest to the claimant.

I should add that the claimant makes a separate claim to interest under the provisions of the Late Payment of Commercial Debts (Interest) Act 1998. By s. 2 this Act applies to a contract for the supply of goods or services where the purchaser and the supplier are each acting in the course of a business, other than an excepted contract. The expression “contract for the supply of goods or services” is defined to mean (inter alia) a contract by which a person agrees to carry out a service for a money consideration. While the Agreements between the defendant and Reader’s Digest may be agreements to carry out a service (because of the packaging requirements of Clause 7)), the November Licence is to my mind just that, a licence, and is not (despite the defendant’s undertakings in Clause 7) an agreement to carry out a service. The Act does not therefore apply.

I find the correct construction of the November Licence was that the claimant was only entitled to a proportion of royalties in the strict sense. I find that picture costs were to be deducted from the royalty payments although the claimant is entitled to an account of the sums said to have been expended on picture costs. I find that there was no intention sufficient to satisfy the prerequisites for a rectification of the November Licence. I find that no fiduciary relationship existed between the parties and the defendant did not therefore owe any fiduciary duties to Bright Star. I find that there was no misrepresentation on the part of the defendant which induced Bright Star to enter into the November Licence. I find that there was no collateral contract as alleged. I do not find that the claimant is entitled to interest to the extent that payments under the November Licence were made late.