Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
MR JUSTICE WARREN
Between :
(1) BILL STRAW (2) BLIX STREET RECORDS INC. | Claimants |
- and - | |
(1) GRAEME MARTIN JENNINGS (2) BEYOND THE SEA LIMITED (3) BEYOND THE SEA PTY LIMITED (4) DIDGERIDOO RECORDS PTY LIMITED | Defendants |
Andrew Hunter QC (instructed by Michael Simkins LLP) for the Claimants
Mark Vinall (instructed by Russells) for the Defendants
Hearing dates: 5th, 6th, 7th, 10th, 11th,12th, 13th, 14th June, and 11th July 2013
Judgment
Mr Justice Warren :
Introduction
This case concerns the commercial exploitation of the recordings of the American vocalist Eva Cassidy (“EC”). She died at the young age of 33 on 2 November 1996. Although not well-known in her lifetime, she became famous after her death largely, if not wholly, through the promotion and distribution of her works by the parties to this litigation. The dispute between the parties concerns the proper way in which the profits and perhaps losses arising from different aspects of that commercial exploitation are to be shared between the claimants and the defendants.
Following EC’s death, the first claimant (“Mr Straw”) obtained from the Cassidy family an exclusive licence to EC’s recordings. Subsequently, Mr Straw’s company, the second claimant (“Blix”), became the exclusive licensee. Mr Straw, and later Blix, became the owner of the worldwide distribution rights to EC’s catalogue.
In the spring of 1998, Mr Straw made an oral agreement with the first defendant (“Mr Jennings”). This oral agreement was never reduced to writing; nor did it cover expressly some important areas which a formal written agreement would almost certainly have covered. The essential provisions of the oral agreement, for the purposes of the present litigation, were that Mr Jennings or his companies would distribute the recordings of EC in respect of which Mr Straw held the exclusive licence in certain territories outside North America, principally the UK and Australia, but also other European countries excluding the Republic of Ireland. The profit would be shared equally. The companies concerned are the second to fourth defendants, Beyond the Sea Ltd, an English company (“BTSL”), Beyond the Sea Pty Ltd, an Australian company (“BTSPL”) and Didgeridoo Records Pty Ltd, another Australian company (“Didgeridoo”). I shall refer to Mr Jennings and to the companies collectively simply as “the Defendants”.
The parties did not expressly agree what items would be brought into account in ascertaining the profit of their joint venture (no-one has suggested that there was a partnership). This eventually gave rise to some discord when, on the first accounting by the Defendants, a deduction was made for their benefit of 30% of the income received as a distribution fee in relation to UK and Australian sales (the main markets) and 10% for exports.
Mr Straw objected to that deduction. He considered that there was no entitlement to charge in this way for the work done by the Defendants in relation to the distribution element of the business. Mr Jennings was of the view that it was permissible to charge in this way, the 30% figure representing, in relation to UK and Australian sales, roughly 10% direct costs, 10% overheads and 10% profit. The parties eventually resolved this element of dispute by agreeing that the profit element should be ascertained on the actual figures and be split equally between Mr Straw and Mr Jennings (or between Mr Straw and Blix, on the one hand and the Defendants on the other). The profit element was to be ascertained by deducting the costs of the Defendants’ distribution business attributable to recordings within the scope of the joint venture from the distribution fee.
Either at the same time or as a later variation (it does not matter which) it was agreed that not only would the direct costs of the non-distribution aspects of the business be deductible as an expense in ascertaining profits, but also that an apportioned share of the indirect costs (ie overheads including wages) would be deductible.
In the context of the overall venture the result was thus that Mr Straw and his interests would receive:
50% of the net profits arising from the non-distribution elements of the venture after deduction of the 30%/10% distribution fee (I refer to the resulting figure as “the Net Profit Share”); and
50% of the profit element of the 30% distribution fee, that is to say the amount by which 30% of gross receipts exceeded the distribution costs including overheads attributable or apportioned to the distribution business (“the Distribution Profit”).
Following this agreement, the venture thus had two elements (albeit that they formed part of a single enterprise). First there was the creation, promotion and exploitation of recordings (or what can be referred to as the label activities). The second was the distribution of recordings, principally in the form of physical discs, to retailers or other purchasers. The first element has been referred to in these proceedings as “the Joint Venture” or “JV” and the second element as “the Distribution Agreement” or “DA”. I will use the acronyms.
The JV was terminated on 31 July 2006 in the circumstances explained in more detail below.
There has been accounting by the Defendants in relation to the Net Profit Share under the JV although some comparatively minor adjustments are claimed by Mr Straw and Blix. There was some accounting in relation to the DA but this was reversed in the circumstances which I shall explain later. Mr Straw and Blix originally claimed their share of the profit which they allege is due under the DA and sought the taking of necessary accounts. The claim is now for a quantified amount as I will explain.
Issues
In his opening submissions, Mr Andrew Hunter QC (who appears for Mr Straw and Blix) indicated that he would not be pursuing certain aspects of the pleaded case principally on the basis that they involved comparatively small sums of money and that it would be disproportionate in terms of time and further expense to the pursue them. Further, the pleading originally claimed an account. Following amendment after disclosure had been given, the claim has been quantified and it is said that an account is no longer required (or pursued). The claim is for £1,625,332 plus interest.
The remaining issues in relation to the Distribution Agreement can be identified as follows:
Its terms in relation to
losses and
the periods in respect of which profit (or loss) should be ascertained.
The correct approach to the ascertainment of Distribution Profit and the correct figures to use.
Whether I should determine the amount of the Distribution Profit as part of the present hearing or whether the matter should be sent off for an account to be taken.
Assuming that I determine the amount myself, the actual amount due.
I say a little more about those issues at this stage.
As to issue i) a), it is common ground that there was no express agreement about this. The only agreement was that the Distribution Profit was to be shared equally. Mr Hunter submits that the agreement to share profits does not carry with it an implied agreement to share losses. Indeed, he goes so far as to say that there is an implied term that losses would not be shared. The point will be academic if, as Mr Hunter submits, there was on the facts no loss either over the whole period of the venture or in any period of account which might reasonably be adopted, whether a quarterly, 6-monthly or annual period of account.
As to issue i) b), Mr Straw’s case is that the Distribution Profit ought to have been calculated periodically with his share of the profit for the relevant period being distributed to him or Blix. Further, neither he nor Blix is liable to contribute to the loss, if any, revealed for a particular period of account. Mr Jennings’ case is that the profit or loss should be ascertained over the whole period of the JV with the final profit or loss being shared. Failing that, he says that Mr Straw or Blix are obliged to share in the loss for any period of account in which a loss is shown.
As to issue ii), Mr Hunter submits that the correct methodology to adopt is that appearing from the account sent by Mr Stewart to Mr Straw under cover of an email dated 11 April 2005 (“the April 2005 Account”) for the period ending 30 June 2004. This is an important document which I will be considering in some detail later in this judgment. Essentially, one starts with the income over the relevant period and deducts from it the direct and indirect costs; evidentially, those costs are established by the April 2005 Account. In contrast, Mr Mark Vinall (who appears for the Defendants) submits that the approach adopted by Mr Spencer is correct. Under that approach, one starts with the financial accounts prepared for the purposes of statutory accounts and tax returns for BTSL, BTSPL and Didgeridoo which show a “Reported Profit”. The Distribution Profit is then ascertained by reference to the formula:
Distribution Profit = Reported Profit Before Tax – JV Profit Share – non-Eva profit
That formula comes from the evidence of Mr Spencer. He accepts that it requires adjustment, in particular the Reported Profit Before Tax must be increased to reflect the inclusion in that element of amounts which are not deductible in computing Distribution Profit.
As to issue iii), Mr Hunter submits that I have sufficient material to show what is owing without the need to refer anything for the taking of an account. Mr Vinall submits that this is not appropriate even if the methodology proposed by Mr Hunter is correct and, a fortiori, if the methodology which he proposes is correct. Mr Vinall originally submitted that it would be shown, if an account is taken, that there was an overall loss on the distribution business for the period of the JV so that no payment on account of profits should be awarded to Mr Straw or Blix, which was the fall-back position which Mr Hunter advocated. This is no longer sustainable in the light of the evidence given by Mr Spencer.
There are limitation issues in relation to the Distribution Agreement claim which I will deal with in due course.
There are also issues on the counterclaim. Mr Hunter submits that the whole counterclaim is misconceived for a variety of reasons, not the least of which is that Mr Jennings cannot establish any ownership rights in the material concerned. The disputes turn, to some extent, on disputes of fact about the contribution of Mr Jennings to the allegedly infringing material.
The Witnesses
The following witnesses of fact were called on behalf of Mr Straw and Blix: Mr Straw, Mr Graeme Regan and Mr Alan Stewart who were all cross-examined by Mr Vinall. Evidence from Ms Belinda Cole (“Ms Cole”) was also before the court in the form of a witness statement in respect of which a hearsay notice had been given, she being resident in Australia. Expert evidence on behalf of the claimants was given by a chartered accountant, Mr Austin Jacobs.
On behalf of the Defendants, the witnesses of fact were Mr Jennings and Mr Stuart Spencer, who were cross-examined by Mr Hunter. No expert evidence was adduced by the defendants.
The events in question occurred some years ago. It is not surprising, therefore, that the recollection of all of the witnesses was incomplete. It was often difficult to tell whether what was said was genuine recollection or reconstruction. It is apparent that matters were dealt with informally. Thus, in relation to the formation of the original agreement and its subsequent variation, much was left unsaid. And in relation to communications between the individuals involved in the running of the JV and the DA, much of it was oral with no record of any sort being kept of conversations.
Mr Straw was, I consider, an honest witness doing his best to help the court. But there were aspects of his evidence which were not altogether satisfactory. There was, however, quite a lot of peripheral material emerging from his cross-examination. It is not necessary to resolve all the factual disagreements which were raised; I will in due course deal with his evidence so far as is necessary to resolve the issues which I need to decide. The areas in which his evidence was not altogether satisfactory do not lead me to conclude that his evidence generally is unreliable.
There is only one matter concerning his evidence which is a matter for comment at this stage. During the course of proceedings against the Cassidy family in the US, Mr Straw gave evidence by way of deposition in October 2005. In the course of what was a quite lengthy examination, he gave an answer which is now known to be incorrect. He stated that the topic of splitting the Distribution Profit had not come up for discussion by July 1999. There was produced to me a copy of a memorandum prepared by a Mr Paul Bater, a cousin of Mr Jennings and a tax adviser, which he sent to Mr Jennings on 1 April 1999. It was sent to Mr Straw at about that time. The copy of the memorandum which I have just referred to contains manuscript annotations made by Mr Straw.
The memorandum describes at section D the EC record distribution structure. For the US, “BS Co. contracts out manufacturing & distribution [to 3rd parties?]” against which Mr Straw’s annotation is “Yes”. For the rest of the world, (i) “BS Co. licences MJ to manufacture [where?] & distribute” against which Mr Straw’s annotation is “territories to be worked out” and (ii) “BS Co. retained 50% of net profit (after deducting MJ’s distribution fee)” against which Mr Straw’s annotation deletes “distribution fee” and substitutes “direct costs & pro-rated overhead”. In section E, Mr Jennings’ distribution fee is stated to be 30% which was to cover “direct costs, packing and freight (1/3) labour and overheads (1/3) and profit before tax (1/3)”. These, of course, could only have been estimates of the proportionate split between the three elements of the fee. A line drawn by Mr Straw shows that his reference to direct costs and pro-rated overhead is a reference to the first two elements of the distribution fee.
It is said by Mr Vinall that this incorrect evidence from Mr Straw shows that he is at best unreliable and at worst willing to give knowingly incorrect evidence to further his cause, as his evidence in the deposition would have helped his cause against the Cassidy family.
In contrast, Mr Hunter says that there is no ground on which to draw adverse inferences against Mr Straw. He points out – and this is common ground – that an actual agreement about Distribution Profit was not reached until December 1999 but the timing of discussions was less clear. It was only with the benefit of the Paul Bater memorandum that it has become possible to surmise that the topic was first discussed during or soon after April 1999. Mr Straw did not have, and was not taken to, the memorandum during the course of his deposition. The events in question had taken place more than six years before the date of the deposition. Mr Straw’s own evidence before me was that what he said in his deposition was an “honest mistake”. Mr Hunter characterises that as a credible explanation. I agree and do not think that there is anything in the point which should make me question Mr Straw’s honesty and credibility.
Mr Regan was a helpful witness. He had in the past worked with Mr Jennings as a business partner, being a shareholder and, for a period, a director of Didgeridoo and BTSPL. Although he had parted ways with Mr Jennings on perhaps not the most friendly of terms, I reject any suggestion that his evidence was deliberately slanted in favour of Mr Straw and against Mr Jennings.
Mr Stewart’s evidence is not easy to assess. He came across as a straightforward individual. But there is no doubt that his memory about the events in question is less than perfect and I consider that there was a fair measure of reconstruction not only in what he accepted as such but also in what he said was actual recollection. He accepts that his health, both physical and mental, was not good at a critical time and that he was under considerable stress. I do not doubt that he believed the truth of what he told me but I have to treat with a great deal of care what he had to say about the preparation of the April 2005 Account and in particular about Mr Jennings’ instructions in relation to them. I do, however, reject Mr Vinall’s suggestions that Mr Stewart’s evidence was somehow slanted against Mr Jennings and that Mr Stewart bore ill-will to Mr Jennings.
Mr Jennings was a less than satisfactory witness. He was evasive in the extreme about all matters to do with money, especially in relation to his own financial affairs about which he was cross-examined at some length in order to ascertain where the large profits made by BTSL and BTSPL had gone. It was, after all, cash-flow difficulties which were blamed, at the time in 2005, for the need to claw back payments made to Mr Straw on account of his share of distribution profit (see paragraph 120 below) and their re-allocation as profits of the JV so that Mr Hunter was perfectly justified in attempting to get to the bottom of what Mr Jennings had received and when. Mr Jennings, who had set up a structure of trusts and companies to hold his assets, professed total ignorance of any detail of the structure or of what assets had been placed within it. He says that he did what he did on advice and left everything to the professionals. No doubt he did do it on advice; but equally he must have given instructions to the professionals to shelter his assets and must have known that assets of considerable value were placed in the structures. He was not able to state clearly the purpose of the structure. I do not believe that Mr Jennings was as ill-informed as he professed to be. I consider he was well aware of the magnitude of the value of the assets he had caused to be placed into the structures and was well aware of the purpose of doing so, a purpose which was frankly revealed by Mr Spencer as I will describe in a moment.
Equally surprisingly, he professed a remarkable lack of knowledge about the financial position of his companies in relation to the JV and the DA. I would not necessarily expect him to know the detail of income and expense at any particular time, but his evidence really came to this: that, at least at the critical time when the April 2005 Account was prepared, he had no idea of the financial state of the distribution business, having only a general “feel” for how things were going. I find it hard to believe that Mr Jennings was so focused on other aspects of the business that he was in effect leaving the financial side to Mr Stewart. Quite the reverse: Mr Jennings was, I consider, deeply involved in all aspects of the business; he was a very hands-on operator.
Given his evasiveness in relation to his personal financial arrangements and his distancing of himself from the financial state of his companies, I am very circumspect about other aspects of his evidence. My circumspection is reinforced by a number of areas which I will identify and discuss in due course, including the existence and purpose of certain licence agreements, his evidence about Redlands, his stated explanations of the cash-flow crisis within the Defendants in 2004, his tax affairs and his evidence about the 2005 accounting.
As with Mr Straw, it is not necessary to resolve all the factual disagreements which were raised and I will again in due course deal with his evidence so far as is necessary to resolve the issues which I need to decide.
Mr Hunter’s cross-examination of Mr Spencer commenced with questions about the structure for holding Mr Jennings’ assets to which I have referred. Mr Spencer was closely involved with the setting-up of these structures. He was also involved in what Mr Hunter describes (a description from which I would not dissent) as extremely aggressive creative accountancy in the preparation of financial statements and accounts for Mr Jennings’ companies, in particular for BTSL. Mr Spencer was very reluctant to answer Mr Hunter’s questions. He did not dissemble, but he did evade. However, when pressed, he did frankly admit that the purpose (or at least, one of the purposes, since tax avoidance was clearly also a purpose) of the structures I have mentioned was to take assets out of the reach of creditors such as Mr Straw and his companies. I would only add that the very nature of the structures was, it seems to me, not only to take assets out of the reach of creditors but also to hide them from creditors.
Having got that aspect of his evidence out of the way, Mr Spencer became more relaxed and fluent. I accept his evidence on matters of fact. However, his evidence went into not only what he had done in relation to the preparation of accounts but why he had done it. Some of it was more in the nature of expert evidence which it was not his role to give. I am therefore careful not to attach undue weight to it.
The only expert evidence came from Mr Jacobs. Mr Hunter submits that his evidence was “measured, neutral and authoritative and that he plainly had extensive highly relevant experience as a royalty and net profit share auditor of many years standing. He drew on industry contacts (for instance from Australia) to further inform his opinions”. I am invited to accept his evidence in its entirety.
Mr Vinall is critical of Mr Jacobs’ evidence and says that I should not place reliance on it. I summarise his closing submissions on this matter in the following paragraphs.
Mr Jacobs was over-enthusiastic in his client’s cause. This caused him (i) to make a number of assumptions in favour of Mr Straw and Blix which were unexplained and unjustified (ii) express categorical opinion where there was a range of opinions which it was his duty to explain and (iii) become an advocate in his clients’ cause on matters of accountancy expertise and fact.
Mr Vinall submits that, under cross-examination, Mr Jacobs was reluctant to accept reasonable points put to him which might tend to undermine the case against Mr Straw and Blix. He submits that Mr Jacobs repeatedly refused to acknowledge that “he had stepped outside the proper bounds of the role of an expert witness, even in the context of the clearest example of his doing so”. This, he says, must cast grave doubt on whether he really understood the nature of an expert’s task of providing the sort of independent opinion which one finds referred to in the Protocol for the Instruction of Experts (see paragraphs 4.3-4.4 at 35.19 of the White Book).
What Mr Vinall draws from this is that I should treat Mr Jacobs’ opinions with considerable circumspection, and should not rely on them when they cannot be seen to be clearly supported by the underlying evidence.
Mr Hunter submits that these criticisms are unjustified. He accepts that Mr Jacobs was not an expert with experience of anything like this particular profit-sharing agreement. As both sides agree, this agreement was pretty much unique. No-one in the world has expertise and experience directed at it. Mr Jacobs was, however, a real expert in the world of profit-sharing agreements generally; he has great experience of profit-sharing agreements and of the accounting and auditing processes in relation to them. I agree with Mr Hunter that Mr Jacobs’ expertise qualifies him to provide assistance to the Court.
I have no doubt that Mr Jacobs was an honest witness and doing his best to help the Court using the financial information available to him which, even on the most charitable analysis, was inadequate. It was necessary for him to make assumptions to fill the gaps and, where he has done so, it is clear what he has done. I do not think that he can be criticised for that. I see no reason to think that, in the areas where he does have expertise, the opinions which he has expressed should not be accepted. After all, this is not a case of competing experts where the sort of points made by Mr Vinall might support the conclusion that the expert view of one expert should be rejected in the face of an opposing view.
My conclusion is that I can place reliance on Mr Jacobs. But that is not to say that every aspect of what he says is the end of the story. Ultimately, all of the questions are for the Court, and where he has trespassed into areas where Mr Vinall says he should not have trespassed, I take careful account of what is truly a matter of expertise, what is reasonable assumption to enable an expert opinion to be proffered and what is inadmissible speculation.
The Pleadings
The Claim Form was issued on 8 April 2011. The Amended Particulars of Claim (“the APoC”) on the basis of which the action came to court are dated 27 March 2013. The APoC plead the case in relation to the initial agreement between Mr Straw and Mr Jennings, the JV and the DA.
They identify the document which led to the initial dispute about a distribution fee. In March or April 1999, Mr Straw received an accounting statement for the period 1 July 1998 to 31 December 1998 (“the 1999 Account”). There is no dispute that such an account was received or about its contents. In the 1999 Account, the net profits of the venture were calculated with deductions for (i) a “distribution fee” equal to 30% of the gross receipts and (ii) in-house overhead and staff costs.
The pleaded case is that these deductions were not permissible in the light of the terms which Mr Straw and Blix say were to be implied into the original agreement. I do not need to decide the case about implication, because the matters were subsequently dealt with expressly as I have indicated in the introduction to this judgment.
The APoC then identify the dispute which arose about whether those deductions had been properly made. In mid-2000, the parties agreed orally to compromise that dispute on the basis that the Defendants could charge (i) a distribution fee capped at 30% of revenues provided that the profit element of the distribution fee, estimated at one third of it (ie the Distribution Profit as I have defined it) would be shared equally between Mr Straw and Blix on the one hand and the Defendants on the other.
It is pleaded, and is common ground, that no express agreement was made about when the Distribution Profit should be accounted for. Mr Straw and Blix did not insist on any particular time or sequence of intervals. Mr Straw and Blix contended that there was an implied agreement that the Defendants should account to Mr Straw and Blix for their share of the Distribution Profit at some point during the DA or, at the latest, within a reasonable time after it had been terminated.
The APoC refer to two payments on account of Distribution Profits which were made: £500,000 in December 2001 and £175,000 in January 2003 (“the Payments on Account”). There is no dispute that these payments were made.
The APoC allege that in February 2005, the Defendants proposed that those payments should be re-allocated as payments on account of the share of profits of Mr Straw and Blix under the JV and that their share of the Distribution Profit should instead be paid over a period of 8 years and 10 months from January 2005. It is alleged that Mr Straw and Blix did not agree to this and that the Defendants nonetheless did effect the proposed re-allocation with the result that the share of Mr Straw and Blix in the net profits of the JV was calculated and paid accordingly. I shall return to this aspect of the case in due course.
The APoC then assert that it was implicit in the Payments on Account and the subsequent proposal and re-allocation of those payments that the Defendants had acknowledged that the share of Mr Straw and Blix in the Distribution Profit was at least £675,000.
I will be looking at the April 2005 Account in more detail later. It is enough for the moment to say (i) that the sum stated as owing to Mr Straw and Blix was £758,127 and (ii) that Mr Straw and Blix contend that certain deductions appearing in the April 2005 Account were wrong in principle. The impact of correcting these alleged wrongful deductions is to increase the amount due by £867,205.
The APoC plead that the JV (and thus the DA too) was terminated by consent on 31 July 2006. That is common ground.
The APoC then set out the claims in respect of the DA. The first of the pleaded claims appeared as a result of the amendment allowed by Master Teverson. It is a claim that the Defendants are indebted in at least the sums which I have just mentioned: “at least” because there might be further sums owing in respect of the period 1 July 2004 (the end date of the April 2005 Account) to 31 July 2006 (the date of termination of the JV and DA). Payment of those two amounts is sought. The second of the pleaded claims (which was the only claim originally made) is for the Defendants to provide a full and proper account of the share of Mr Straw and Blix of the Distribution Profit.
There are smaller claims made in respect of the Net Profit Share (ie in relation to the JV). The first is called the Reimbursement Claim and the second is for a full and proper account of the JV profits for the last two quarters of 2003 and the first quarter of 2004. The APoC take a pre-emptive stance in relation to limitation, alleging that none of the claims are time-barred.
An Amended Defence and Counterclaim (“the AD&C”) was served and is dated 9 April 2013. The lack of agreement with the APoC starts at an early stage with disagreement about who was a party to any agreement. It is alleged in the AD&C that the original agreement was made between Mr Straw and BTSPL and Didgeridoo both acting by Mr Jennings. It is said that BTSPL performed the agreement in the UK and Europe and that Didgeridoo did so in Australia. Mr Jennings wished to make BTSL a party to the agreement in order to take over BTSPL’s rights and obligations under the agreement in the UK. The company was formed for that purpose in October 1999. It is alleged that Mr Straw and Blix accepted this substitution by their conduct.
The AD&C does not accept that the original agreement was varied by consent to reflect the resolution of the dispute about deduction of the distribution fee. Instead the agreement “underwent a process of continuous development, of which this was part”. Nothing turns on this distinction. The fact is that, after resolution of the issue, there was a distinct agreement concerning the Distribution Profit.
The terms of that agreement, the DA, are disputed. The Defendants assert that it dealt with both profits and losses. Whilst accepting that there was no express agreement about the treatment of distribution losses, it is said that it was a term of the DA implied on grounds of obviousness that losses like profits would be shared equally. In contrast, Mr Straw and Blix contend that it related only to profits. It is denied by the Defendants that there was an express (or indeed implied) agreement that the distribution fee would be capped.
It is admitted by the Defendants that the Payments on Account were made. However, they were only “initially described” as payments on account of Distribution Profits. It is alleged that “In fact, the payments were distributions of profits more generally from the initial success of the album ‘Songbird’”.
The AD&C refer to a letter dated 16 May 2005 from Mr Stewart informing Mr Straw and Blix that the Payments on Account would be treated as payments on account of the joint venture profits more generally. The alleged reason for this was because it was then known that the early Distribution Profit had been eaten up by increasing costs and decreasing per unit revenues. The proposal for payment over a period ― 8 years and 10 months, according to the APoC and 8 years and 4 months according to the Defence ― of the payments which were re-allocated in this way is acknowledged, but it is said that this was made at a time when it was anticipated that the payments could be made but this became unsustainable.
As to the April 2005 Account, it is alleged that this was neither seen nor approved by Mr Jennings or any other officer of BTSL or Didgeridoo prior to its being sent, and is erroneous and not to be relied on. The AD&C sets out, without prejudice to the generality of the suggested errors, a number of ways in which the April 2005 Account was, and was not, erroneous.
The AD&C alleges that down to the date of termination of the JV, there was no Distribution Profit. On the contrary, there was a loss of £122,185 of which the share of Mr Straw and Blix is £61,093 (to be set against profits generally under the JV). This sum is calculated by reference to the statutory filed audited accounts of BTSL, BTSPL and Didgeridoo. The steps in the exercise are:
Take the relevant company’s reported profits before tax;
Deduct the share of JV profit for the relevant period to which that company was entitled.
Apportion the resulting profit or loss (which represents distribution profits or losses across all of its activities in the relevant accounting period) between the DA and non-DA activity;
Aggregate the profits or losses from the commencement of the project down to the end of 2006.
It was admitted that the Defendants had not previously provided an account of Distribution Profit for the period 1 July 2004 to 31 July 2006. It is, however, asserted that no sum is due to Mr Straw or Blix in respect of Distribution Profit. A “Summary Statement evidencing why that is so is served herewith at Annex A”. I will refer to that as “Annex A”: it is an important document. I will return to it later. But to avoid confusion with different editions of Annex A, I note that it is a 3 page document bearing the date “09/04/2013”. However, the assertion that no sum is due does not obviate the need for an account. Annex A is not accepted by Mr Straw and Blix as the appropriate starting point and, even if it is, there are adjustments to it which need to be made which Mr Spencer now accepts results in a net profit.
The A&DC goes on to deal with the Reimbursement Claim and the claim for an account in relation to the JV. It raises limitation defences. And then deals with the counterclaim relating to many alleged breaches of copyright some of which were abandoned shortly before trial and another of which did not feature in the claim by the time of closing submissions.
The pleaded case, following the amendments in the APoC, on behalf of Mr Straw and Blix clearly claims a large sum of money as a debt presently due. One defence to that claim is that the April 2005 Account is inaccurate and is not to be relied upon to prove the amount actually due one way or the other. But that brings into issue the ways in which the April 2005 Account is said to be inaccurate so as to afford a defence to the debt claim. It may be – this is one of the matters I need to decide – that the right outcome is to order that an account be provided by the Defendants or taken by the Court in respect even of the period up to 30 June 2005. But I would expect disclosure to have been given of some financial information to enable the court to assess whether the material relied on by Mr Straw and Blix is in fact inaccurate and unreliable.
This was not done in spite of comments from me early in the trial of the need for disclosure going to the issues arising as a result of the amendments resulting in the APoC. It is striking that no financial documents were produced to me in relation to the period up to 30 June 2004 other than those produced by Mr Stewart in April and June 2005 (to which I will come) and some statutory accounts on which the Defendants now rely as their starting point. There is also Annex A which is based on the statutory accounts for a number of years. What has not been made available or otherwise disclosed is the underlying financial information on the basis of which any account would be taken. Some boxes of papers were produced when the matter resumed for closing submissions but it was far too late for anyone in Mr Straw’s team to go through them to see what they contained.
In an action where an account is sought, it may be right to say that disclosure of underlying financial documentation need not be provided for the trial at which the order for an account is sought but only for the purposes of the taking of the account itself. It does not follow, in the present case, that the Defendants can simply assert that there is a dispute which can only be resolved by the taking of any account to justify a failure to make disclosure. Mr Straw and Blix have pleaded the existence of a debt and have argued, on the basis of the evidence before me, that there is no reason to doubt the reliability of the April 2005 Account. If that is challenged, as it is, it requires the Defendants to produce at least some apparently reliable evidence to demonstrate why the claim is misconceived.
The claims pursued
So much for the pleaded cases. By the end of the trial, the case had really turned into a question as to whether Mr Straw and Blix should be entitled only to an order for account (which was the position of the Defendants) or whether they should be entitled to an order for payment of the debt which they claimed. Mr Hunter was not interested in pursuing the other money claims in relation the JV save for the sum of £175,018 (dealt with at paragraphs 241ff below) or in pursuing an account for a share of the Distribution Profit after 30 June 2004.
The background facts
I need to say a little more about the background facts than what appears in the Introduction to this judgment. I do not think that there is anything contentious about the following paragraphs which are based heavily on the summary in Mr Hunter’s written closing submissions. To the extent that there is any contention, they represent my findings of fact.
Mr Straw is a former attorney (licensed to practice in California) who has been in the music industry since 1967 and has owned record labels since 1990. He operates a number of record labels including the “Blix” label established in 1994. Mr Straw incorporated the company Blix in 2001 to operate the “Blix” record label. Mr Straw assigned his rights in the Cassidy recordings as of 1 January 2001.
Mr Jennings has been involved in the music industry since about 1972. For much of the period at issue in this claim, Mr Jennings traded as “Hot Records”, this being a name which was also used by his various companies.
BTSL was incorporated in England on 18 October 1999, although it did not begin to trade until May 2000. During the times material to this dispute, Mr Jennings was its principal shareholder and director. Mr Regan was also a director for a short period between January 2005 and November 2005. Mr Stewart was its company secretary from October 2002 to November 2005, and a director from November 2005 to November 2006. After May 2000, BTSL was used by Mr Jennings to conduct record label distribution activities in the UK.
BTSPL is an Australian company, formed at some point during the 1990s. During the times material for this dispute, it appears that this company was jointly owned by Mr Jennings, Mr Regan and Ms Lynlea McIntyre and operated the record label “Hot” in Australia and in the UK, until May 2000 when BTSL took over the UK activities.
Didgeridoo is also an Australian company dating back to the 1990s. During the times material for this dispute, it appears that Mr Jennings was its principal shareholder and a director. The company appears to have been used by Mr Jennings to conduct distribution activities in Australia.
Prior to June 1998, when the JV began, Mr Jennings and his companies were a small operation. In the UK, he operated from Pooks Cottage, a small record label under the trading-name “Hot”. In Australia, from a small flat and garage, he operated Hot and a small distribution operation (through Didgeridoo), which distributed the Hot catalogue and “not much else besides” to use Mr Jennings’ own words. Neither BTSPL nor Didgeridoo were in a substantial way of business, showing modest profits or losses prior to 1999. In addition to Mr Jennings’ business partners (Mr Regan and Ms McIntyre) there were a few self-employed contractors (Andrew Bowles and Rebecca Delve in the UK, Ms Cole, of whom more later, and Mr Spencer in Australia).
Insofar as Didgeridoo carried out any non-Hot distribution before April 1998, Mr Jennings said that it charged a 30% fee, from which it was able to make a profit.
Mr Straw’s evidence was that, in about September 1996, he was introduced to the music of EC, shortly before she died. He was greatly impressed. After her untimely death, Mr Straw decided to seek the rights to distribute her music posthumously. I accept that evidence which was not challenged.
On 1 November 1997, Mr Straw agreed (in the trading name of the then unincorporated record label, Blix) a worldwide distribution agreement with EC’s parents. Jumping ahead, I note that this was amended by agreement on 25 October 1999.
Following that, Mr Straw was substantially involved, in late 1997 to the middle of 1998, in releasing Eva Cassidy’s recordings, arranging to master or re-master them, and creating album artwork and packaging (including liner notes) for a new album “Songbird”, and for the re-release of EC’s two existing albums, “Eva by Heart” and “Live at Blues Alley”. I will come later to Mr Jennings’ involvement in the creation of the copyright works subject to the counterclaim.
In 1997, Mr Straw introduced Mr Jennings to the music of EC. During April 1998, they agreed that Mr Jennings would market, promote and distribute (and thus perform the role of both record label and distributor) EC recordings in certain territories outside North America (principally the UK and Australia) on the basis that they would share the net profits.
There was some dispute as to exactly what was agreed at the outset and who the contracting parties were. Mr Straw’s evidence was that he outlined the basic terms of a joint venture he had previously agreed with respect to the label of an Irish artist, Mary Black; Mr Jennings did not recall that. I do not think that anything turns on the resolution of that difference.
Mr Straw was clearly the only original contracting party on his side. The Defendants denied in the AD&C that Mr Jennings became a contracting party as Mr Straw alleged; their case was that the contracting parties were BTSPL and Didgeridoo and not Mr Jennings himself. I will return to this point at paragraphs 94ff below.
The start of the venture was that Mr Straw arranged for copies of the first album which he had released (“Songbird”) to be shipped to the UK. Mr Jennings (acting through BTSPL)) released that album in the UK in about July 1998, and thereafter in Australia. The album achieved modest sales in the UK and Australia. As the figures summarised by Mr Jacobs, which I accept, show, it generated revenues in the UK of about £350,000 in the second half of 1998 and the first half of 1999.
In April 1999, Mr Jennings sent Mr Straw the first Net Profit Share statement of account for the year to 31 December 1998. This statement showed a deduction from gross sales of a 30% distribution fee. This led to a dispute, which in turn led to a further agreement (ie the DA) on which the main claim in the present action is based. There was another dispute concerning the deduction of overheads in computing the net profits, but that was resolved by agreement and does not feature in the claim. In summary, as recorded in the Introduction above, Mr Straw objected to the 30% distribution fee, which he said he had never agreed to and which he contended was inconsistent with the 50/50 profit split which had been agreed.
The facts, continued
After that recitation of (mainly agreed) facts, I turn to matters which are slightly more murky. I start with the DA. Mr Straw’s evidence is he and Mr Jennings agreed, in a telephone call in about December 1999, to resolve the dispute concerning the distribution fee and overheads on the basis that Mr Jennings could continue to deduct a 30% distribution fee and that Mr Jennings would account to Mr Straw for 50% of the Distribution Profit. It is common ground that nothing express was said about the sharing of losses.
So far as the contemporaneous documents are concerned, one sees this agreement reflected in a fax sent to Mr Jennings by Mr Straw on 3 February 2000. The relevant part of the fax is found in paragraph 2) towards to the foot of the first page where Mr Straw indicated that he would reject an alternative proposal by Mr Jennings to take a 5% share of ownership of BTSPL and “stick with splitting the distribution fee profit on Blix product….”. He also stated that Blix was to be paid within 45 days after the close of each accounting period; that was a proposal but I do not see that it was anywhere ever agreed by Mr Jennings.
Mr Jennings made a number of annotations on the fax. It is common ground that the annotated version was in turn sent to Mr Straw although it is not clear when precisely this was. An annotation at the top of the first page reads “Let’s look at that “profit” next year, mid 2001 Then let’s see how liquid it is to split along the lines you’re on” with a line drawn from that comment to paragraph (2).
What is clear, in my judgment, from the evidence is this: (i) there was indeed an agreement to split the Distribution Profit in equal shares (ii) nothing was expressly said about sharing losses (if any) which is not surprising since no-one ever expected there to be a loss and (iii) nothing was expressly agreed about the timing of any payment of Distribution Profit. At most it was mentioned as a proposition in paragraph (3) but, if I understand correctly, Mr Vinall says that that paragraph relates to the distribution of the Net Profit Share under the JV and not Distribution Profit under the DA.
There is nothing in the later documentation, and nothing in the evidence which I heard, to suggest that anything was subsequently expressly agreed about either sharing of losses or the timing of the payment by the Jennings interest to Mr Straw and Blix of their share of the Distribution Profit.
Nor, I might add, was anything said about the capping of the distribution fee at 30% as alleged in the APoC. There was nothing in Mr Hunter’s skeleton argument or in his written closing submissions about this. Nor, so far as I have been able to find, was anything said in the whole of the trial about it save in the evidence of Mr Jacobs concerning his scenario 4. Mr Jacobs saw this scenario (where no part of any loss in Australia should be passed to Mr Straw and Blix) as the capping of the distribution fee. In other words, 30% of gross receipts were allowed as the distribution fee but no more; if losses were shared like profits that would amount to a distribution fee in excess of 30% in economic terms.
During the first half of 2000, there were a number of exchanges between Mr Straw and Mr Regan in an attempt to put in place a formal written agreement to replace the oral agreement which had been made. I do not need to deal with it in any detail. I mention, however, a fax from Mr Straw to Mr Regan dated 9 March 2000 where Mr Straw stated his position that “Blix would be entitled to half of any Hot affiliated company’s profits from the distribution of Blix product, as previously agreed by [Mr Jennings]”. These attempts came to nothing and a written agreement was never made.
It is worth recording here that, after resolution of the issues arising from the dispute over distribution profit, the Defendants did provide, approximately every six months, (and quarterly from July 2000 onwards) accounts in respect of the Net Profit Share (under the JV). The accounts appeared under different letterheads but no real distinction was taken, for the purpose of the account, between BTSL, BTSPL and Didgeridoo. It is common ground that the figures do not include any accounting in respect of Distribution Profit.
The contracting parties
Although the pleadings disclose a dispute about who the original contracting parties were, neither Mr Hunter nor Mr Vinall went into this in any of their submissions. So far as Mr Straw and Blix are concerned, nothing turns on it since, if there is a valid claim at all, one or other of them is entitled to make it and they are both parties to the claim. Further, if the counterclaim is a good one, it could only be revealed on an enquiry whether Mr Straw or Blix or both were infringers. So far as the Defendants are concerned, the position is not so clear. Mr Straw’s pleaded case and his evidence is that he contracted with Mr Jennings personally. His pleaded case is that BTSPL (and later BTSL) “were all joined to the Agreement and performed it for this purpose” but the evidence does not show clearly how this came about or whether, if it did, the companies replaced Mr Jennings as contracting party or took on contractual liabilities in addition to those of Mr Jennings. The Counterclaim is, however, made by all of the Defendants. Their Response to a Request for Further Information explains why the Defendants are themselves entitled to an account in respect of the period after termination of the JV and refers to the Defendants as parties to the JV. However, the Response is qualified by the words “if, as the Claimants contend, they and the Claimants were all parties to the Agreement”.
In the light of the above, it is not clear to me what the position of each party is. I propose to deal with the case, on the assumption, without deciding, that there is no distinction to be drawn between the different persons (individual and corporate) on the two sides of the record. In other words, I draw no distinction between Mr Straw and Blix, and no distinction between any of the Defendants. A right of one is a right of all, and a liability of one is a liability of all. That is Mr Straw’s position and Mr Hunter says as much in a footnote at the end of his written closing submissions. If the Defendants contend that this is an incorrect reflection of their position, I will hear further argument about it as a consequential matter following the handing down of this judgment.
The Distribution Profit; sharing of losses: Issue i) a)
Nothing express was said about sharing any losses of the distribution business. And, in spite of what was pleaded in the APoC, there is nothing to suggest that the question of “capping” of the distribution fee was discussed. There was no need to discuss it in the sense that a distribution fee greater than 30% might be charged because the agreement was that 30% should be charged – no more, no less.
Mr Vinall says that it is obvious and a matter of common sense that the context of the DA requires Mr Straw and Blix to bear 50% of losses just as they are entitled to share 50% of the profits. In support of that argument, Mr Vinall draws attention to the Defendants’ case in relation to North American sales of recordings from Mr Jennings’ catalogue. The original venture did not include only EC recordings. Indeed, it is said that it included not only recordings of other artists provided by Mr Straw and Blix to the Defendants for distribution in their territories, but also recordings from Mr Jennings’ catalogue provided by Mr Jennings to Mr Straw and Blix for distribution in North America. In that latter case, Mr Straw or Blix would not carry out distribution themselves but would pay a third party to do so, the cost of which would be deducted in ascertaining the profit of the JV. I record here that Mr Straw does not accept that it was ever agreed that Mr Jennings would provide any artists in this way although, had any artists been distributed by Mr Straw in the US, the terms would have been those of the JV. Further, Mr Vinall notes that Mr Straw’s position, before the agreement of the DA, was that distribution costs should not be deducted at all; instead, the gross receipts derived from distribution should fall within the JV, with only direct (and possibly indirect) costs being allowed as a deduction. If distribution costs should in fact exceed 30%, they would nonetheless be deductible in ascertaining the distributable profits. I might add that there is no suggestion that the venture as a whole over any particular period would have shown a loss even after deducting the loss attributable to the distribution business, making it unnecessary to express a view whether the JV itself contemplated sharing of losses.
Even if the original agreement did cover the distribution of Mr Jennings’ catalogue in North America, I do not accept Mr Vinall’s argument. In the first place, I do not regard it as obvious or commonsense that there should be a sharing of losses in relation to the distribution business in the UK, the rest of Europe and Australia. Nor do I perceive the implication of a term of the DA as necessary in order to provide business efficacy. Indeed, Mr Straw had entered into not dissimilar arrangements with one of his companies acting as a distributor in the US (Celtic Corner Series, Inc) which expressly provided for profits to be shared but for losses to be borne by the distributor.
The general approach to construction of contracts (including giving meaning to the words used in making oral contracts) is well established: see in particular the well-known passage from the speech of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at pp 912-3 and more recently the speech of Lord Clarke in Rainy Sky SA v Kookmin Bank [2011] UKSC 50 at [14].
Further, as Lord Hoffmann explained in A-G of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988, the implication of a term is, at its root, part of the exercise of construction the aim of which is to ascertain what the parties meant or are to be taken to have meant in using the words which they did.
Lord Hoffmann’s speech is also important in providing a reminder that the various formulations which the courts have used as the test for the implication of a term (see in particular the conditions set out by Lord Simon of Glaisdale in BP Refinery (Westport) Pty Ltd v Shire of Hastings (1997) 180 CLR 266, 282-283, set out by Lord Hoffmann at [26]) are no more than different ways in which judges have attempted to articulate what was “the central idea that the proposed implied term must spell out what the contract actually means, or in which they have explained why they did not think that it did so”. These formulations are not legislation and are not to be allowed to take on a life of their own.
If the agreement has the meaning which Mr Vinall ascribes to it, one is immediately faced with the question: Why did the parties not simply agree that the distribution aspects of the venture should feature simply as one element of the JV? Since the JV profits were divisible in equal shares, the same economic effect would have been achieved if all of the income of the distribution business and all of the costs of running that business (including perhaps a share of general overhead) had been taken into account as would have been achieved by the sharing of profit and loss in respect of the distribution business for which Mr Vinall contends. That assumes, against Mr Straw, the point which I do not decide namely that under the JV itself losses would have been shared in the same way as profits: if that were not the case so that JV losses would not be shared, it is difficult to see any argument that the distribution losses should be shared.
I can see no satisfactory answer to the question which I have just posed. The best that could be said in Mr Jennings’ favour is that given the starting point – namely a dispute whether there should be a distribution fee at all – a natural approach was to see whether the Distribution Profit should be shared. The parties arrived at the solution they did without needing to translate it into a perhaps simpler agreement within the JV. This does not strike me as a very strong argument, let alone a compelling one. Mr Vinall submits that this is explained by the fact that there was a huge difference between the way that the joint venture profits were accounted for and paid. The profits from 70% of the income flowed through into regular profit distributions out of the joint venture, while those from 30% of the income were retained in the distribution business on a longer-term basis. I do not perceive this as an answer to the question which I have posed
In any case, the structures of the original agreement (as Mr Straw saw it including all elements of the venture) and the JV on the one hand and the DA on the other were different:
The JV envisaged a joint enterprise with responsibilities being shared between the joint venturers. The gross receipts of that enterprise less the costs and expenses of running it were to be divided equally. In the nature of the operation of the exercise, one party or the other would be in receipt of income and would pay, in the first instance, the costs incurred in that part of the venture operated by them.
In contrast, the DA envisaged a business which would be operated by the Defendants. The distribution fee of 30% of gross receipts was to be taken from those receipts before ascertaining the gross income of the JV. The fee belonged to the Defendants and the outgoings on the distribution business were the obligation of the Defendants. The distribution fee did not belong to the Defendants and Mr Straw and Blix together nor were Mr Straw or Blix liable for the outgoings of the distribution business (either to third parties contracting with the Defendants or inter se). Instead, the DA provided for the ascertainment of the profit of the distribution business, that is to say the profit of the Defendants in conducting that business. It was that profit, as an amount of money, which was divisible in equal shares. If there was not profit, there was nothing to divide. But that does not make the liabilities of the Defendants liabilities of Mr Straw or Blix.
I do not consider that this conclusion is affected by Mr Vinall’s appeal to the parallel position in relation to North America and the distribution there of Mr Jennings’ catalogue even if, contrary to Mr Straw’s case, the JV extended to such distribution. Indeed, if anything, I perceive the position as supporting Mr Straw’s case. It seems to be common ground that any distribution fee payable to third party distributors would be deductible in ascertaining the divisible profit of the venture. Mr Jennings’ position in relation to distribution in the UK and Australia prior to the making of the DA was that the Defendants too were entitled to a 30% distribution fee.
Quite clearly, Mr Jennings saw distribution as sitting outside the JV and to be his concern alone and for which the Defendants should be paid. On that basis, Mr Straw and Blix would receive no share of the profit of the distribution business nor, clearly, would they be liable for a share of any loss. But Mr Straw saw the distribution business as a separate profit centre and considered that Mr Jennings should not be entitled to profit at the expense of the joint venture. I doubt very much indeed that either Mr Straw or Mr Jennings considered for a moment that the possibility that there might be a loss. Had it been raised, I think it more likely than not (to put it at its very lowest) that Mr Straw would have met that possibility with disbelief and refused to agree to a sharing of loss. Now, it may also be said that Mr Jennings, contemplating the possibility of a loss, might have taken the stance that for his part, he would not agree to an equal sharing of profit unless losses were shared too. Perhaps, after negotiation, they would have agreed to share losses, perhaps they would have agreed to share only profits. Or perhaps they would have reached no agreement at all. I can only speculate what the outcome would have been. But what we do know is that the parties in fact entered into an agreement which did not deal expressly with the possibility of loss. Given the scope for speculation about what the parties would have done, I see no room for the implication of a term that losses would be shared.
This result, it seems to me, is more consistent with the structure which I have described above than the sharing of losses as well. The analogy here is with a third party provider of distribution services. A commercial deal might be done with such a provider that it should have a 30% distribution fee with a proviso that the third party would account for an amount equal to a specified share (eg one half) of its profits on the relevant part of its business. There would be no question of sharing of loss. I see nothing uncommercial in such an arrangement; there is no need to imply a term that losses would be shared in order to give business efficacy to that agreement and it is certainly not obvious to imply such a term.
Mr Jennings might say that this conclusion is absurd because, if he had never sought to charge a distribution fee in the first place, the income and outgoings in relation to distribution would have formed part of the JV so that any loss on the distribution business would have reduced the JV profit and thus been borne equally between the two parties. That is true. But he did seek to charge a distribution fee and the agreement which he reached maintained the structure of such a fee. So this consideration does not, in my judgment, lead to the conclusion that losses must be shared.
My conclusion therefore on issue a) i) is that there is not to be implied into the DA a term that Mr Straw and Blix should share in any loss in the carrying out by the Defendants of the distribution business.
I should add that Mr Hunter submits that this issue is, in any case, academic because, once the correct methodology is applied (which I will come to later) and adjustment made to the April 2005 Account for admitted or manifest errors, there is no evidence that there were in fact any losses after the period covered by that Account.
The Distribution Profit and period for ascertaining profit: Issue i) b)
Mr Vinall’s submission is that the Distribution Profit (and he would say loss) should be ascertained over the entire duration of the DA. There is no obligation on the Defendants to make any payment on account but, if such a payment is made, it is to be taken account of in the final account. If there has been overpayment, the excess must be repaid. And if there is an overall loss, Mr Straw and Blix must make payment to the Defendants. I have rejected those submissions so far as concerns losses but if Mr Vinall is right about taking an account over the entire period of the DA, it would follow that a loss in any given period could be set against a profit in another period.
Mr Hunter has to accept, as he does, that the DA does not expressly provide for the periods over which the Distribution Profit is to be calculated. He stands by the pleaded case which is that there is to be implied term that there should be an account of Distribution Profit at some time during the DA or at the latest within a reasonable time after it had been terminated. If the DA comes to an end, the Defendants must account for any profit (they would say over the whole period of the DA) within a reasonable time. I do not propose to spend any time on that last proposition which seems to me to be obvious.
More difficult is the position during the course of the DA. What Mr Hunter says is that it does not matter whether Mr Straw and Blix are right about the first limb of the implied term (obligation to account at some time during the DA) because (i) the Defendants did in fact render two accounts, in August 2000 and April 2005 and (ii) Mr Straw and Blix do not seek any account for the period after 30 June 2004 (the end of the period of account under the April 2005 Account). As to (i), Mr Hunter says that Mr Straw and Blix do not complain about the timing of these accounts: whatever they may have been entitled to insist on (for instance, annual accounting, or the same accounting period as under the JV), these periods of account give them all that they now seek.
For my part, I do not consider that it can possibly have been intended that, no matter how long the DA might run, there would be no distribution of Distribution Profit with the Defendants being able to retain the entire profit until termination. It is to be implied, in order to give business efficacy to the DA if for no other reason, that Mr Straw and Blix would be entitled to payment from time to time during the course of the DA. Identification of the appropriate accounting periods might have given rise to difficulty and in the absence of agreement (either expressly or to be inferred from conduct) the court might have had to identify some reasonable period of account. But it is not necessary to do so for the reason given by Mr Hunter, namely that the Defendants did in fact provide the accounts which he has identified. I will be dealing in detail with the April 2005 Account in due course, but whatever its defects and whether or not its contents were authorised by Mr Jennings, it is my view that it demonstrates, in a way which is binding on the Defendants, an intention to fix 30 June 2004 as the end of a period over which an account would be given.
Further, the implied term would not, in my judgment, be simply an obligation to provide an account for the purposes of making a payment on account of the final profit (or, on the Defendants’ case, loss) over the entire duration of the DA. Rather, the implied term would oblige the Defendants to account for (and pay) to Mr Straw and Blix their share of the Distribution Profit in respect of a relevant accounting period with no right for the Defendants to claw back any future loss from distributions already made.
Since I have decided that Mr Straw and Blix are not liable for losses in respect of any relevant accounting period, it follows that, if Mr Straw and Blix are entitled to rely on the two accounts which Mr Hunter has identified, it does not matter to Mr Straw’s and Blix’s claim if there was a loss for the period from 30 June 2004 to the termination of the DA. If I am wrong on that, there remains Mr Hunter’s submission that the point is academic because there is no evidence of loss. This aspect will be covered later in this judgment.
Ms Cole’s 2000 Account
On 1 May 2000, Mr Straw wrote a long letter to Mr Regan. For present purposes, it is necessary to refer only to one paragraph which reads as follows:
“…..I also need a detailed accounting of Hot’s 30% distribution fee. Martin agreed Hot would share the distribution fee profit with Blix, and that the distribution profit is generally one-third of the 30% fee. When you, Martin and I spoke about this in the recent three-way phone conversation, Martin confirmed this, but questioned whether or not there has actually been a distribution fee profit. In order to have meaningful discussion, I will need to go over these figures as well.”
Before moving on to the response to that request, I note that there was never any challenge to the contents of that paragraph. It confirms what is now clear namely that an agreement was made to share the distribution profit but, more importantly, it is consistent only with a common understanding that Mr Straw and later Blix should be able to seek, from time to time, an account in relation to the Distribution Profit. It was not suggested in response to that request that Blix was not entitled to seek an account, nor that any payment would only be on account of the eventual Distribution Profit (or loss). It is consistent with the conclusion which I have reached in relation to Issue i) b) although it does not, of course, feature as part of the reasons for reaching that conclusion.
Ms Cole was, in 2000, the book-keeper for BTSL, BTSPL and Didgeridoo. In the bundle is a hand-written note from her to Mr Straw’s partner, now wife, Lois Gerard (whom I will refer to as “Ms Gerard”). It is undated, but the best estimate of its date is early July 2000. In it she stated that she was sorry to be taking so long with the figures (that is to say relevant to the Distribution Profit). She said that she was going to sit down with Mr Jennings and go over them that afternoon. Subsequently, she sent a statement of account in respect of the Distribution Profit to Mr Straw under cover of a letter dated 10 August 2000. These two communications were clearly sent in response to Mr Straw’s request.
The statement of account covered the period ending 31 December 1999. It revealed a loss in both the UK and Australia of £9,348 and A$51,131 respectively. Mr Straw and Blix do not challenge those figures. They do, however, rely on the statement, and on Ms Cole’s witness statement, to establish the methodology which she used, which methodology they say is the correct one.
Mr Jennings accepted in cross-examination that he was involved in and authorised the preparation of this accounting. Further, his answers to questions from Mr Hunter can be interpreted only as an acceptance that the methodology which Ms Cole used was correct: he accepted that she used the methodology which she did under his supervision. Mr Jennings accepted that he had no reason to doubt Ms Cole’s competence. The methodology which she describes was to calculate the distribution profit by deducting costs referable to distribution (including a proportion of general overheads) from 30% of the revenues ascertained from sales figures, not, one might think, a difficult concept to grasp and at first sight obviously correct. I say obviously correct, because the straightforward and simple agreement made by Mr Straw and Mr Jennings at the inception of the DA said nothing about the accounting principles or practices to be applied.
So far as I am aware, it was not suggested by anyone at the time that the losses on the distribution business should set against Mr Straw’s and Blix’s Net Profit Share or that either of them was directly liable to make payment to the Defendants. That, again, is consistent with my decision on Issue i) a).
But then the situation of losses changed. On 18 March 2001, the album Songbird went to Number 1 in the UK charts. Mr Hunter puts it accurately when he says this:
“Almost immediately there was a massive increase in the sales and revenues of Eva Cassidy recordings. As [a Schedule for JV Accounting for July 1998 to December 2001] records, quarterly UK revenues rocketed from £466,392 in Q1 2001 to £6,350,780 in Q2 2001. Sales stayed at over £800,000 per quarter for the next three quarters.
The sudden and massive success of Songbird in March 2001 triggered a number of events which are central to this case.”
It is those events to which I now turn.
Payments on account of Distribution Profit
I have already mentioned the making of payments on account of Distribution Profit in paragraph 30 above. The background to these payments is set out in Mr Jennings’ witness statement. He calculated, for the tax purposes of the Defendants, what it would be safe to pay to Mr Straw in relation to the Distribution Profit up to March 2001 and arrived at a figure of £675,000. This amount was split – it does not matter why but it may have been because that is what Mr Straw wanted from his own tax perspective - with £500,000 being paid in December 2001 and £175,000 in January 2003. This was not, of course, a final accounting in respect of the period up to 31 March 2001 and the payments can only be seen as made on account which is how they were described by Mr Stewart at the time. The figure was, however, a “safe” one by which Mr Jennings can only have meant that the Distribution Profit for the period would be at least £675,000 with a balance to follow when a full accounting for that period was undertaken. It was also a figure which he thought the tax authorities would accept. As he said in answer to Mr Hunter:
“Well, it was how much we could have -- you know, you're looking for tax deductions. If you made a lot of money very quickly, if you have never had any money before in your life and you suddenly make a lot of money, then you want to get a tax deduction if you can.”
The unexpected can happen, so I suppose that had the profit turned out to be less than that figure (because some huge liability had been overlooked, for instance) then Mr Straw and Blix would have to account for the excess. There is nothing whatsoever in the evidence before me to suggest that the Distribution Profit for the period ending 31 March 2001 was less than the figure which Mr Jennings had, at the time, regarded as “safe”.
Mr Jennings also accepted in cross-examination that the £675,000 was shown in the financial statements as a cost of sale and Mr Straw was treated as a trade creditor. Mr Hunter relies on that to show the reality to be that there was a significant Distribution Profit up to 31 March 2001 so that Mr Straw’s and Blix’s share was at least £675,000. I would note that the treatment of the £675,000 as a cost of sales and of Mr Straw as a trade creditor is, once again, consistent with my conclusion in relation to Issue i) a).
I will come, in a moment, to the re-allocation of the £675,000 as payment of the Net Profit Share, leaving nothing paid on account of Distribution Profit. The justification for this re-allocation was stated, at the time, to be lack of cash resources. It almost certainly was the case that the necessary cash resources were not available, but given that the Defendants had received large amounts of cash, it is relevant to ask why the cash was not there.
Cash-flow difficulties faced by the Defendants
Mr Hunter submits that the reason why the cash was not there is that Mr Jennings had removed huge sums of money from his companies in a manner which could not be justified and that he had procured BTSL to purchase a property called Redlands. There is a further matter which, although not relevant to cash-flow, is relevant to the ascertainment of Distribution Profit. Mr Hunter submits that Mr Jennings directed his accountants to enter into what Mr Hunter describes as “a course of extremely aggressive accounting so as to minimise the potential corporation tax liability of Mr Jennings’ companies”.
The manner in which it is said that large sums, possibly as much as £5m, were removed from his companies was by the granting of Licence Agreements by Mr Jennings. Two of these Licence Agreements are in the bundle. They bear the date 1 July 2001 and 8 July 2002 although whether they were actually made on their respective dates or anywhere near them seems to me to be very doubtful. It seems clear from Mr Spencer’s evidence that there was a third Licence Agreement although this has not been disclosed.
Under the two disclosed Licence Agreements, Mr Jennings purported to grant to BTSL rights in relation to “the Recordings” specified in each Agreement until 30 June 2004 namely various specified EC audio recordings. The Agreements refer to “an agreement between me and [Blix] relating to the licensing of certain records by [EC] in certain territories”. It is not at all clear to me to what agreement that is referring. It seems to be an acknowledgment that the original agreement relating to the joint venture was indeed made with Mr Jennings and not with any of his companies otherwise there is no basis on which Mr Jennings would have any personal interest in the Recordings. That is one scenario. If it is right, then Mr Jennings, as the contracting party with Mr Straw and Blix, would himself be liable to ensure payment of the share of the Distribution Profit to Mr Straw and Blix. I suppose that it might be said that Mr Jennings is entitled to enter into whatever agreement he likes with his companies. But that does not entitle him to use the cash generated by the distribution business for his own purposes and then to plead cash-flow problems when it comes to paying Mr Straw and Blix their share of the Distribution Profit.
But that is a wholly unrealistic scenario. The reality, it seems to me, is that it was understood by Mr Straw and Mr Jennings that the actual operation on the ground of the joint venture and the distribution business would be carried out by BTPSL, later BTSL, and Didgeridoo. It was implicit in that arrangement that those companies would have the benefit of Mr Straw’s own rights over the EC catalogue which he had acquired from the Cassidy family. The companies simply did not need a further licence from Mr Jennings. Mr Straw did not bring the benefit of his rights over the EC catalogue to the party to enable Mr Jennings to exploit it for his own personal benefit in the way that Licence Agreements effect.
What actually happened in terms of cash movements is obscure. It is suggested on behalf of Mr Jennings that the Licence Agreements only gave rise to a series of accounting entries and that no money actually left BTSL. I think it is far more likely that large sums of money were removed and provided some, at least, if not all of the funding for various real property projects (purchasing and improving a property called Annandale, purchasing the property at Burton Street, Sydney and paying off a mortgage on a holiday home in Potato Point) with other amounts going into his family trust structures. I could extend this (overlong) judgment by several pages in explaining this expenditure. But I am satisfied on the evidence which I have heard from Mr Spencer and from Mr Jennings’ generally unsatisfactory answers in cross examination, that large sums of money were removed and spent as I have indicated.
The description of “unsatisfactory” in relation to this part of Mr Jennings’ evidence is something of an understatement. I have explained this in a little detail in my general consideration of the witnesses at paragraphs 30 to 35 above. Even Mr Vinall acknowledged that this aspect of Mr Jennings’ evidence was not as good as it might have been. He describes Mr Jennings as “admittedly less cogent on various financial matters, relating both to the accounting and his personal financial affairs”. I fear Mr Vinall must have been in a different courtroom from me to be able to put that forward as a realistic description of Mr Jennings’ evidence in this area.
Redlands featured large in the debate about use of company funds. Mr Hunter’s position is summarised in the pithy paragraph 71 of his written closing submission:
“In January 2002, Mr Jennings used £1 million of BSL company money to purchase Redlands, a run-down farm / country estate. Over the next approximately 2 years he spent in excess of £1 million of company money turning it into a modern country residence. The details of Mr Jennings’ cross-examination regarding Redlands are summarised above. His claim that he did this for the business is specious. It was plainly intended as a grand residence for himself, the outbuildings were disused farm buildings, which required complete rebuilding or conversion before they could serve as company premises. By far the largest building was the Grade II listed farm house, and it seems (looking at the estate agent’s specifications) that the majority of the £1 million refurbishment costs were spent refurbishing this.”
As to that cross-examination, Mr Jennings told me that his decision to have the BTSL purchase Redlands for £1 million and to spend in excess of £1 million refurbishing it using his family builders was totally and solely in the interests of the joint venture agreement and for no other reason.
Mr Hunter submits that Mr Jennings’ answer and his attempts to defend it were wholly incredible. Redlands was primarily a residence, and the refurbishments to it were primarily residential and carried out for the benefit of Mr Jennings himself. Mr Jennings had purchased and refurbished Redlands mainly for himself. From 2003 to date Redlands has been Mr Jennings’ sole residence outside of Australia, his UK home. During the course of his cross-examination Mr Jennings admitted inter alia that (and here I adopt Mr Hunter’s own words):
“Redlands had 63 acres of country land which had nothing to do with the business (and which the companies employed ground staff to tend to); that the main buildings, including the primary building, a listed farm house, were residential and not authorised for commercial use; that in fact Redlands was an unconverted deteriorated farm estate when his company purchased it; that he used Redlands to produce and sell hay; that he had work done on the lake; and that the companies applied for planning permission for a swimming pool apparently because “Big companies have all sorts of things don’t they?”
There is some hyperbole in that quotation. The reference to ground staff gives the impression of some baronial hall, and the reference to a “farm estate” rather than a small farm gives an impression of something grander than it is. It is, however, to my mind an unsustainable proposition that Redlands was purchased solely and totally for the benefit of the joint venture.
In any case, whatever the true motivation of Mr Jennings, it is not suggested that Redlands was an asset of the joint venture. It was, all along, BTSL’s asset. If the consequence of acquiring that asset was a contributory cause to the inability of BTSL to pay to Mr Straw and Blix their share of the Distribution Profit, then it seems to me that Mr Jennings must at the very least provide a clear justification for bringing about a situation of this inability to pay. This is especially so given that the acquisition of Redlands was the acquisition of long-term illiquid asset purported for the sole benefit of a joint venture which could be terminated at any time. One might expect there to have been some discussion with the co-venturer before spending money in a way which produced cash-flow difficulties. Perhaps even without discussion there could be an excuse for the failure to pay provided that some objective justification was provided. But that does not arise for decision because Mr Jennings entirely failed to persuade me that the acquisition of Redlands provided a sensible way of promoting the joint venture even if it was a sensible way in the long term of benefiting BTSL.
Further, in his email to Mr Straw dated 16 May 2005, Mr Stewart admits that one reason for the cash-flow problem is that money is locked up in Redlands:
“With regard to your share of the albeit varying amounts in relation to the distribution venture, this remains locked within Redlands and Martin asks for your forbearance in dealing with this as a separate and distinct issue at a more opportune time in the future.”
Whatever issues there may be about Mr Stewart’s authority to provide to Mr Straw the accounts which he did, I have no doubt that what he said in that passage is entirely accurate so far as concerns money being locked up in Redlands and the request for forbearance coming from Mr Jennings.
I therefore conclude that the acquisition of Redlands was a contributory factor to the cash-flow problems it faced when the payments on account were re-allocated to Net Profit Share.
So far as concerns the aggressive company accounting to which Mr Hunter refers, I must say that I agree that some of the manoeuvres were, as I might describe them, on the cutting edge of creative accounting. Let me list the matters which Mr Hunter purports to identify and which seem to me to have some force:
Deducting the supposed licence fees under the Licence Agreements as expenses.
Deducting artificial internal management fees and administration charges (almost £2 million was deducted from BTSL under this head over the joint venture period).
Making large deductions in respect of property expenses for Redlands even though that property was largely refurbished and maintained for Mr Jennings’ personal benefit.
In Australia, paying substantial rent to Mr Jennings for Annandale, itself purchased using the company money taken through the licence fee device.
Deducting a range of Mr Jennings’ personal expenses.
Engaging in inter-company lending / debt waiving.
Altering the year end of BTSL so that the large revenues triggered by Songbird’s success were accounted for in an extended 17 month period.
I do not propose to say much about these aspects of the companies’ accounts. I do not have any expert evidence about whether they are each matters which could properly, on one view at least, be reflected in accounts prepared for taxation purposes or for the purpose of statutory accounts. All that I do want to say is that, if and to the extent that the inclusion of these amounts has any impact on the calculation of Distribution Profit, they should not be included. This is a matter to which I will return when considering Mr Spencer’s methodology for ascertaining that Profit.
I would add to Mr Hunter’s list something which appears in an email dated 24 June 2004 from Mr Stewart to Ms Gerard seeking to postpone payment for a few days of moneys which it had previously been agreed would be paid on 30 June. Mr Stewart asked for this postponement because
“we will be sending our Oz office a large chunk of £s on 28th of this month and they will send the exact same amount back to us on the 2nd July! I know that this sounds crazy but we have been advised by our auditor Peter Hussey to do this in order to establish a ‘pattern of intercompany trading’ between Hot UK and Hot Oz which will be reflected in our respective year end Accounts as at 30th June this year. Put quite simply, it’s a cosmetic accounting exercise which we are having to do in order to avoid potential UK tax problems that could arise if we don’t do it.”
I think that passage speaks for itself. Whether HMRC or the Australian revenue authorities were told about this is a matter of speculation.
The cash-flow problems manifested themselves in the fact that during the course of 2004 the Defendants fell into arrears with distribution of the Net Profit Share to Mr Straw and Blix. Thus, in August, Mr Stewart emailed Ms Gerard to say that the Defendants had “cash flow to start paying you for qrs 3 and 4 2003 from September” but whether this resulted in any payment at all is not clear. It does not matter much because the fact is that by the end the year, arrears were more than £600,000 according to an account prepared by Mr Stewart in relation to the re-allocation of the £675,000 payment on account of Distribution Profit.
The April 2005 Account, the events leading up to it and the re-allocation of the Payments on Account to Net Profit Share
I now come to one of the most contentious aspects of the case which concerns the April 2005 Account and its preparation. In a nutshell, the case on behalf of Mr Straw and Blix is that the April 2005 Account is to be relied on subject to adjustments to remove certain deductions which were not, as is now common ground, appropriate deductions in ascertaining Distribution Profit. Their case is also that Mr Stewart had the authority of BTSL and Didgeridoo (in practice of Mr Jennings) to prepare and send the Account to Mr Straw. But, even if he did not, the underlying figures material to the calculation of the Distribution Profit can be relied on and the fact they were not said by Mr Jennings at the time (or indeed until the Defendants were formulating their defences to the present claim) to be inaccurate speaks volumes. In contrast, the case on behalf of the Defendants as presented to me was that Mr Stewart had no authority to send the April 2005 Account to Mr Straw and Blix and that it is inaccurate and cannot be relied upon. Instead, a different approach should be adopted to the calculation of the Distribution Profit based on the statutory accounts which, it is said, are more reliable than the April 2005 Account because they are based on accounts which have been subject to audit. I deal elsewhere with the correct methodology and with whether the ascertainment of Distribution Profit (assuming an account is not ordered) should start with the April 2005 Account or with the statutory accounts. The accuracy or otherwise of the April 2005 Account is an important factor in answering that question and hence the need to examine the circumstances of its preparation.
The pleaded case of the Defendants is that the April 2005 Account was neither seen by nor approved by Mr Jennings or by any officer of BTSL or Didgeridoo prior to its being sent to Mr Straw and Blix. Implicit in this is that the Account was not seen or approved even for internal purposes and not merely that it was not approved for distribution.
Mr Stewart’s evidence was that some time in the last quarter of 2004, Mr Jennings instructed him to prepare an up-to-date accounting in respect of the Distribution Profit. One purpose of this, no doubt, was to put Mr Jennings in the picture to the extent that he was not already aware of the amount of profit to date so as to be able to deal with the pressure coming from Mr Straw for payment of amounts outstanding in relation to Net Profit Share and Distribution Profit. Mr Stewart’s evidence is that he discussed the figures with Mr Jennings which eventually went into the April 2005 Account and that Mr Jennings (i) approved the Account and (ii) authorised its dispatch to Mr Straw. Mr Stewart gave evidence in cross-examination of a conversation which he had had with Mr Jennings at Redlands about the accounting. In particular, he recollected discussion of the inclusion of a management charge for Mr Jennings’ time. Mr Vinall acknowledged that there was a conversation about that topic at some stage but suggested to Mr Stewart that it was a discussion for internal purposes about trying to assess costings to which Mr Stewart responded that that was not his own recollection.
Mr Hunter submits that Mr Stewart’s evidence is consistent with other matters (and I take this verbatim from his written closing submissions):
It was at this time that Mr Spencer collated and sent to Mr Stewart up-to-date distribution accounting figures for Australia, something which Mr Spencer stated he would have only done on Mr Jennings’ authority.
This fits with the time at which, according to his deposition in the US proceedings against the Cassidy family, Mr Jennings appears to have spoken to Mr Stewart about deducting a management fee.
It also fits with the time that Mr Regan and Mr Bowles were (according to Mr Jennings’ witness statement) urging deductions to be made for Asian and Irish sales.
It makes sense given the broader background: Mr Jennings’ expenditure was causing cash flow problems, and Mr Jennings wanted Mr Stewart to persuade Mr Straw to accept a reallocation of the on account payment, and to defer payment of distribution profit. Before that could be advanced, it would make sense to prepare an up-to-date Distribution Profit account.
Those are powerful points and I take them into account in my conclusions on the facts.
Moving on, it is common ground that there was a meeting between Mr Straw and Mr Stewart in February 2005 held in Seattle. At this meeting, Mr Stewart made a proposal for the payment of outstanding Net Profit Share. Mr Stewart produced a sheet containing certain financial information (“the February 2005 Paper”) and two further sheets containing a schedule of payments over the period to April 2012.
The February 2005 Paper was prepared on the basis that the £675,000 which had been paid on account of Distribution Profit (as I have already explained) would be re-allocated to the outstanding amount required to discharge the liability in respect of the Net Profit Share. The Net Profit Share would be paid by monthly instalments (rather later than when the JV required them to be paid). The Distribution Profit clawed back in this way would be repaid over the period from 1 January to April 2012 by monthly payments. The principle was clear although I find the arithmetic in the February 2005 Paper difficult to follow. In the first place, it shows the £675,000 payment being set against JV liability amounting to only £618,506 and does not show how the balance is being dealt with. That is a minor point which was corrected in Mr Stewart’s fax to Mr Straw dated 1 June 2005 (“the 1 June fax”) to which I come in different context in a moment, where he said that the payments on account would be re-allocated to Net Profit Share up to the fourth quarter of 2004. Secondly, it described the repayment of the Distribution Profit as taking place over 8 years and 4 months commencing January 2005. That would take one to April 2013 rather than 2012. Perhaps that is a misprint, since it does refer to payment over 100 months. However, the schedule of payments only takes one to April 2012. I do not know how this is to be explained. It does not need to be explained since nothing turns on it. I would only add that I see no reason to doubt that the proposals to re-allocate the payment on account and to set it against Net Profit Share and to pay the Net Profit Share over the periods described were put forward with the knowledge and approval of Mr Jennings.
Mr Straw says that he did not accept this proposal. It is clear that he did not do so. Nonetheless, the re-allocation was effected so that the statements of account provided for periods after February 2005 showed Net Profit Share being accounted for on that basis. This re-allocation was acknowledged in an email from Mr Stewart to Mr Straw dated 16 May 2005 (“the 16 May email”). This email enclosed a statement showing the payments on account (in their whole amount) being set against Net Profit Share with a balance to pay of £227,120. Mr Stewart wrote that Mr Jennings had instructed him to make a payment of that amount. It is worth quoting from the email the passage which followed:
“By way of explanation, I would mention that in order to avoid jeopardising our financial position generally, and Redlands in particular, this is the maximum amount that we can pay you at the present time. Please note that in calculating the amount we are paying now, we have reclassified the distribution payments already made of £500,000 and £175,000 respectively, as we see this as the neatest way of applying these payments against our outstanding indebtedness to you…”
after which passage there follows on the passage which I have set out at paragraph 135 above.
Now, it may be that there was, as Mr Jennings suggests, a downturn in sales and true that staff were being laid off, as Mr Stewart stated in that same email. But that is no reason why Mr Straw and Blix should not be paid. I do not accept Mr Jennings’ evidence that this downturn – even if it did occur – was the reason for cash-flow difficulties. The reason was that the cash which should have been in BTSL and Didgeridoo to meet their liabilities to Mr Straw and Blix was not there: it was not there because it had (i) been extracted as a result of the Licence Agreements which I have referred to and (ii) because of the acquisition and improvement of Redlands which, for reasons I have already given, provides no excuse (in contrast to an explanation) for a shortfall in cash.
The passage which I have just quoted demonstrates a cavalier treatment of Mr Straw and Blix. Even if the Defendants were correct in their case, which I have already rejected, that Distribution Profit was to be ascertained over the entire duration of the DA, as at February and May 2005, there was a substantial distribution profit: that is why the proposal provided for payment of the share of that Profit, albeit over a period of years. One thing, however, was clear, namely that payments on account were made on account of Distribution Profit and not of sums which might from time to time be owing whether as Net Profit Share or Distribution Profit.
Mr Straw and Blix might have had, it seems to me, a powerful case for refusing to accept the re-allocation and, ultimately, suing the Defendants for their Net Profit Share on the basis that the set-off had not been validly effected. However, that is not what they did and it has not, in the present proceedings, sought to unravel the effect of what was done. The result, then, is surely that, as at May 2005, the Defendants acknowledged that the Distribution Profit was such that Mr Straw and Blix were entitled to at least £675,000 in respect of the period to 30 June 2004.
Following the February 2005 meeting in Seattle, it is the evidence of both Mr Straw and Mr Stewart that Mr Straw was pressing for an updated account of the Distribution Profit and his and Blix’s share of it. I do not think that part of their evidence can seriously be challenged and I accept it. This led to Mr Stewart finalising what became the April 2005 Account. On 11 April 2005, Mr Stewart sent to Mr Straw an email (“the 11 April email”) attaching an Excel file (the email refers only to “an Excel file”) which he described as containing “the relative UK + Oz Hot/Blix Eva distribution accounting for all period up to 30.06.04”. He drew attention to the fact that for period up to 31 December 2001, the distribution accountings were done by Ms Cole and thereafter by Mr Stewart himself and Mr Spencer in Australia. Neither he nor Mr Spencer had copies of Ms Cole’s workings. He asked for an acknowledgment of safe receipt. The attached file is the April 2005 Account and runs to 8 pages.
The first page dealt with BTSL for the 12 months ending on 30 June 2004. It showed total distribution income for the EC business of £1,792,700 in 2003 and £1,064,089 in 2004. From this were deducted a number of items of distribution costs giving a total distribution profit of £(647,880 + 251,671) = £899,551.
From the distribution profits thus ascertained were deducted items for Mr Jennings’ management time and income foregone in relation to Asian and Irish sales. These are now accepted by the Defendants as deductions which are not allowable in computing Distribution Profit, making it unnecessary for me to say any more about them. The third page carries out the same exercise for the 12 months ending on 30 June 2003, again containing deductions which are admitted to be inadmissible. It shows a distribution profit, excluding the inadmissible items, of £648,257.
The second page carried out a similar exercise for Didgeridoo over the same period and for the 12 months ending on 30 June 2003. It showed a loss for each year, although it is alleged by Mr Straw and Blix that the figure included for overheads contains, and can be shown to contain, inadmissible items. I will return to that in considering Mr Jacobs’ evidence. Curiously, the third page carried out the same exercise of the period ending 30 June 2003 but arrived at a smaller loss due to a reduction in the figures for overheads. Taking the losses as shown on the second page, they were £221,036 and £185,712 to 30 June 2003 to 30 June 2004 (ie twice the figures for converting Mr Straw’s half share of the losses at £110,518 and £92,856 from A$s into £s shown at the foot of the first page).
The remaining four pages dealt with all periods from 1 July 1998 to 30 June 2002. The summary, even after allowing for inadmissible deductions in relation to Mr Jennings’ management charges, reaches a figure for Mr Straw’s share of Distribution Profit of £652,696. It reflected a loss in Didgeridoo which was set against the profit in BTSL. It is now accepted by Mr Hunter that it is right to treat the DA globally in this way within a given period of account. The page identified £500,000 as having been paid on account in January 2001. That was correct at the time of this accounting, but does not take into account the re-allocation of that £500,000 to Net Profit Share. Mr Straw’s and Blix’s share of total Distribution Profit for the whole period taking account of Australian losses amounted, even on the face of the April 2005 Account, to something in excess of £750,000 and thus in excess of the £675,000 payments on account which had been made. If the items improperly deducted are eliminated the figure is considerably larger.
Before turning to the dispute about whether the April 2005 Account was sent to Mr Straw with Mr Jennings’ approval, I think it best to look at what happened after the April 2005 Account had been sent. The next relevant email on the file is dated 29 April 2005 (“the 29 April email”) from Mr Stewart to Mr Straw. It attached “various excel files which comprise the bulk of Stuart [Spencer] and my workings for the Oz and UK distributions up to 30/06/04 respectively”. He referred to his email of 11 April reminding Mr Straw that it was Ms Cole who had done the bulk of the work on accounting prior to 1 January 2002. It is not entirely clear what the excel files sent on this occasion were, but they certainly included the file which had been sent with the 11 April email.
On 19 May 2005, Mr Straw sent an email (“the 19 May email”) to Mr Jennings which was in relation to the payment of £227,120. Mr Straw was pleased that a payment had been made but was not happy with the paperwork which he described as re-writing history by reclassifying the £675,000 payments on account. The email was also his preliminary response to the distribution accounting which Mr Stewart had sent him on 11 April 2005. This, he said, was the only distribution accounting which he had received other than the one sent by Ms Cole on 10 August 2000 covering the period up to 31 December 1999. He listed a number of objections each of which could have been made by reference to the April 2005 Account and did not need to be based on the contents of any other Excel files. Mr Jennings must have been aware from that date, at the latest, that Mr Stewart had sent some accounting document to Mr Straw relating to Distribution Profit.
That produced a long response, not from Mr Jennings, but from Mr Stewart by the 1 June fax. He was rather defensive about the re-allocation but denied that it was a re-writing of history. He recorded that a substantial portion of the overall profit on the venture was locked into the value of Redlands. He referred to a small loss on the distribution venture for 2003 and for 2004 but that, I should comment, was only on the basis that items were deductible which is now common ground, were not.
The most relevant paragraph for present purposes is the last paragraph on the second page. In that paragraph Mr Stewart expressed his surprise and disappointment about Mr Straw’s comment that he had seen the distribution accounts for the first time when they were emailed “last month”. Mr Stewart felt absolutely sure that he had sent copies previously and past experience might suggest that material which he had sent either did not arrive or had somehow “disappeared into the ether”.
The 1 June fax went on to consider various aspects of the April 2005 Account. It described the methodology in relation to the JV accounting (ie ascertainment of Net Profit Share) and in relation to the distribution accounting. Mr Straw accepts this as the correct methodology to apply to the ascertainment of Distribution Profit. Mr Stewart made reference to one of the summary sheets (ie which is clearly a reference to the first two pages of the April 2005 Account). And then, on the final page of the 1 June fax, Mr Stewart attempted to justify the deductions in relation to management charges and Asian and Irish sales which it now accepted by the Defendants are not deductible.
On the same day, 1 June, Mr Stewart sent to Mr Straw a letter sending him copies of the supporting schedules to the distribution accounting (clearly a reference to the April 2005 Account which he had (re-)sent with the 1 June fax). Mr Jennings accepted that he saw this letter in draft before it was sent: he did not raise concerns about its contents although whether he went as far as approving it as Mr Hunter suggests is not entirely clear. There were 94 pages enclosed. These schedules show a number of items which Mr Hunter submits are not deductible in calculation of Distribution Profit relating in particular to Redlands. These schedules demonstrated how the figures found in the April 2005 Account have been arrived at. There is no evidence before me to suggest that the figures for income and outgoings actually included in the schedules are significantly incorrect save for certain matters raised by Mr Vinall which I come to later (although whether outgoings shown are properly deductible in ascertaining Distribution Profit is another matter) and every reason to think that they are correct unless one supposes that Mr Stewart and Mr Spencer were producing false accounts to deceive Mr Straw. There is not a shred of evidence to support such a suggestion and it is, in any case, not one which Mr Vinall has put forward.
Indeed, it is unlikely in the extreme that Mr Stewart would have overstated income since that would be based on the same figure for gross receipts as the JV accounting (ie ascertaining the Net Profit Share); and given the exercise which Mr Stewart was obviously undertaking – to reduce the Distribution Profit to as small an amount as possible, for instance by including the management charge and the items in respect of Asian and Irish sales – it is hardly likely that the outgoings will have been deliberately understated. The April 2005 Account is likely, therefore, to show the minimum which would be shown as due were a full account to be taken, subject to some points made by Mr Vinall which I will come to.
To complete this chain of correspondence, Mr Straw sent to Mr Stewart a fax on 30 June 2005 repeating his objections to some of the deductions included in “overhead” to which Mr Stewart replied maintaining his position. He also made it clear that he had not received any distribution accounting from Mr Stewart prior to the 11 April email. From Mr Straw’s perspective, in dealing with Mr Stewart, he had no reason to think that he was not dealing with a person authorised to deal with the matter on behalf of BTSL and Didgeridoo and, indeed, Mr Jennings.
While this dispute was rumbling on between Mr Straw and Mr Stewart, an event is alleged by Mr Jennings to have taken place within the Jennings camp which I should relay. He says that there was a phone conversation between Mr Stewart, Mr Jennings, a Ms Clark, Mr Regan and Mr Spencer (with Mr Jennings at one end and Mr Stewart at the other end (although where the other parties were I am not clear and nothing turns on it). Mr Jennings did not mention this conversation in his witness statement but he did so in his oral evidence. He dated the conversation at 20 May 2005. He said that he expressed his anger and surprise at Mr Stewart having sent the April 2005 Account to Mr Straw without approval. Mr Stewart said that he could not recall such a call. Mr Regan said that he could remember a call in which the April 2005 Account was discussed although he was unable to put a date on it and the impression I gained was that he considered it was the disclosure of the 94 pages of schedule which had led to Mr Jennings’ concerns, in which case the call would have taken place after 1 June. Mr Spencer also said that he remembered such a call, although like Mr Jennings he had not mentioned it in his first witness statement, although he did so in his second witness statement. He was unable to confirm that it was prompted by the 19 May 2005 communication from Mr Straw, although his reconstruction rather than his memory was that this was what he thought.
It seems to me that several of the issues which I have identified above are interlinked in the sense that the answers to each informs the others and in that there are questions of credibility to resolve as well. The issues are these:
Mr Stewart’s actual authority to prepare the April 2005 Account and his authority to send it to Mr Straw; and similarly his actual authority to send the 94 pages of schedules.
When Mr Stewart first sent the April 2005 Account to Mr Straw.
The (alleged) phone call concerning the April 2005 Account.
In relation to the authority of Mr Stewart to prepare an account in relation to the Distribution Profit, there can, in my judgment, be no doubt that he had implied actual authority to do so. It was within the scope of his ordinary responsibilities to do so and, in any event, I am satisfied that he was asked by Mr Jennings to do so. He also had, clearly in my judgment, ostensible authority to deal with Mr Straw in relation to Distribution Profit accounting and, to the extent that any agreement was reached about Distribution Profit, BTSL and Didgeridoo would be bound.
I am also satisfied that the reason he was asked to do so was not simply for internal information purposes. It was to produce something which could be sent to Mr Straw to show him what the Defendants considered that he and Blix were entitled to by way of Distribution Profit. At that time, it was clear that there was a substantial Distribution Profit. The Defendants did not have the cash to pay any sums in respect of that Profit and, indeed, were in a position where they had to claw back the payments on account of Distribution Profit and reallocate them to Net Profit Share. I am sure that Mr Jennings, for all his protestations of distance from, and non-involvement in, the financial aspect of the business was well aware of those basic truths.
I am also satisfied that he was well aware that a contributory factor, if not the main factor, in the inability to make the necessary payments to Mr Straw and Blix was because so much money was tied up in Redlands. I have already set out what Mr Stewart told Mr Straw about that on more than one occasion. I am sure that what Mr Stewart said about that was true, that Mr Jennings knew it was true and that he authorised Mr Stewart to tell Mr Straw that truth.
I am also satisfied that Mr Stewart discussed with Mr Jennings what should go into the document to be provided to Mr Straw. Even if Mr Jennings did not see the final form of the April 2005 Account, I am sure that he knew that it would show a distribution profit based on an income equal to the 30% distribution fee less deductions which would include not only direct costs but also indirect costs. Within indirect costs, he knew that there would be deductions for his own management time and in respect of the Asian and Irish sales and Redlands.
Whether he knew the detail of the individual items that would go into the overhead is less clear. That was what he employed others to do. But I am sure that he had a good idea of the overall expenditure and its components, especially in relation to wages. He was taking enough interest in the financial aspects of the business to lay off staff in order to save wage costs as Mr Stewart explained to Mr Straw in the 16 May email. Whether Mr Jennings knew that items of expenditure were included in overheads which perhaps ought not to have been included – for instance some or all expenditure on Redlands refurbishment, private use of cars – I do not know and need not decide. The point is that the actual figures included against each item in the 94 page schedule are ones which Mr Stewart in England and Mr Spencer in Australia took from the books and records of BTSL and Didgeridoo respectively. Mr Stewart did so with a view to presenting the results to Mr Straw and it is reasonable to conclude that Mr Spencer too knew that this was the purpose of providing the figures. Incidentally, I accept Mr Hunter’s submission that Mr Spencer would not have provided all this material to Mr Stewart without Mr Jennings’ approval.
What is less clear is whether Mr Jennings actually knew the bottom line for each period of account and how much in total would be owing to Mr Straw and Blix, although I have little doubt that he appreciated it would be substantial and at least as much as the payments on account which were to be re-allocated. In that context, I ought to say that I am certain that the re-allocation proposal was made with Mr Jennings’ knowledge and approval. The proposal itself was recognition that a large sum was owing, otherwise there would have been no reason to propose payment off by instalments over 8 years and 4 months. Against that background, Mr Jennings must have expected that the accounting document being prepared by Mr Stewart would paint a gloomy picture and, what is more by reason of the inclusion of deductions of management charges and in relation to Asian and Irish sales, more gloomy than would otherwise have been the case.
What is also less clear is whether Mr Jennings expressly authorised Mr Stewart to send the April 2005 Account to Mr Straw. It is at least possible that Mr Jennings would have wanted to see the final account before it was sent off in order to make a commercial decision about how best to play his hand. I cannot reach that conclusion because it is mere speculation and not supported by the evidence. On the one hand, Mr Stewart says that he discussed everything with Mr Jennings and that he had authority to dispatch the April 2005 Account. On the other hand, Mr Jennings will go no further than to accept that some accounting documents would be prepared but only for internal purposes, so the question of allowing the account to be sent to Mr Straw but only if final approval was given, could not arise.
The relevance of the alleged phone call is that it may throw some light on the authority of Mr Stewart to do what he did; as a free-standing issue, it is of no relevance to the case. Mr Hunter says that I should conclude that either there was no call at all on or around 20 May 2005, or that such a call was simply to discuss the appropriate response to Mr Straw. He cannot say there was never a call: clearly there was a phone call at some time involving all of the people I have identified. Further, I am satisfied from the evidence of Mr Regan, which supports to a limited extent Mr Jennings’ version of events, that this call was more than a discussion of the appropriate response to Mr Straw following his letter of 19 May 2005.
But, I ask myself, why would Mr Jennings be angry about sending the April 2005 Account to Mr Straw? There was nothing on the face of it which Mr Jennings ought to object to (save perhaps the fact that a lot of money was owed). His explanation to me, insofar as I understood his evidence, was that inappropriate deductions were shown, in particular his management charge, which would cause dissent with Mr Straw. That is not an explanation at all given, as I have held to be the case, he expressly discussed the inclusion of this item and agreed to it.
One explanation may be that what really upset Mr Jennings was not so much the provision of the April 2005 Account but the sending of the 94 pages of schedules which revealed to Mr Straw for the first time how the figure for overheads was arrived at and which would give rise to objection from Mr Straw, particularly in relation to expenditure on Redlands. It seems, however, that Mr Straw received these schedules for the first time only with the 1 June 2005 letter. That would mean that the phone call took place after 1 June 2005. That would not be inconsistent with Mr Regan’s evidence and would be consistent with the impression he gave that it was the schedules which provoked a response from Mr Jennings.
The problem with that explanation is that the 1 June fax is clearly a response to the 16 May email which was sent to Mr Jennings (albeit it was copied to Mr Stewart) and must have been discussed between Mr Jennings and Mr Stewart before 1 June. Indeed, Mr Jennings accepts that he saw the letter before it went but did not pay much attention to it. Whatever reason he may have had for not paying much attention to it – the obvious reason being that he was leaving everything to Mr Stewart and what Mr Stewart did was done with authority – the fact is that the letter was sent. One of the things Mr Stewart said in the letter that he would do, was to send the detailed workings under separate cover. This is precisely what he did in the letter of the same date. The 1 June letter is, however, a very defensive document and it is again surprising to my mind that Mr Stewart would have written in this way unless he had some concern other than Mr Straw’s response. It does look like an attempt to “sort Bill out” as Mr Jennings says he, Mr Stewart, promised to do.
Mr Vinall is critical of Mr Stewart’s evidence about this aspect of the case. It is not just that he cannot remember a conversation which must have had a real impact, but his evidence shows that he is at best unreliable and at worst he is dissembling. I acquit him of the latter, but I am bound to say that his evidence on this aspect is less than satisfactory however strongly he has expressed it.
Further, I have to assess his evidence in the context of his other evidence about the sending of the April 2005 Account to Mr Straw. Until his cross-examination, his position was as set out in the 1 June fax, that is to say that he had sent the April 2005 Account to Mr Straw prior to sending them “last month”. This letter, it will be remembered, was stated to be a response to the 11 April email with no mention being made of the 29 April email. I had taken that to mean, and I am sure that this is what Mr Stewart intended to say, that he had sent the document to Mr Straw well before the beginning of April. Indeed, in his cross-examination he thought it might even have been as long ago as the end of 2004. He was clearly confused about when he did send it and such answers as he gave were clearly reconstruction rather than recollection. The final reconstruction came from questioning in re-examination. The reconstruction was that he had it in his mind that the occasion which he though Mr Straw was referring to was the sending of the April 2005 Account on 29 April; and when he was suggesting in the 1 June letter than he had sent the Account previously, he was correct because that was a reference to the 11 April email. That there might be something in that point becomes apparent when it is asked why the 29 April email was sent since it does not appear to add anything to the 11 April email unless the attachment to the later email included material not in the earlier one. The evidence, so far as it goes, does not assist with that save that the later email refers to “various excel files” whereas the earlier refers only to “an Excel file”. I suspect that the two attachments contained the same pages, perhaps in different files. But assuming the material was the same, why did Mr Stewart send it again? No answer has been given to that; it is only possible to speculate.
It is difficult to draw any conclusion. Certainly, Mr Stewart’s evidence cannot be relied on, and that might cast some further doubt on the reliability of his evidence concerning the phone call and thus of his authority to send the April 2005 Account to Mr Straw.
One matter is clear from all of the evidence which I have received. By 1 June 2005 Mr Jennings knew that the April 2005 Account had been sent to Mr Straw and was aware of its contents. It is also clear that he allowed Mr Stewart to send the 1 June letter and approved its contents. He implicitly thereby allowed him to send the 94 page schedule.
My view, however, is that it is unnecessary to decide whether Mr Stewart had authority to send the April 2005 Account to Mr Straw and thus unnecessary to draw any conclusions about the phone call or about when Mr Straw was first sent the April 2005 Account. What is important for present purposes is not when it was sent or whether it was sent with authority but whether its contents are accurate. Reliance is placed by Mr Straw on the April 2005 Account because it is, on his case, the best material available to show what the Distribution Profit was: it is the best starting point. Mr Hunter says the taking of an account will reveal no further relevant information and the court has everything it has to make a decision on what is owing. Even if that is not the case, the Defendants have failed to produce any material to demonstrate a material inaccuracy in the accounts such as would reduce the amount owing after adjustment to reflect the elimination of deductions which it is common ground should not be made ie Mr Jennings’ management charges and the deductions in relation to Asian and Irish sales.
On that basis, it is irrelevant whether the April 2005 Account was sent with or without authority or indeed that it was sent at all. The argument would be the same even if it had not been sent at all, the question being the accuracy of the Account as evidence of the amount of the Distribution Profit so as to obviate the need for the taking of an account.
Another reason for considering the question of authority to send the April 2005 Account to be irrelevant is this. It was clear from Mr Jennings’ oral testimony that he had decided to leave the matter of Distribution Profit accounting to Mr Stewart from shortly after receipt of the 19 May email. He had become resigned to the fact that the joint venture was likely to come to an end and took little interest in what was happening on the accounting front. He never challenged, or instructed Mr Stewart to challenge, the figures on which the April 2005 Account was based so that Mr Straw never had any reason to think that those figures might overstate income or understate outgoings. On this basis, even if Mr Stewart acted beyond his authority in sending the April 2005 Account, he did have authority to continue discussions and negotiations with Mr Straw about Distribution Profit accounting. This is all the more reason to place reliance on the figures in the April 2005 Account save to the extent that they can clearly be shown by Mr Straw to contain inadmissible deductions or by Mr Jennings to omit or understate allowable deductions.
Methodology for ascertaining Distribution Profit: Issue ii)
The correct methodology for ascertaining the Distribution Profit in an ideal world cannot, in my judgment, be open to serious dispute. The starting point is to ascertain the income relevant to the calculation. That is not difficult: it is the distribution fee of 30% of gross receipts. On the outgoings side, the direct costs of the distribution business were to be deducted. The indirect costs were to be ascertained as a proportion of the general overheads of BTSL and Didgeridoo. It appears from the evidence of Ms Cole that records were kept, perhaps in a slightly haphazard way, of the time spent by staff on the distribution of EC recordings as compared with time spent on other business with apportionment of staff costs and overheads being apportioned on the basis of such records. According to Ms Cole, and I accept this, the actual decision about how to apportion overheads was taken by Mr Jennings and in practice about 90% was apportioned to the EC distribution business. This whole approach to distribution profit accounting is consistent with how Mr Stewart described it in his fax dated 5 August 2005 to Mr Straw: “… the actual method of accounting must surely follow common sense and generally accepted accounting principles, which we believe have been applied at all times”.
I say “in an ideal world” because in an ideal world, all the necessary records would be readily available in order for the calculations to be done. Unfortunately, that is not the case. First of all, it is not at all clear what records were ever kept. Secondly, even assuming that they were kept, they have not been produced by the Defendants for the purpose of this action.
Now, it is possible, at least in theory, that if the taking of an account were to be ordered for the period ending 30 June 2004, the Defendants would be able to produce the material required for that exercise to be conducted effectively. But if the reality is that no such material is available any longer (if it ever was) then some other method of calculating the Distribution Profit must be adopted.
Mr Hunter says that the April 2005 Account should be adopted, with adjustments to remove items which should not feature in the calculation of Distribution Profit. Mr Stewart prepared the April 2005 Account adopting the correct methodology (once one removes the items which should not feature). There is no reason to question the figures which he used, subject to some adjustments which are justified in the light of the evidence, including the expert evidence of Mr Jacobs. Accordingly, the April 2005 Account provides a firm basis for the calculation of Distribution Profit for the relevant period.
Mr Vinall says that the April 2005 Account is not to be relied on. Too many adjustments are required to make it safe to rely on it. In any case, the underlying figures used are not reliable and were never approved or authorised to be provided to Mr Straw by the Defendants and in particular Mr Jennings. The logic of Mr Vinall’s position is therefore that an account should be provided by the Defendants or taken by the court. Alternatively, he submits that the statutory accounts form a more reliable starting point for the ascertainment of Distribution Profit. Some adjustments may be needed but the fact that they are audited accounts makes the figures far more reliable than those in the April 2005 Account. I am not sure which of those is his primary position and which is his secondary position, but as will be seen, it does not matter.
In my judgement, both the April 2005 Account and the statutory accounts are capable of forming a starting point for the ascertainment of Distribution Profit for the period ending 30 June 2004 assuming that it is not now appropriate to order the taking of an account. The question is which is the more suitable and reliable starting point.
So far as concerns the April 2005 Account, it is my view that Mr Stewart’s underlying figures can be taken as substantially reliable subject to some qualifications which I will come to, none of which would reduce income and none of which (apart from deductions in relation to Redlands and Annandale and with one minor possible exception) would increase deductible costs.
The April 2005 Account is based on two sources of information. The first source, relating to the period up to 31 December 2001 was Ms Cole’s figures as Mr Stewart emphasised to Mr Straw on more than one occasion. There is no reason to doubt Ms Cole’s competence – even Mr Jennings accepted she was professional and competent – and no reason to think that her figures were incorrect. In any case, there is in practice no way of checking them and they are the best evidence which is ever likely to be available. Mr Stewart had explained to Mr Straw that neither he nor Mr Spencer had her workings and nothing has come to light during the course of this litigation to suggest that they are or might be available. It is, in my judgement, wholly unrealistic to think that an order for an account would produce any material on which a final determination could be made having any more accuracy than the figures used in preparation of April 2005 Account. All that such an order would produce would be added delay and cost, unjustly postponing the day on which the Defendants must make payment.
The second source of information was the material which Mr Spencer supplied to Mr Stewart (with Mr Jennings’ approval) in relation to Australia and the material to which Mr Stewart had direct access in relation to the UK.
The April 2005 Account was, so far as concerns the period ending 30 June 2002, based on both those sources although the period covered by Ms Cole to 31 December 2001 accounted for the bulk of the income and outgoing over that period. So far as concerns the years ending 30 June 2003 and 30 June 2004, the Account was based on the source material of Mr Spencer and Mr Stewart.
Subject to some points made by Mr Vinall, I see no reason to doubt Mr Stewart’s underlying figures. Mr Stewart was operating a computer system of which no criticism is made, as was Mr Spencer. There is no reason to think that any income was omitted (and even if it was, it could only show additional amounts owing to Mr Straw and Blix). Nor, subject to Mr Vinall’s points, is there any reason to think that any significant items of expenditure were omitted or that the costs actually incurred in relation to any item are incorrectly stated. Again as I have already commented, it is hardly likely that Mr Stewart would understate any items of expenditure which he had identified given that he was clearly attempting to keep Mr Straw’s and Blix’s Distribution Profit share as low as could be justified.
It is an entirely different matter whether the April 2005 Account is accurate in terms of what are proper deductions. It is now common ground that Mr Jennings’ management fee and the items in relation to Asian and Irish sales are not deductible so that adjustment can be made to eliminate those items.
Mr Vinall’s points can be summarised this way. First of all, the 94 pages did not contain final figures and would not necessarily include all relevant expenses. Secondly, the extent to which Mr Stewart actually relied on Ms Cole’s figures is not clear. And thirdly, there were methodological inconsistencies in the way he accounted for Redlands expenses.
Let me take those in turn. The criticism made is based on what Mr Spencer said in seeking to justify his own approach as in Annex A. His evidence about the accuracy of Mr Stewart’s figures was that they were an attempt to show as small a profit or as large a loss as possible. In other words, the overall expenses could be overstated. That is not a point on which Mr Straw and Blix seek to rely: they do not seek an account and are content, subject to the major adjustments relating to management charges, Asian and Irish Sales and Redlands and Annandale, to accept Mr Stewart’s figures. In any case, I do not for a moment accept Mr Spencer’s suggestion which was to the effect that the 94 pages of schedules were so unreliable as to form an unsafe foundation for the ascertainment of Distribution Profit. They may not, I readily accept, be 100% accurate. But they were put forward by Mr Stewart with the intention that Mr Straw and Blix should rely on them. Mr Jennings knew that the figures were being provided; but even if he did not know at the time (which I find as a matter of fact that he did) it is absolutely clear that he knew not very long afterwards and yet took no steps to disabuse Mr Straw of their reliability.
Nonetheless, there may have been expenses which were omitted. Mr Vinall gives one example, namely depreciation costs which appear in the financial statements on which Mr Spencer relies but are not reflected in Mr Stewart’s figures. Mr Stewart and Mr Spencer accepted that these were proper costs to include. This is one identified a cost which I think the evidence suggests should be reflected in the distribution accounting. I will deal with at the end of this judgment with how this deduction should be dealt with. The sum involved is about £33,000. There is also an issue relating to certain legal costs (see paragraph 249(ii) below) but that is a matter which I can resolve without the need for an account.
As to the second matter, I do not understand why there is any uncertainty about the extent to which reliance was placed on Ms Cole’s figures. It seems to me that they were relied on as the only figures available for the period.
As to the third matter, I do consider that the position in relation to Redlands (and to some extent Annandale too) is unsatisfactory. It is unsatisfactory in a way which may be to the detriment of one party or the other, depending on whether methodological consistency would have resulted in the deductions in respect of Redlands and Annandale being larger or smaller in amount. It is also unsatisfactory in a way which could only be to the detriment of Mr Straw and Blix in that the expenditure which was deducted may well be capital expenditure (in whole or in part) which should not feature as a deduction in the distribution accounting. This factor does not lead to the taking of an account. It can be dealt with in a more proportionate way as I will explain later.
The Defendants contend that a different approach is more appropriate, namely to start with the statutory accounts. The Defendants did not provide any detail of the financial consequences of this approach until the service of the AD&C which included Annex A. Annex A was not explained in the AD&C; but it was explained in Mr Spencer’s second witness statement dated 3 June 2013, the day before the commencement of the trial. He explained that Annex A was based on the statutory accounts and the use of the formula which I have already referred to at paragraph 16 above namely:
Distribution Profit = Reported Profit Before Tax – JV Profit Share – non-Eva Profit
Mr Spencer explained in his witness statement that he had taken the financial statements as the basis for sales figures and detailed costings and that the “Profits After Tax Figures” came directly from those statements. In relation to BTSL, there were three “add backs” in relation to management charges paid to BTSPL, the write-off of Eva Rights and the payments on account of £675,000. In relation to Didgeridoo there were “refinements” in relation to Eva Rights and Book Entry Interests.
Even without Mr Jacobs' evidence, it seems to me that the 2005 April Account provides a more reliable starting point than the statutory accounts. The April 2005 Accounts adopt a methodology which is very close, if not identical, to the methodology which ought to apply in the ideal world of full and readily available data. For reasons explained, I consider that the underlying figures can be relied upon subject to the caveats I have mentioned. In contrast, Mr Spencer’s approach starts with financial statements (albeit audited ones) prepared for an entirely different purpose, adopting accounting conventions which have not been shown to be appropriate to the calculation of Distribution Profit and reflecting the sort of aggressive accounting which I have also mentioned. Mr Jacobs confirms this in the second addendum to his report and I accept what he says. As he puts it, the financial statements were not prepared for the purpose of distribution accounting but for
“stating the companies’ financial positions for tax purposes. Because of this they include accounting adjustments that are intended to manipulate the taxable profit but which have nothing to do with the distribution accounting (nor for that matter the joint venture accounting)….
….
In my opinion, the correct methodology for calculating the Distribution Profit is to identify the actual costs that relate to the distribution activities, as Belinda Cole and then Alan Stewart did in the August 2000 and the April 2005 distribution profit accountings. The same methodology was used in the joint venture accounting i.e. using the actual joint venture costs as the basis of the accounting.
This is the methodology that I have seen used by others when calculating profits to be shared by joint venture parties.”
Further, Mr Spencer accepted in cross-examination that Annex A as it was contained in the AD&C and as he presented it, would need further qualification to reflect, for instance, the non-deductibility of certain management charges. It is not possible to say what, if any, other adjustments might be needed which Mr Spencer had failed to identify in Annex A.
Moreover, Ms Cole had not used this methodology in her earlier accounting nor had Mr Stewart done so when producing distribution accounting in 2005. Financial statements have never formed the basis of the ascertainment of Net Profit Share.
In my judgment, it is unsustainable (as was eventually common ground) that the approach reflected in Annex A is the appropriate methodology which ought to be adopted in the ideal world which I have identified of full and readily available reliable data. It is at best a starting point in the real world when one moves away from the ideal world. In the real world, however, there is a competitor in the shape of the April 2005 Account. I have no doubt that the April 2005 Account wins the competition and is the more suitable starting point.
Should an account be taken?: Issue iii)
The question is then whether the Distribution Profit should in fact be ascertained on the basis of the April 2005 Account (with adjustments) or whether an account should be taken. It is relevant to note that nothing was said when the DA was originally made or when the arrangements concerning the distribution fee were engrafted onto it about the taking of accounts. The contractual obligation was to pay 50% of the Distribution Profit. The provision of pieces of paper called accounts and, to the extent appropriate, of back-up material to justify the figures in those accounts was, of course, needed in order to show that a particular payment or proposed payment represented the 50% share. But the provision of accounts and other material is not an end in itself: the only real end is the payment of 50% of the profit. Accordingly, it seems to me that a resolution of the present dispute which gives to Mr Straw and Blix an amount which is no more than they could be entitled to is a proportionate and just response if, as they do, they restrict their claims to that amount. The fact that the amount claimed is not a precise reflection of what they might be entitled to if full accounts were taken does not lead to the conclusion that the Defendants are entitled to insist on an account.
Conversely, if it were clear that the amount claimed by Mr Straw and Blix might be less than they claim (ignoring de minimis adjustments), they should not be entitled to an order for payment of more than they would clearly obtain on the taking of an account.
It is significant, as I see it, that the Defendants have not produced any material other than in relation to the depreciation charge mentioned above to demonstrate that the April 2005 Account is inaccurate so far as concerns the figures relevant to the ascertainment of Distribution Profit. They have known for a considerable time that Mr Straw and Blix rely on the April 2005 Account and yet have done nothing to show that the figures contained in it are incorrect. They have asserted vigorously that its preparation and distribution by Mr Stewart was not authorised (although in the light of the evidence it is clear that Mr Stewart was instructed to prepare an account relating to the Distribution Profit so that the case of the Defendants has to be qualified to that extent). But what they did not do, either in 2005 or until preparation of their Defence in the present action, was to assert that the April 2005 Account contained incorrect underlying figures; and they have never produced any material to show that those figures are wrong. It was not until cross-examination that the suggestion was made that there should be an adjustment to the April 2005 Account to reflect depreciation; and no other item has been shown to have been omitted. It is simply not good enough, in my judgment, for the Defendants now to point to this item (and the Redlands/Annandale inadequacies) to delay for another doubtless substantial period of time the payment of that which Mr Straw and Blix can show they are entitled to on the basis of the evidence now before the Court. The Court must not be blind to the fact that the Defendants have consistently denied that Mr Straw and Blix were entitled to an account because nothing was due. But now they are forced to accept that significant sums are due because that is so even on Mr Spencer’s approach. It was the Defendants’ obligation to account to Mr Straw and Blix for 50% of the Distribution Profit; they should have done so years ago and should have produced the necessary paper-work to demonstrate what was due. The circumstances of the present case are such that it would, to my mind, be a great injustice to Mr Straw and Blix if there were to be a further long and costly delay in making recovery. The Defendants have had every opportunity to demonstrate on the basis of proper evidence why the April 2005 Account is inaccurate but, subject to the matters expressly raised which I have already discussed, they have not only failed to show that the Account is inaccurate but have not provided evidence (in contrast with assertion) of any way in which it might be inaccurate. There is an irony, in any case, in the Defendants position in that they relied on another approach, Mr Spencer’s Annex A, to demonstrate that there was a loss: they did not say that an account should be taken in order to demonstrate the loss. That, of course, is not an answer to their argument that an account should now be taken.
Having rejected the taking of an account as the correct course, it follows that the April 2005 Account forms the basis for the ascertainment of the Distribution Profit up to 30 June 2004. The next step in the exercise is now to see how that approach translates in to a money amount.
Quantum of Distribution Profit claim: Issue iv)
Taking the April 2005 Account at face value but reversing out the £500,000 which was re-allocated against Net Profit Share, the amount due is £758,127. The calculation can be seen in Mr Jacobs’ report at Schedules 2a and 2b of his expert report (Schedule 2b although expressed in A$s is in fact in £s). In reaching that figure, he has not excluded Mr Stewart’s deductions for Mr Jennings’ management fee and for income forgone from Asian and Irish sales. That is the first component of Mr Straw’s and Blix’s claim in relation to Distribution Profit.
The second component is the claimed sum of £867,205. This results from adjustments which it is contended should be made to the April 2005 Account to reflect items of deduction in both the UK and Australian businesses which it is said should not have appeared or which reflect items in the 94 pages of schedules which should not feature either in whole or in part in the distribution accounting. It is said that these are not matters which need to be referred to the taking of an account: there can be no dispute about the figures, only about whether the amounts are deductible.
In relation to the distribution business in Europe, Mr Straw and Blix now rely on three items which Mr Jacobs has identified as wrongly included as distribution overheads. I will discuss them in turn. They are:
£375,000 notional management charges for Mr Jennings.
£203,674 for foregone income on Asian and Irish sales.
£341,135 spent on refurbishing Redlands.
As to the first two items, it is now, obviously correctly in my view, conceded that it is not proper to include these items in ascertaining Distribution Profit whatever the correct accountancy treatment for other purposes might be. The April 2005 Account therefore needs to be adjusted to reflect the exclusion of these items.
As to the third matter, Mr Jacobs carried out an analysis of the European and Australian expenses of the distribution businesses on the basis of information provided to him. At paragraph 4.1.8 of his report he noted that there was no Redlands-related expenditure during the period 1 July 2003 to 30 June 2004 although the detailed workings provided in the 94 pages of schedules disclosed that £290,365 was actually spent on the property in that period but none of the expenditure was allocated to distribution overheads. I can see that from page 2 of the 94 pages. Mr Jacobs says that the workings also disclosed that the actual spend on Redlands for the period 1 July 2002 to 30 June 2003 was £641,135, but £300,000 of this was not allocated to the distribution business. That figure is not easy to derive from the 94 pages but it has not been challenged and I take it as correct.
The balance of £341,135 is what Mr Hunter submits should be excluded from the expenses to be deducted in the calculation of the Distribution Profit. In his report, Mr Jacobs noted that it was not clear why part only of the expenditure was allocated to the distribution business and I suspect that he, like me, was no better informed by the end of the trial.
Although the figure of £341,135 can be derived from paragraph 4.1.8 of the report, in paragraph 4.1.6 Mr Jacobs said this:
“I would also dispute the inclusion of certain costs relating to “Redlands”…….. Due to the nature and size of these Redlands-related costs (totalling £371,393), in my view, they are capital in nature, being refurbishment expenditure on either the property itself or on the fixtures and fittings within the property, from which a benefit will be enjoyed over a significant period of time.”
I do not know how Mr Jacobs arrives at the figure of £371,393, half of which is what he uses as the basis of adjustment in his scenarios 3, 4 and 5 although I assume it is the sum of £341,135 plus some other amounts of expenditure prior to 1 July 2002.
Mr Hunter says this in his written closing submissions:
“Based on the factual evidence this [the £341,135] was not a distribution expense on any view. It was money spent updating Mr Jennings’ country estate. As the Defendants now recognise, Mr Jacobs was correct to remove it.”
I do not think that Mr Hunter is correct when he says that it is now recognised by the Defendants that Mr Jacobs was correct to remove it. And I do have some difficulty myself in seeing that it is all properly to be excluded from the deduction. As a matter of fact, I do not know, and it is not in evidence, what was paid for by the £341,135. Mr Jacobs makes the assumption that 100% of that figure was capital expenditure, but it may not have been. If a percentage of that figure was properly treated as income expenditure, it may be that some of that percentage was attributable to premises used in whole or in part for the purposes of the distribution business. There must then be an argument that some part of the income expenditure should be attributable to general overhead and thus come into the calculation of Distribution Profit.
I do not, however, consider that the same treatment should apply to any part of the expenditure which was properly treated as capital. Redlands was not an asset of the JV; it was an asset of the Defendants. Expenditure of a capital nature on the property should, in principle, be exclusively down to the owner. Suppose, for instance, that the Defendants had acquired a small industrial property from which to operate. They could not have charged any of the capital cost as an overhead in calculating the Distribution Profit. Nor, in the absence of any agreement to the contrary, could they have charged a notional overhead or rent; at least, I have no evidence that accountancy practice would permit or require such a charge to be imposed and, in the absence of such evidence, it cannot be allowed in the present case. The position is no different, as I see it, in relation to capital expenditure on refurbishment from that which pertains in relation to acquisition.
The problem facing me, then, is how to deal with expenditure which may be partly income and partly capital. I will return at the end of this judgment to the just way of dealing with this in the light of the overriding objective.
In relation to the distribution business in Australia, Mr Straw and Blix contend that alleged distribution losses in Australia should not be deducted either. The distribution costs sought to be deducted amount to nearly 57% of the gross income of the entire venture over the accounting periods in question, nearly 27% more than the distribution fee. Mr Hunter’s submission is that, even before one gets into a detailed analysis, that cannot be correct. He must therefore be submitting that either the income of Didgeridoo is understated in the April 2005 Account or that the costs include either inadmissible items or overstated items. Thus, Mr Jennings accepted in cross-examination that the Australian business ought to have been profitable with an income equal to the distribution fee of 30% of gross income.
Mr Jacobs’ evidence was that no competent Australian distribution operation should lose money on a 30% distribution fee. I am reluctant to attach much weight to that piece of evidence. It relies on information obtained from two independent (unidentified) sources that fees charged by distributors in Australia are normally 25% from which the distributor would expect to make his profit. It is, however, supportive of what Mr Jennings agreed. If the costs on their face appear excessive (as they do) it is reasonable to look for an explanation of why they are so high and to examine carefully whether deductions sought to be made are properly made. Mr Jacobs presented some explanations after a closer scrutiny of the calculations. They are:
Some costs of repairing an Australian properly, Annandale, have been included which should not have been and the rent for Annandale (which was not at arm’s length but rather was paid to Mr Jennings) was inappropriately high.
An excessive amount for Australian staff wages had been included.
The same applied with respect of other costs such as telephone, motor vehicle and other expenses.
Mr Jacobs’ report explains that Mr Stewart had calculated the loss for Australian activities over the entire period from 1 July 1998 to 30 June 2004 as A$1,738,035. He allocated 50% of the loss (A$869,018) to Mr Straw and Blix and then converted the loss into sterling at £364,314. Mr Jacobs noted that repair costs totalling A$94,164 relating to Annandale had been included within overheads. Annandale was (I do not think there is any dispute about this) a property owned by Mr Jennings at the time and which was developed in order to house Mr Jennings’ Australian distribution business. The amount of expenditure in the years ending 30 June 2003 and 30 June 2004 which was claimed as a distribution cost was modest (just under A$13,000 in total) although the actual spend on Annandale was over A$281,000 for the same period. Mr Jacobs’ opinion was that all of the claimed expenditure should be disallowed.
As with Redlands, Mr Jacobs concluded from the amount of the expenditure that the costs were all of a capital nature, being for the refurbishment of the property. It would not, he says, be normal accounting practice to classify this type of expenditure as a distribution cost. As with Redlands, I do not know the exact nature of the expenditure: there must again be an argument that at least some percentage of the cost might be attributable to income and, if so, that some it should be reflected in the overhead figure. Again, I will return at the end of this judgment to the just way of dealing with this in the light of the overriding objective.
Mr Jacobs considers that the figure for wages is excessive. It represents about 28% of Australian income whereas the corresponding figure in the UK is about 5%. Mr Jacobs could draw no conclusion about why Australian wages were so high since a detailed analysis was not provided to him (nor has it ever been provided to Mr Straw).
In addition to repairs, a significant rent was paid by Didgeridoo to Mr Jennings totalling A$103,669. Significant sums were spent on phones (A$87,274) and travelling expenditure (A$160,940) which to Mr Jacobs appeared excessive. Since he did not have sight of the documentation to support the expenditure, Mr Jacobs was unable to state the degree by which these items were overstated saying only that it “would appear therefore that the costs allocated to the distribution of the Recordings in Australia may have been overstated”; not, one might think, a very strong starting point for a claim that these costs should be disallowed without further enquiry.
Nonetheless, Mr Hunter submits that Mr Jacobs did express the opinion, on which he seeks to rely, that if the overstated costs had been properly allocated, there would have been no distribution loss in Australia. Mr Vinall asks rhetorically where that opinion is to be found. If it is to be found anywhere, it is in paragraph 4.3.9 of Mr Jacobs’ report where, having said he was unable to determine by how much the distribution costs had been overstated, he went on to say this: “if the Australian distribution costs had equated to 25% of income (which is the norm for Australia per my research), the costs would have totalled A$1,474,523, resulting a profit of A$128,122 (rather than a loss)”.
In relation to all of these criticisms of the underlying data other than in relation to the costs incurred in relation to Annandale, I consider that they all fall on the side of the line which leads to the need for the taking of an account. The starting position of Mr Straw and Blix is to rely on the April 2005 Account. It is one thing for them to demonstrate that a particular item (such as Mr Jennings’ management fee) should be wholly disallowed. It is quite another to say that the apportionment of expenditure which has actually been incurred to overheads is wrong or excessive or to assert without good evidence that an amount is excessive. That sort of detail is appropriately addressed on the taking of an account. In particular, I cannot properly on the evidence before me, including the opinion evidence of Mr Jacobs, say that any particular proportion of the wages bill of Didgeridoo should be disallowed as an expense or assess by how much, if at all, the rent charged for Annandale was above the market rental.
That is not to say that the result of taking an account, even if one were ordered, should be to postpone the date for payment of significant sums. If it is clear that Mr Straw and Blix would be entitled to an ascertainable sum of money even if they lost on every disputed item, I see no reason why the court should not order a payment of that sum, or something very near it, leaving the disputed elements to be dealt with on an enquiry.
In the light of this discussion, I do not accept that the April 2005 Account should be adjusted at this stage by the elimination of any part of the overhead costs which are reflected in the April 2005 Account with the exception of the expenditure on Redlands and Annandale which, as I have said, I will return to at the end of this judgment.
There is one other point which I can usefully deal with at this stage since it is one raised by Mr Jacobs. He observed that Mr Stewart had allocated a share of the Australian losses to Mr Straw and Blix but that this was not in accordance with their agreement. That, of course, is a matter for me. I have already decided that losses in one period of account cannot be set against profits in a different period. The critical question here is, what are the relevant periods of account? In my judgment, the relevant periods are the periods in relation to which an account was actually presented by the Defendants. One period is therefore the period of the enterprise up to 31 December 1999 in relation to which Ms Cole prepared the 2000 Account which was sent to Mr Straw. The other is the period from 1 January 2000 to 30 June 2004 which was the subject matter of the April 2005 Account prepared and distributed by Mr Stewart. There is no other relevant account by reference to which an accounting period can be fixed. And, given the absence of any express agreement, I do not think that it can be implied that annual or quarterly or any other fixed period of accounting was to be adopted.
On the facts, this point is actually academic because, even if it were possible to treat each year to 30 June as a separate period of account and taking the UK and Australian businesses together, there was always a profit once Mr Jennings’ management charge and the Asian and Irish sales are eliminated.
Another point which arises in relation to the Distribution Profit is how to deal with the period after 30 June 2004 until termination of the JV and the DA. No account has been provided by the Defendants for this period nor has any disclosure been given in relation to it.
Mr Hunter says this period should simply be ignored. Mr Straw and Blix certainly do not seek, in this action at least, any further money in relation to that period. If in fact there was a profit in that period, that fact should not, clearly, postpone the recovery by Mr Straw and Blix of what is owing up to 30 June 2004. Even if there was a loss, it follows from my decision that Mr Straw and Blix are not liable to contribute to losses in a given period of account, that this affords no defence to a claim for payment in relation to amounts due in respect of earlier periods. But even if that decision were wrong, the first thing the Defendants should do is to provide an account for the relevant period – something which they have had the opportunity to do for several years but have failed to do. Subject to any challenge to that account, they might then have a claim to recover a share of the loss from Mr Straw and Blix. But unless and until that happens, there is no cross-claim giving rise to an immediate right to set off. The most that they could hope for would be a stay of execution on any order in favour of Mr Straw and Blix.
For completeness, I should mention that Mr Spencer accepts that, even on his approach and following revisions to Annex A which he now accepts should be made, Mr Straw and Blix are owed £386,096 representing the Net Profit Share over the entire duration of the JV. This contrasts with the loss which was shown in Annex A as originally presented in the AD&C.
The Cassidy litigation
In late 2003, a dispute had arisen between Mr Straw and the Cassidy family about the licensing rights in relation to music for a film about EC’s life. Mr Straw eventually commenced proceedings and the Cassidys made a counterclaim.
In connection with that litigation, Mr Straw carried out a review of the accounting in early 2004 which had been given in relation to the JV of the royalties payable to the Cassidy family under the various licences which Mr Straw had originally obtained from the family and on the basis of which the JV was able to operate. The review revealed that some overpayments had been made to the Cassidy family by Blix because the royalty calculation had failed to take account of a reduction in the royalty where sales were made at a discounted price. The royalties were paid by Blix and were an expense of the JV. Accordingly, Blix was entitled to receive reimbursement of royalties from the Defendants which were the recipients of the sale proceeds. This was not a problem as between the parties to the JV on the one hand and the Cassidy family on the other hand since it was possible to claw-back the overpayments from future royalty payments.
That clawing back led, however, to the need to recalculate the Net Profit Share for the relevant periods. In effect, the profit of the joint venture was increased by the amount of the overpaid royalties which were recovered from the Cassidy family. Blix was entitled to half of such increased profit as part of the Net Profit Share.
It was not until some time later that the actual figures were agreed. There was correspondence between Mr Straw and Mr Stewart from no later than 25 September 2004 to April 2005. This did not result in any re-calculation of the Net Profit Share and the matter was not resolved until 2006 after the termination of the JV and the DA.
Within the Cassidy litigation, depositions were taken both in the UK and the US, including depositions from Mr Straw in the US and Mr Jennings in England. I have been referred to various parts of the transcripts of these depositions by both sides either to support their own case or to attack the credibility of the deponents and others before me. It would unduly lengthen this already overlong judgment were I to deal with the detailed submissions which I have received. I have re-read the relevant passages and taken them into account as well as the submissions in reaching the conclusions which I do.
After notice of termination of the JV and the DA had been given in January 2006, there was further correspondence concerning the recalculation of the Net Profit Share as a result of the overpayment. I can take it quite shortly, basing myself on Mr Straw’s witness statement which is not now open to any significant dispute on this aspect:
On 16 March 2006, Mr Straw sent a fax to Mr Stewart setting out what he said was owing. He claimed £181,224 in respect of unreimbursed Cassidy parties’ royalties (ie royalties paid by Blix which were costs of the JV) and unpaid JV profits regarding an adjustment of Blix’s Net Profit Share due to “clawed back” royalties.
On 21 April 2006, Mr Stewart sent a fax to Mr Straw. This fax was sent on the instructions of Mr Jennings: this can reasonably be inferred from the contents of an email dated 20 April 2006 from Mr Stewart to Mr Spencer reporting on changes which Mr Jennings had made to a draft of the fax. In it, Mr Stewart agreed to £175,018 unpaid Blix profit share, but disputed (as a separate matter) the £6,206 of unreimbursed royalties paid by Blix. Mr Stewart’s challenge was based on two matters relating to Grace Griffith and Bryan McCulley royalties, the detail of which is complex but of no relevance to the matters with which I am concerned. The result was that Blix was shown as owing £16,105 to the Defendants. Mr Stewart had sent a copy of a draft of this communication to Mr Jennings for comment. I will return to this fax when dealing with acknowledgment in the context of limitation.
Mr Straw responded on 7 May 2006 saying that he did not disagree with Mr Stewart’s breakdown but that the distinction was one without a difference. He maintained the £6,206 claim and Mr Stewart and Mr Jennings discussed the position internally.
It now appears from further disclosure given shortly before the trial from Mr Stewart’s files, that Mr Stewart and Mr Jennings did discuss the matter internally. It seems that Mr Jennings drafted a letter which Mr Stewart then sent under his own name on 27 May 2006. This included the following: “thank you for confirming my joint venture profit share figure of £175,018” and went on to reiterate the point made in earlier correspondence that Blix’s joint venture profit and the Cassidy Parties royalties were fundamentally different in character and should be accounted for separately. Mr Hunter submits that this letter amounted to a clear admission that £175,018 was due in respect of net profit, and that this constituted a separate account.
Mr Straw might have thought from that correspondence that at least the £175,018 figure was agreed. But he would have been wrong. On 14 June 2006, Mr Stewart sent a fax to Mr Straw which, among other matters, asserted that this figure should be treated as “an opening balance to which there will no doubt be many adjustments”. It is quite clear that this fax was instigated by Mr Jennings as can be seen from a draft letter in Mr Jennings’ handwriting (one of the documents disclosed from Mr Stewart’s file). It is but one example of Mr Jennings taking every step which was open to him to raise disputes in order to avoid the making of payments which were due.
In fact, the £175,018 has never been paid. Mr Straw’s claim in relation to the £6,025 was not paid either; indeed, in the end, the Defendants unilaterally determined that the £16,145 figure should be deducted from outstanding sums due.
Matters have moved on to some extent. In paragraph 53 of the AD&C, the Defendants acknowledged that the sum of £175,018 is due but they say that any obligation to pay that sum is extinguished by contribution to losses under the DA (ie negative Distribution Profit) and their alleged entitlement to apply adjustments to the Net Profit Share in respect of two items:
£34,563 said to be 50% initially charged as a joint venture cost to acquire and exploit footage to make promotional videos. It is claimed that the charge should be reversed on account of Mr Straw and Blix retaining since the termination of the JV the benefit of the film footage for their sole and absolute use.
£51,995 said to be legal fees incurred during the JV to protect the rights in the EC recordings and to act against pirated copy CDs. It is claimed that the charge should be reversed on account of Mr Straw and Blix retaining since the termination of the JV the benefit of the recordings for their sole and absolute use.
As to set off of distribution losses, there are no overall losses in any given accounting period in the light of the adjustments which must unquestionably be made to the April 2005 Account so no question of set-off in fact arises.
As to the £34,563, I agree with Mr Hunter when he says that there is nothing in the point. There can be no doubt that the expenditure was properly deducted as an expense of the JV; the footage was, if I understand correctly, in fact used for promotional purposes. If that is correct, the JV has made valuable use of the footage and it would be quite wrong simply to reverse the accounting entry and to give the Defendants a right to adjustments to what is owing accordingly. It might be said that the footage is an asset of both parties jointly in the context of the JV and should be dealt with as an asset in common ownership following the termination of the JV. That case has not been presented and I say no more about it.
As to the £51,995, I again agree with Mr Hunter. There can be no doubt that the expenditure was properly deducted as an expense of the JV. It was an income expense for the purpose of the JV. The fact that it may have had enduring benefit, in the sense that the pirate may have been sunk without a trace leaving Mr Straw and Blix free from the anxiety of further piracy by the particular pirate is not justification for reversing the expenditure in the accounting for Net Profit Share. Although Mr Straw and Blix brought to the JV the benefit of the licence from the Cassidy family, they did not warrant that nobody would attempt to pirate or, if they did, that they would indemnify the JV from any prejudice suffered. I reject the Defendants’ case on this point.
Accordingly, Mr Straw and Blix are, in my judgment, entitled to the benefit of the whole £175,018 in the accounting for Net Profit Share subject to any limitation defence which I deal with separately later.
Limitation
There are a number of live limitation issues. The Defendants assert these defences:
The claim for an account of the Distribution Profit prior to 9 April 2005 is statute barred, that date being 6 years before the date on which the Claim Form was issued.
The claim arising out of the recalculation of Net Profit Share following discovery of the Cassidy overpayment is statute barred, relating as it does to an adjustment which should have been, but was not, asserted no more than 6 years before the date on which the Claim Form was issued.
The claim for payment made as an action in debt is properly construed as a claim for sums due upon taking an account for the period prior to 9 April 2005 and is statute barred.
Mr Hunter submits that the limitation defence is hopeless. His first submission relates to the additional sum becoming due by way of Net Profit Share as a result of the discovery in early 2004 of the royalty overpayment to the Cassidy family. He submits that the earliest point of time at which the claim can have accrued is when the Defendants (being the parties with the duty to account) provided a recalculation of the Net Profit Share. The earliest date that that occurred was on 21 April 2006 when Mr Stewart sent his fax accepting the workings sent by Mr Straw on 16 March 2006 which was the first time when any recalculated net profit figure was advanced by them at all.
His second submission is that Mr Stewart’s letter of 27 May 2006 expressly agreed the amount due and stated in terms that it was due separately from the other smaller matter then separately in dispute. That, it is submitted, is a clear acknowledgment of the debt. It is sufficiently pleaded as such at paragraph 28 of the APoC as to which see paragraphs 264 and 265 below.
Mr Vinall contends that the claim relating to the Cassidy royalty error is time-barred. He notes that the overpayments were discovered in early 2004, and that the alleged errors in JV accounting related to the last two quarters of 2003 and the first two quarters of 2004. The Defendants provided quarterly joint venture statements of account to Mr Straw and Blix for the relevant periods between December 2003 and October 2004. On any view the obligation to credit the joint venture accrued during 2004.
He contends that the fact that Mr Straw did not actually calculate the amount owing until early 2006 does not affect the accrual of the cause of action. If there were any doubt about this, it is resolved by section 23 of the Limitation Act (an action for account shall not be brought after expiration of the time limit applicable to the claim which is the basis of the duty to account). Mr Straw and Blix do not, he points out, say that the sums were not capable of being quantified earlier: the 16 March 2006 letter setting out their claims relies on information provided by the Defendants in September 2004 (for 2003 Q3 and Q4) and 10 March 2005 (for 2004 Q1 and Q2). Moreover, Mr Straw accepted in cross-examination that he was not going to dispute that the calculation could have been done earlier although it was “complicated. I’m not saying it was impossible to do”.
Mr Vinall submits that Mr Hunter’s second submission is misconceived. Put briefly, Mr Straw and Blix have failed at any stage to plead (as they are required to do) acknowledgment of a debt under section 29 Limitation Act 1980, relying on Busch v Stevens [1963] 1 QB 1. That case was actually about whether the fact of an acknowledgement could be pleaded in what was then a Statement of Claim or whether it could only be raised in a Reply. But I do not doubt the principle that acknowledgment, like a plea of limitation taken by a defendant, ought to be pleaded somewhere. But that said, late amendment is not prohibited; the overarching principle must always be the overriding objective.
Even if the acknowledgment riposte to the limitation point is a good one, Mr Vinall submits that Mr Straw and Blix have misunderstood what it was that Mr Stewart in fact acknowledged. Mr Stewart stated that Mr Straw owed Hot £16,104.56; as a matter of law there could only have been an acknowledgment of £158,913.44 as opposed to £175,018 as claimed by Mr Straw and Blix. Mr Vinall notes that this was accepted by Mr Straw during cross-examination but that is irrelevant since the issue is one of law. But Mr Vinall says it is legally correct, relying on Bradford & Bingley plc v Rashid [2006] 1 WLR 2066, at [58] in the speech of Lord Brown. He also refers to McGee on Limitation periods, 6th ed, §18.025
Dealing with that last point immediately, I do not think that what Lord Brown said supports Mr Vinall’s submission. What Lord Brown said was that if a debtor in fact admitted liability (£500 in the example of a claim for £1,000) that would amount to an acknowledgment of only £500 and not of such amount as might actually be owing. It seems to me that the question is really one of construction of the correspondence. What did Mr Stewart actually admit? It is clear to me that he acknowledged only that the net sum was owing to Mr Straw and Blix. In my judgement, Mr Straw and Blix can claim only the net sum and the balance is time-barred.
In relation to Mr Hunter’s primary submission, in contrast with the suggested acknowledgment of a debt which is Mr Hunter’s second argument, the question in my view is when Mr Straw and Blix would have been entitled to issue proceedings against the Defendants without being met with a valid riposte “You are too early. We are not yet in breach of contract. You must give us more time.” I do not think that the Defendants could be said to be in breach of contract until they had been informed (or discovered for themselves, which they did not) by Mr Straw of the error. It was Blix which made the overpayment; and the overpayment formed the basis of the accounting which the Defendants gave. It cannot be right to regard the Defendants as being in breach of the JV on the basis that they had accounted for too small an amount at a time when they had no idea that an error had been made by the counterparty to the JV (ie Mr Straw and Blix). Further, they could not, in my view, be regarded as in breach of contract until a reasonable time had passed for them to make further accounting.
It is clear, however, that the Cassidy overpayment was known to the Defendants by 25 September 2004 since, on that date, Mr Stewart sent to Mr Straw a recalculation of the overpayment. A reasonable time within which to provide the necessary accounting (in both the sense of preparing corrected account and in making payment) had, I consider, clearly expired well before 8 April 2005. Accordingly, I accept Mr Vinall’s submission that the claim is time-barred although that is subject to Mr Hunter’s second argument about acknowledgment.
So far as concerns the second submission, I am left, on Mr Vinall’s submissions, with a pleading point. He has not argued that the case is not within section 29(5) at all on the footing that the claim is not in respect of a debt or any other liquidated monetary claim. As to the pleading point, Mr Hunter relies, as I have said, on paragraph 28 of the APoC where it is said that it was agreed between Blix and Mr Stewart in May 2006 that the total sum owed to Blix was £181,224 in respect of, among other matters, “Blix’s joint venture profit share resulting from the adjustment required to the joint venture accountings attributable to the Cassidy Parties’ royalties discounts…” which is a reference to the relevant overpayments.
In my judgment, that is a sufficient plea to allow Mr Straw and Blix to contend that the correspondence amounts to an acknowledgement. Although Mr Vinall may well be right to say that the correspondence does not amount to a new contract (which is not a point now pursued by Mr Hunter) it is surely right that, if a person agrees an amount of money is due, he acknowledges it is due. It is pleaded that the sum of £181,224 was agreed to be owing and within that assertion is the proposition that each of the matters referred to in paragraph 28 was agreed. One of those was the fact of the Cassidy overpayment and, although the figure of £175,018 was not included in the pleading, a reference to the letter makes clear what the position is.
The result is that the limitation defence fails as to £158,913.44 but succeeds as to £16,104.56
Turning to Distribution Profit, it has been the Defendants’ case that they were obliged to account under the DA only at the termination of the DA. If that were right, no cause of action would have accrued entitling Mr Straw and Blix to an account or payment in respect of Distribution Profit until 2006 in which case the claim would not be time-barred. But in that case, there would be a single period of account over which the profit or loss would need to be assessed: a loss (if there was one) from 1 July 2004 to 31 July 2006 (the termination of the JV) would reduce the Net Profit Share showing as at 30 June 2004.
Mr Straw and Blix, however, have contended that they are entitled to account at some time during the course of the DA or on the termination of the DA. Neither side has contended that an account should have been produced within a reasonable time after the expiry of some conventional accounting period, such as quarterly or annually. The most that is said by Mr Straw and Blix is that it is open to the parties to agree, expressly or by implication from their conduct, that a particular period is to be treated as a period of account in respect of which there should be an obligation to account. Accordingly, attractive as the proposition is that periodic accounting was implicit in the DA, that is not a result which I should adopt in the light of the parties’ respective positions.
Adopting the approach that a relevant accounting period can arise out of the conduct of the parties, two, and only two, relevant accounting periods can be identified. The first arises as a result of the 2000 Account produced by Ms Cole and has an end date of 31 December 1999. The second arises as a result of the April 2005 Account produced by Mr Stewart and has an end date of 30 June 2004. The 2000 Account showed a loss in both the UK and Australia so that no claim is made in respect of that period. No question of limitation arises. The claim in respect of the latter was made on 8 April 2011 when the Claim Form was issued. Although this was more than 6 years after 30 June 2004, it was not until Mr Stewart produced the April 2005 Account on 11 April 2005 (less than 6 years before the Claim Form was issued) that the accounting period ending 30 June 2004 fell to be treated as a date as of which an account should be prepared: it was only from the 11 April 2005 date at the earliest that Mr Straw and Blix had a contractual cause of action on which to base a claim for an account or a claim in debt.
Accordingly, in my judgment, there is no limitation defence to the claim for payment of the share of Distribution Profit in respect of the period from 1 January 2000 to 30 June 2004.
It is convenient to deal at this stage with another pleading point which Mr Vinall takes. It is that it was common ground until the hearing that the Distribution Profit was to be calculated once and for all and that was Mr Straw’s and Blix’s pleaded case. I do not agree that that was the pleaded case. Paragraph 9 of the APoC alleged that it was an implied term that there would be accounting “at some point during the Agreement or, at the latest, within a reasonable time after it had terminated”. It is not consistent with that pleading that there should be only one accounting. Suppose an account had been provided ending one year before the termination of the JV. It cannot sensibly be suggested that there should not be an accounting for the remaining year of the JV once it had terminated.
Reliance is then placed on paragraph 29(1) of the Amended Reply and Defence to Counterclaim. That reads as follows:
“It was agreed that the Distribution Profits “would be accounted for at some point of time during the Agreement”: see paragraph 29 [of the Defence and Counterclaim]. The Defendants thus accept that the latest time they could produce the accounts was when the Agreement ended (31 July 2006), which is less than six years before the claim was issued (8 April 2011).”
I do not read that as inconsistent with the approach now taken by Mr Straw and Blix which is that the parties were able to agree accounting rests for the purpose of the DA. The pleading is saying that the account could have been left until termination of the JV not that it had to be left until then.
In any case, even if that is wrong, so that the point is not pleaded, the consequence would be that an account would only have to be given after 31 July 2006. Mr Straw and Blix would have no claim until after termination of the JV. The Claim Form was issued well within 6 years from that date with the result that Mr Straw and Blix would be entitled to an account, albeit over the whole period of the JV. Even on Mr Spencer’s approach to calculation of the Distribution Profit, there was a profit of some £386,096 which remains unpaid. Indeed, Annex A, in its original form as annexed to the AD&C, shows a significant profit for the period after 30 June 2004 of £104,467 for the year ending 30 June 2005 and £79,752 for the year ending 30 June 2006 (no figure is given for July 2006). One can therefore be sure that there was no loss, on any footing, for the period 1 July 2004 to 31 July 2006 so that if Mr Straw and Blix wish to restrict their claim, as they do, to the profit for the period ending 30 June 2004 provided that it is based on the April 2005 Account, there is no reason why they should not do so and the pleading point gets the Defendants nowhere.
The Counterclaim – copyright claims
The counterclaim as pleaded was extensive. It asserted that during the course of the JV, BTSL and Didgeridoo by Mr Jennings and/or their other employees and one or both of Mr Straw and Blix created a number of original sound recording, literary, artistic and/or film works for the purpose of performing the JV. These were:
The graphic work or collage that consisted of the arrangement of artistic works on the CD packaging of Time After Time, Imagine, American Tune and Wonderful World (referred to in AD&C as “the Albums”).
The literary work that consists of the text (other than song lyrics) on the CD packaging of the Albums.
The film work comprising the video featuring EC to promote the recording “Over the Rainbow”.
The compilation and sequencing of the EC recordings into the Albums.
These were collectively referred to as “the copyright works”. It was alleged that copyright (not restricted to UK copyright) subsisted in them which was jointly owned by BTSL and Didgeridoo on the one hand and Blix, alternatively Mr Straw and Blix, whether by reason of joint authorship or by reason of the copyright works having been created for the purposes of performing the JV and thereby being jointly owned by the parties to the JV.
Infringement since 31 July 2006 was alleged on the part of Mr Straw and Blix by their continuing to reproduce and issue to the public copies of the copyright works and/or authorising the same without the consent of any of the Defendants. Loss and damage (unspecified) was alleged.
The claims were all denied for a variety or reasons. Perhaps the most important are that Mr Jennings was not an author or joint author of the copyright works and that none of the Defendants has ever owned any copyright in them.
Shortly before the hearing commenced, the Defendants abandoned all of the claims relating to foreign copyright and adjusted the UK copyright claims to far fewer claims than originally made. All claims were abandoned other than in relation to the following:
Over the Rainbow: video.
Time After Time: compilation and sequencing.
Imagine: compilation and sequencing; album artwork.
American Tune: compilation and sequencing; liner notes and track notes.
Wonderful World: compilation and sequencing.
These matters are reflected formally in a Notice of Discontinuance dated 11 June 2013. That Notice sets out what is meant by “compilation and sequencing” (the literary work that consists of track listing on the album and the compilation and sequencing of the EC recordings on the album) and by “liner notes and track notes” (the literary work that consists of the text (other than song lyrics) on the CD packaging of the album). During the course of the hearing, the claim in respect of the Over the Rainbow video was abandoned. By the time of closing oral submissions, the claim in respect of artwork for Imagine had also been abandoned.
So, after an extensive set of allegations of breach of copyright (to meet which Mr Straw and Blix no doubt needed to incur some considerable expense) the remaining copyright claims are these:
A UK copyright infringement claim in respect of the “compilation and sequencing” copyrights in respect of the albums “Time After Time”, “Imagine” “American Tune” and “Wonderful World”.
A UK copyright infringement claim in respect of the liner and track notes for the album “American Tune”.
The AD&C also asserted, in paragraph 60 under the amended numbering, a separate non-copyright claim to the effect that the Defendants are entitled to an account from Mr Straw and Blix of “joint venture profits (including, for the avoidance of doubt, Distribution Profits) under the Agreement”. It is said that this account should include an account identifying what monies have been received post 31 July 2006 consequent upon the exploitation by Mr Straw and Blix or either of them of assets created pursuant to the terms of the JV.
Either separately, or as a particular aspect of that last matter, the Defendants claim to retain an interest in assets created for the benefit of the JV. It is articulated (to the extent that it is articulated at all in the pleadings) in the Response dated 19 March 2012 to a Request of Further Information. In relation to what is now numbered paragraph 60 of the AD&C, it was explained that an account was sought only in relation to monies received or credited to Mr Straw and Blix after 31 July 2006 and only in respect of “the exploitation of assets created pursuant to the terms of the [JV] during the life of the [JV]”. It was alleged (if, as Mr Straw and Blix contended, the Jennings interests and Mr Straw and Blix were all parties to the JV) that there was such an entitlement to an account on the basis that:
“such assets, including without limitation physical or electronic copies of the Recordings [ie EC recordings], were created for the purposes of the joint venture; the Claimants and the Defendants as parties to the joint venture were co-owners of those assets in equity and/or in law and/or assets of the joint venture; and to the extent that the Claimants (or either of them) have received any monies consequent upon exploitation of those co-owned assets, the Claimants received and held 50% of such monies as trustees for the Defendants, and are liable to account to the Defendants in respect of the same.”
I start with the legal ownership of “compilation and sequencing” of the albums Time After Time, Imagine, American Tune and Wonderful World. Mr Hunter submits that the Defendants have failed to establish authorship or legal ownership and that the true author and legal owner is Mr Straw. The argument has proceeded on the basis that the listing can be the subject of a copyright claim and I propose to proceed on that basis.
So far as the documentary evidence is concerned, Mr Vinall accepted in an exchange with me, in relation to all of the copyright claims, that he could not succeed on the basis of that evidence; the documents did not, as he said, “get me where I need to get to. It’s all going to turn on oral evidence …”. I assume that included whatever Mr Jennings had said in his witness statement. But that was sparse: so far as I can see, the only relevant passage is in the second half of paragraph 42 (in which Mr Jennings describes some of the things he had done to make the JV a success) where he says this:
“….and most of all, the creation of substantial assets by the Joint Venture, by way of four albums and the film-clip of “Over The Rainbow” which, at the end of the first chapter of my micro-management of the project in my territory, really did cause Eva’s resultant world-wide success. The evidence of this is well documented and in particular in the further information the Defendants have filed, the contents of which I re-affirm. The contributions that I made are shown in the attached files “Supporting Copyrights Claim 1 & 2 together with 4 Attachments.”
His oral evidence, Mr Hunter would have it, did not cover this in any more detail and that all he did was to deny that Mr Straw did the compiling and sequencing. I think that that is literally correct although to say that that is “all he did” does not reflect the strength of feeling behind the denials. It is correct that Mr Jennings did not himself say anything about what he actually did do. Indeed, the only material which Mr Vinall relies on (apart from the denials) is what is found in the documentary evidence and what emerges from Mr Straw’s cross-examination.
Mr Straw’s written and oral evidence was that he was in charge of the compilation and sequencing of all of the EC albums. He produced the drafts and made the final decisions. He did, he accepts, consult other people including from time to time Mr Jennings. He says he sometimes took their views into account: I am sure he did, but I feel sure that if someone (including Mr Jennings) had an original idea, he would take account of it and would reflect it in any decision which it was for him to make. It was, nonetheless, Mr Straw’s evidence that it was he who decided what the tracks to be included should be and the order in which they appeared. Mr Hunter submits that none of this testimony was remotely shaken during a lengthy cross-examination.
Mr Hunter submits that Mr Straw’s version of events is corroborated by the documents. He relies on the following which, again, I take verbatim (omitting file and transcript references) from his closing written submissions:
- In the album notes of “Imagine”. This states: “Bill Straw, founder, Blix Street Records, compiled Songbird, Time After Time and Imagine”. These notes were approved by Mr Jennings.
- The same is true for “American Tune” – Mr Straw is credited as compiler and sequencer
- And Mr Straw was also credited as having compiled and sequenced “Wonderful World”, at least in the Blix version of the album. On the Hot version, there was a joint Straw/Jennings credit. However, Mr Straw’s evidence was that he did this because Mr Jennings badgered him to do so rather than because it was a true reflection of what had happened.”
To say in relation to the first of those that Mr Jennings approved the notes is, I think, accurate, although I ought to set out what he actually said. The questions and answers went like this:
Q. That's what it says and that's what you authorised to be manufactured, yes?
A. Yes, of course.
Q. The reason you authorised it in that form is that's absolutely correct, Mr Straw did the compiling and sequencing?
A. Even if I thought it wasn't correct I would hardly stop the manufacturing because of it.”
I am sure that if Mr Jennings had actually thought it was incorrect, he would have said as much in answering Mr Hunter’s questions and would not have given the roundabout response which he did.
Mr Vinall’s assessment of the evidence of Mr Straw and Mr Jennings is, it will come as no surprise, entirely different from that of Mr Hunter. It is necessary to go into what he says in a little detail. I follow the scheme contained in paragraphs 94ff of his written closing submissions recording his submissions very much in his own words as set out in those submissions.
First, he submits that Mr Straw’s evidence as to Mr Jennings’ contribution was at times flatly contradictory. Mr Straw recognised in cross-examination that:
“it is very, very important for -- when you are distributing outside your home territory, that your distributor be as involved and as invested in what you’re doing as possible”
Mr Straw also said that Mr Jennings was “special in that he was a distributor, so I wanted him to be happy, so I would certainly talk to him from that point of view”. This is consistent with the correspondence in February 2003 where Mr Straw wrote to Mr Regan in the following terms:
“I have had a couple of good talks with Martin … as you said, mostly creative, but that is where it all begins and ends … get that wrong and there’s nothing else to talk about. It also gives us both a chance to remember each other’s true value as friends and creative contributors”
In light of this, Mr Vinall says that it is contradictory for Mr Straw to classify Mr Jennings’ contribution in general as merely peripheral as he did during the course of his cross-examination in order to seek to limit the significant role Mr Jennings had in the creation of the Albums.
Mr Vinall submits that Mr Jennings’ evidence was unshaken by cross-examination. Mr Jennings consistently rebutted the suggestion that his contribution regarding compilation and sequencing was limited to “a few suggestions…here and there” and the allegation that Mr Straw was solely responsible for compilation and sequencing. I comment here that to say that the submission that Mr Jennings rebutted the suggestions is not correct. He simply denied them and gave no more detail (that is to say none) about what he actually did than he had provided in this witness statement. Mr Vinall refers to passages in the transcript to remind me of what Mr Jennings actually said. A transcript must be treated with care because the actual words when read on a piece of paper will often not convey their significance and the weight they carry. In the end, it is a matter for me to assess on all of the evidence what it is that Mr Jennings contributed.
Mr Vinall deals with each of the relevant Albums and the relevant copyright claims.
Time After Time: compilation & sequencing. The point is made that nobody is credited on the Time After Time album for compilation or sequencing. Mr Straw claims a retrospective credit for sequencing Time After Time on the subsequent Imagine album but this does not give rise to any presumption under the Copyright, Designs and Patents Act 1988 (“CDPA”). That may be so, but it does not suggest that Mr Straw saw anyone else as being entitled to such a credit and there is nothing to suggest that Mr Jennings ever objected.
Mr Straw accepted during cross-examination that the creative conversations mentioned in the correspondence, for instance in a letter from Mr Regan to Mr Straw and Ms Gerard dated 13 February 2003, probably took place to determine what tracks should go on Time After Time. One of the matters discussed between the pair was whether the track ‘Take Me to the River’ should be replaced with a Blues Alley session track. During the compilation process, Mr Straw would send batches of songs to Mr Jennings and/or Mr Regan as Mr Straw accepted. From the beginning to the end of the compilation process, the track ‘Take Me to the River’ was removed and the track ‘The Letter’, which was recorded live at Blues Alley, made its way onto the album.
Next it is said that there are other considerable differences between the final and initial line-up on the album. For example, the song ‘You Can Only Be You’, which was spoken about in a letter from Mr Straw to Mr Regan did not appear on the final album. The track listing was clearly a work in progress which Mr Jennings had a significant contribution in determining. I would comment that it may have been work in progress; and it may be that Mr Jennings was consulted and made comments. But that he made a significant contribution is no more than assertion.
Sequencing is a separate matter from compilation. Compilation is what goes into the album, sequencing is how the tracks play “back to back”. Insofar as sequencing is concerned, Mr Straw did not deny that he sent the album tracks to Mr Jennings with the intention of getting further input on sequencing. That, I consider, is a slightly tendentious interpretation of what Mr Straw actually said since it gives the impression that Mr Jennings was being consulted as a person whose approval was necessary for a final decision. Let me set out the very brief exchange:
“Q. So the reason you are sending it to him is for further input in sequencing, isn't it?
A. I am certainly not shy about sending these.”
That it seems to me, is no more than an acknowledgement of what Mr Straw said on more than one occasion, namely that he consulted many people including Mr Jennings, but it has never been suggested even by Mr Jennings that all these other people were somehow joint authors of the compilation and sequencing. Mr Vinall submits that the significant contribution Mr Jennings played in the sequencing of the album is obvious. I find it far from obvious.
Imagine: compilation & sequencing. Mr Straw has a credit for compilation which creates a presumption of authorship under the CDPA. However, the Defendants claim that Mr Jennings made a significant contribution to the compilation and sequencing of Imagine such that he is a joint author.
Mr Straw accepted that the document which lists contenders for tracks to be on Imagine is in Mr Jennings’ handwriting; this document must date from around 14 May 2002. The only differences made between the track listing in this document and the final album is that the tracks ‘Yesterday’ and ‘Summer Time’ are removed and a decision is made as to which version of ‘Who Knows Where the Time Goes’ should feature on the final album. The effect of this is that 9 of 10 tracks on the final album derived from Mr Jennings’ list of contenders. That, it seems to me, is another slightly tendentious way of putting things. It is true that 9 out of the 10 tracks on the final album derived from a list of contenders in Mr Jennings handwriting. There is, however, no evidence about how he came to write that list. Mr Straw was the only person giving evidence about any of this – Mr Jennings had not done so in his witness statement and gave no detail in the witness box; and all Mr Straw could say is that he did not know how Mr Jennings formed the list saying “I don't know whether Martin wrote those down based on a phone conversation or the same and he knocked them up, I don't know”. [That is what the transcript records and the sense is clear although it seems likely to me that something has been slightly incorrectly transcribed.]
Mr Vinall notes that Mr Straw did not deny that Mr Jennings was involved in a formative stage in contributing to the compilation and sequencing of Imagine but stated “I was not shy about consulting with many people. And he was my distributor in the main territories”. One sees Mr Straw there using the same phrase as he had used in relation to Time After Time. In fact, this was a significant understatement of Mr Jennings’ true role according to Mr Vinall. That again is an assertion. There is no evidence to support it other than Mr Jennings’ denials of Mr Straw’s own evidence about Mr Jennings’ involvement.
What is missing from Mr Vinall’s references to Mr Straw’s cross-examination is what Mr Straw said about the selection of the lead track ‘It Doesn’t Matter Anymore’. Mr Straw had no doubt that when he first heard the track, which was after the preliminary selection of tracks, it should go straight to the top. I have no doubt that this important and significant decision was that of Mr Straw. He may have consulted others including Mr Jennings about it but I would reject the proposition that the input of anyone else was of significant importance in the selection of that track as the lead track and its inclusion in the album.
American Tune: sequencing. I take Mr Vinall’s submissions out of order taking compilation and sequencing first and dealing with the liner notes and track notes below.
So far as sequencing is concerned, Mr Straw has a credit for compilation and sequencing which the Defendants accept creates a presumption of authorship under the CDPA. Nevertheless, Mr Vinall submits that Mr Jennings also made a substantial creative contribution to the sequencing of the album in much the same way he did for both Time After Time and Imagine. It is slightly dangerous for Mr Vinall to rely on that comparison before knowing whether I would accept his submissions in relation to Time After Time and Imagine. As can be seen, things are not nearly as clear-cut as he would have it and the doubts surrounding the copyright issue in relation to those albums apply equally to American Tune.
Nonetheless, Mr Vinall is correct when he points out that Mr Straw accepted that a note which relates to sequencing of tracks was written by Mr Jennings and that Mr Straw acknowledged that this document shows Mr Jennings being involved at a formative stage in relation to which tracks should be on the album and in what order. But as Mr Vinall accepts, that input was more to do with compilation than sequencing. Further, I would add, Mr Straw again made the point that he consulted many people and that Mr Jennings typically gave Mr Straw his views on everything.
It is important to record other answers given by Mr Straw during the same part of his cross-examination in order to capture the flavour more than the selective answers relied on by Mr Vinall do. I set out two exchanges:
“Q...... Again, I start in general terms: the compilation and sequencing of this album [American Tune] was something you and Mr Jennings did together, wasn't it?
A. Once again, my process was the same. I realised that I was in the centre of it and I was consulting a lot of people and so it would be difficult, from Mr Jennings' perspective, to determine what influence he had or didn't have. But I certainly talked to him.”
and
“Q. So you would naturally be particularly interested in Mr Jennings' views on how the new album would play in the UK.
A. I certainly wanted it to play well in the UK, as any place else. We didn't have the ability to necessarily tailor it that much because we were limited with what we had. But one consideration was the name of the album, and originally it was going to be True Colours and it became American Tune. And the debate really was, this was right during the thick of the Iraq war, and it was some question about how many people wanted to be reminded of American Tune. In the end, we went that way, but that was one of the main considerations. So that was definitely a UK consideration.”
Wonderful World: compilation & sequencing. Mr Jennings has a credit for compiling the tracks on Wonderful World, alongside Mr Straw, which creates a presumption of authorship under the CDPA. Mr Vinall’s submission is that despite this credit, and Mr Jennings’ close contribution throughout the course of the deal, Mr Straw takes the unlikely position that the only reason Mr Jennings was credited was because Mr Jennings asked for it, and “I don’t see anything wrong in sharing a credit out of … extending yourself for a friend.”
It is said that this does not sit comfortably with Mr Straw’s recognition that he had conversations with Mr Jennings during the production of Wonderful World about which tracks reached minimum quality standards and should feature on the album: this would self-evidently have been a very important issue. Mr Vinall refers to one answer given by Mr Straw where he said this:
“ ... we have this vast array of material and we always wanted to do justice to Eva’s legacy and what had gone before. So one of the biggest concerns was not to put a track on that fell below minimum standard. I would say the conversations I had with Martin, most probably had to do with that issue.” ”
This is another occasion where I need to put the answer in context. It is easiest to do so by setting out a rather longer extract from the transcript:
“Q…….. You are seeking to minimise his role, aren't you, Mr Straw?
A. I didn't always consult him at the end. I would ask questions of Martin that were Martin kinds of questions. But I spent hours putting together and listening down to things with a lot of different people and I wouldn't say that -- I would say that Martin's input wasn't ... any greater -- it would vary by -- every project is different, every song is different. My biggest problem was Chris Biondo, who had originated this stuff, so he felt an ownership thing. There was a lot of strong feelings. Everybody I named here, other than the engineers, who were truly at the end of the project, but sometimes brought some of the greatest input. Everybody had their particular kind of input. Martin was special in that he was a distributor, so I wanted him to be happy, so I would certainly talk to him from that point of view. But to say that ... the person who had the most influence would be Lois because she was there when we ran down every draft. Chris Biondo would have an effect on things -- everybody else's thing would have to do with their role in it. But I am not minimising Martin's role, but to say that he was more than peripherally involved in the sequencing of this stuff just isn't true.
Q. We will have a look at that, Mr Straw. You referred to a "Martin kind of question", I think. What is a "Martin kind of question"?
A. His biggest concern would probably be ... once again, it varies on every album, but he would have a strong feeling about a particular track, that would be the problem, would probably be the strongest Martin kind of question. Not necessarily where it goes in the sequence but it's on the album.
Q. Can you remember any particular tracks he felt particularly strongly about?
A. (Pause) You know, there's Wonderful World is a prime example of that. And I suppose that ... the areas that were probably -- that he would come into, there would be -- we had this vast array of material and we always wanted to do justice to Eva's legacy and what had gone before. So one of the biggest concerns was not to put a track on that fell below minimum standard. I would say the conversations I had with Martin, most probably had to do with that issue. And I think one track I can think of ... but, again, this is vague, would be the Stevie Wonder song I can only be me, where we used that track other people didn't want to use it at all. So part of what I was trying to do was get sounding boards and if the guy who recorded it, Chris Biondo thinks that track doesn't belong on that album then I think well wait a minute, number one Stevie Wonder was one of her heroes, so she put a lot into that song, she heard it in a film, and maybe he doesn't like the way he mixed it, but her performance gets through. So I would look for an ally in Martin on particular tracks and that may have been one of the tracks. I do not want to believe in this too much.
Q. Out of all the people that you list in paragraph 128, Martin and Graeme at Hot are the ones with experience of putting out albums, sequencing albums, aren't they?
A. Not Eva Cassidy albums, but they did their albums, yes.
Q. You respected and trusted Mr Jennings' musical judgement about sequencing an album.
A. I trusted his judgement if he agreed with me on a particular issue, so it was my responsibility, and at the end of the day I wasn't going to put out anything I wasn't happy with, so ... and I, you know, I had to ... I had a lot of -- I made a lot of people less than happy in that regard, but the loyalty has to be with the project.”
I have to say that that part of Mr Straw’s evidence rang very true and it sums up not only how he saw Mr Jennings but how things were. This passage appears as part of wider questioning by Mr Vinall; it is not part of the cross-examination relating to Wonderful World, which comes into it only as an example.
There is one further submission made by Mr Vinall in relation to Wonderful World which I need to record. He says that the burden is on Mr Straw to rebut joint authorship given the presumption arising as a result of the credit and that the burden has not been discharged.
Assessing all of the evidence which I have had (it is not, of course, possible to deal with everything in this judgment but should say that I have read the whole of the cross-examinations of Mr Jennings and Mr Straw which touch on these issues), I do not consider that Mr Jennings has established the co-ownership rights in relation to compilation and sequencing which he claims. In my assessment, it was very much Mr Straw who was in control of, and the ultimate decision maker in relation to, the selection and ordering of tracks. He consulted many people, including Mr Jennings, but their input was not such as to give rise to any copyright ownership.
This is not, in my judgement, in any way inconsistent with the nature of the JV in which Mr Straw and Mr Jennings (and their respective companies) were joint venturers sharing equally. It was Mr Straw who held the licence from the Cassidy family and who brought the benefit of the licence to the JV. But he did that only for the purposes of the commercial exploitation of the EC recordings in the UK, Europe and Australia. Mr Straw and his interests alone remained responsible for commercial exploitation in other territories (including, it might be noted, Ireland). In practice, the same compilation and sequencing was used in the Blix releases and the Hot releases. I would not expect Mr Jennings to have any say in the decisions concerning compilation and sequencing of the Blix releases although he would have practical input through his involvement in the Hot releases. The point I wish to make, however, is that it was in the end Mr Straw and not Mr Jennings who called the shots in the way that the long passage I have quoted above from the transcript demonstrates.
As it happens, it was the UK which turned out to be the highly successful market and, to some extent, the success in North America may have piggy-backed on the success in the UK. But that does not, in my view, lead to a different result.
Mr Jennings’ case is stronger in relation to Wonderful World than the other albums given the joint credit. But even here, I do not consider that Mr Jennings’ claim should succeed. It would be wholly unrealistic in the light of all the evidence to think that the actual input of Mr Jennings in relation to Wonderful World was any different in nature and extent from the other albums. I do not consider that I could properly reach a different conclusion in relation to Wonderful World than that which I reach in relation to the other albums. In all case, it is my judgment that Mr Jennings’ claims to joint authorship attracting copyright protection fails.
American Tune: liner and track notes. So far as the documentary material is concerned, the liner notes are credited to Laura Bligh (EC’s cousin) and Eileen White with Mr Jennings being identified only by the words “Edited by”. Eileen White is the wife of Chris Biondo and was involved in various aspects of the design of various album packaging.
The documentary evidence about the production of these liner notes (the correspondence in June 2003) leads me to the conclusion that it was indeed Laura Bligh and Eileen White who wrote the substance of the liner notes and that Mr Jennings had only a minor editorial role – minor in the sense that not much needed doing.
Mr Jennings is, however, credited as author of the track notes. Track notes, for the reader not familiar with the terminology, are the descriptions following each track listed setting out (i) some or all of the writer/composer/publisher (ii) where and when the track was recorded and the artists involved and (iii) a more personal note (the written equivalent of a sound-bite) about EC’s interest in the song.
The extent to which these track notes involved Mr Jennings in work and research is revealed by other documents. Mr Hunter submits that they clearly show that the track notes were in fact not Mr Jennings’ original creation but rather were derived from the basic track information supplied to him by Mr Straw and from Ms Bligh’s material. He remarks that this is no doubt why Mr Vinall accepted in opening that the copyright claims could not succeed on the documents alone. The relevant material is contained in a number of faxes passing between Mr Straw and Mr Jennings in the period 26 to 29 June 2003 and an email from Ms Bligh to Mr Jennings and Mr Stewart on 25 June. The faxes passing between Mr Straw and Mr Jennings demonstrate not only Mr Straw’s significant input into the liner notes but also the derivation, for him, of much of the material which eventually appeared in the track notes.
So far as the witness evidence is concerned, I am unable to derive any assistance from Mr Jennings’ witness statement where I can find nothing about what he did to prepare these track notes. There was the following exchange in his cross examinations:
“Q. As regards track notes, what happened is you took Laura Bligh's material and converted that into the form of short one or two sentence notes for each track; isn't that right?
A. No. No, that isn't right.
Q. So you're saying –
A. It isn't right, what you just said.
Q. What did you base the track notes on, do you say?
A. I knew some stuff myself and, you know, I believe I got the bits from Bill really. Or Bill got the bits and passed the bits to me that I didn't already have and then I wrote it down.”
I am bound to say that, if one looks at the pages of the documents which I have just referred to, it is difficult to detect the “stuff” which Mr Jennings already knew; it appears that much of the track notes reflects “the bits from Bill” and the rest what he got from Ms Bligh. There was nothing in Mr Jennings’ witness statement or his oral evidence to show what he actually did provide by way of other material.
The position of the Defendants is that both of these amount to joint authorship in the track notes and liner notes. Their case was set out in Mr Vinall’s skeleton argument which remains the basis of the claim. He submits that Mr Jennings’ contribution can be pieced together from the documents. He accepts that Mr Jennings was provided with material from Laura Bligh and Eileen White. But, he says, Mr Jennings can be seen to be selecting material from both sources, re-ordering and editing it. He takes one paragraph as a sample although I have to say that, having looked through the correspondence and other documents in the file, there is nothing else on which Mr Vinall can really rely. Although the text is not short, I think it best to set out the passages on which Mr Vinall relies.
First, he says Mr Jennings can be seen to have begun by selecting part of Ms Bligh’s material:
“…What I’m planning to say about the album AMERICAN TUNE is that several of the songs come from rehearsal tapes, and that this means Eva was singing in a very relaxed atmosphere. Small wonder, therefore, that her vocal interpretations were so lovely. Some singers need an audience to bring out their best, but not Eva. She was in the studio that was essentially her musical home, surrounded by supportive friends, freed from any pressures of live performance. She had spent countless hours there – indeed, she had helped paint it, to glue acoustic tile to the walls, and so on. I am assuming that these tapes were made in Glenn Dale, not in Rockville, but I need to check that. It was Keith Grimes who brought these rehearsal tapes to Blix Street Records. Like Eva, he was a perfectionist, and he constantly analysed his own performances to try to find ways to improve the arrangements, the chords, his own guitar playing, etc. Since the band rehearsals were in a recording studio, Chris Biondo would often run a tape during rehearsal, which Keith would take home to self-critique…”
That was edited into a manuscript draft:
“Some singers need an audience to bring out their best but not Eva Cassidy. Freed from any such pressure, it was the recording studio that was Eva’s natural musical home. She spent countless hours there, even helping paint it and sticking acoustic tiles on the walls. Band rehearsals were held there and Chris Biondo was in the habit of running a tape whilst guitarist Keith Grimes, a perfectionist like Eva, would take the tapes home to study the perf’ces.”
This appears to have been typed up with minor changes as and sent to Mr Straw:
“Some singers need an audience to bring out their best. Not Eva Cassidy. Freed from any such pressure, it was the recording studio that was Eva’s natural musical home. She spent countless hours there, even sticking acoustic tiles on the walls and helping paint it. Band rehearsals would be held there and Chris Biondo was in the habit of running a tape whilst guitarist Keith Grimes, a perfectionist like Eva, would take home the tapes to study the performances”
Mr Vinall does not quote the bottom of the page “Notes cobbled together by: Martin Jennings”. Quite so.
This, Mr Vinall says, was subsequently edited by Mr Straw and finally became the final version as distributed with the CDs.
“Some singers need an audience to bring out their best. Not Eva Cassidy. The recording studio was Eva’s natural musical home where she was free from the pressures of live performance. She spent countless hours there, recording, rehearsing, even helping to paint the walls and glue on acoustic times. Band rehearsals would be held there and Chris Biondo was in the habit of running a tape whilst guitarist Keith Grimes, a perfectionist like Eva, would take home the tapes to study the performances.”
That leaves out some significant aspects of the liner notes. The paragraph relied on by Mr Vinall is but one paragraph of a longer note. The important middle paragraph was entirely drafted by Mr Straw and can be found appearing for the first time on a “cut and paste” document (found at D/248 in the bundle). And the passage at the end, contained in Mr Jennings’ first draft, was taken straight from Ms White’s material:
“It is a testament to the extraordinary talent of Eva Cassidy that, without benefit of multiple retakes and adjustments, her flawless pitch and remarkable clarity of voice never fails to send a shiver up the spine or bring a tear to the eye.
Mr Vinall submits that Mr Jennings made a substantial creative contribution to the final work and was a joint author of it. He challenges Mr Straw’s suggestion that the Mr Jennings’ editing did not go beyond the essence of what Ms Bligh provided.” He submits that the evolution of the liner notes which I have set out above shows that that this is clearly incorrect and that Mr Jennings’ contribution clearly passes the test of authorship. My assessment is that that is an incorrect conclusion to draw. I do not consider that Mr Jennings’ input in the context of the liner notes as a whole amounts to authorship.
As for the track notes, Mr Straw conceded that Mr Jennings “wrote the -- you know, most of the track notes”. Mr Hunter says that the contemporaneous documents (referring to D/253-6 of the bundle) clearly show that the track notes were not Mr Jennings’ original creation. I do not agree with that. I consider that Mr Vinall is correct and that Mr Jennings has established authorship of these track notes. There is certainly nothing to displace the statutory presumption.
That is enough to dispose of the copyrights claims other than the track notes for American Tune. But Mr Hunter raises other defences, namely that Mr Straw and Blix in fact had the necessary licence or consent to exploit the copyright, that there were no infringing acts in the UK and that the Defendants have suffered no loss. I will deal with those defences as briefly as I can, noting that Mr Straw and Mr Jennings only need to rely on them in relation to the track notes for American Tune in the light of my conclusions in relation to the other copyrights claims..
Licence and consent. The issue here is whether, assuming the joint copyright ownership which the Defendants assert were, contrary to my view, established, the circumstances of the creation of the copyright give rise to a licence or consent for the continued use by Mr Straw and Blix of that copyright even after the termination of the JV.
Mr Vinall says that it is not open to Mr Straw and Blix to take this point since it is not pleaded. He says that the point was first raised in Mr Hunter’s written opening submissions. It still remains unpleaded. He submits (referring to Copinger 16th ed para 5-217 and the case cited there) that
a claimant needs to establish their cause of action by proving the acts in question were done without licence. This burden is discharged by formal evidence that consent was not given.
once the claimant discharges this burden, the onus shifts onto the defendant to establish the existence and extent of the implied licence.
Mr Vinall submits that the absence of licence has been clearly pleaded by the Defendants. I agree with that submission at least. As such, the onus, he says, is on Mr Straw and Blix to plead and prove the existence and extent of their alleged implied licence.
Mr Hunter has two things to say about that. First of all, given the extreme paucity of the pleaded case against Mr Straw and Blix in relation to the copyright counterclaim, and the fact that that claim has changed beyond all recognition on a number of occasions, that is a submission “that smacks of double standards in the extreme”.
But secondly, it is wrong, he says, because it is for the Defendants to prove lack of consent. The pleaded case is found paragraph 63 of the AD&C. This alleges that Mr Straw and Blix have infringed by continuing to reproduce and issue to the public copies of the copyright works without consent. And so one can see that it is part of their case that, to use Mr Hunter’s words “there was no consent to the vague acts of infringement that are alleged. They need to prove that”.
He submits that the issue, therefore, becomes a pleaded issue as a result of that. He says that it is something which Mr Straw and Blix have denied. However, I am unable to see where in the pleadings it is denied. The relevant paragraph of the Amended Defence to Counterclaim responds to paragraph 63 by saying that it will be dealt with once proper particulars of it have been provided and making no mention of the possibility of an implied licence. That is fair enough as an approach to a pleading: how, it might be asked, could Mr Straw and Blix assert an implied licence to commit acts of infringement which were unidentified? The Response to the Request for Further information does not take one much further asserting simply that Mr Straw and Blix had continued to exploit the copyright works. One example was, however, given which was the broadcast of the finished Over the Rainbow video clip in relation to which the copyright claim has now been abandoned. If there is inadequacy in pleaded cases, it lies with the Defendants as much as with Mr Straw and Blix.
I do not need to decide this issue in the light of my decision on the ownership issue save perhaps in relation to the track notes for American Tune. But even if Mr Vinall is right and I am wrong on that issue, it seems to me that there is a well-arguable case that an amendment should be allowed even at this late stage or, more relevantly if there were to be an appeal, since the issue is essentially one of law.
I propose to consider the implied licence point without, at this stage, deciding whether it can properly be raised. I do so, of course, on the basis of the evidence currently before the court although I have to say that I do not see what possible further evidence there could be in relation to this issue which has not already been adduced.
Mr Hunter relies on the decision of Lightman J in Ray v Classic FM [1998] FSR 643 approving the following statement of principle (originally stated by Jacobs J in an Australian case, and approved by Widgery LJ in Blair v Osbourne & Tomkins):
“it seems to me that the principle involved is this; that the engagement for reward of a person to produce material of a nature which is capable of being the subject of copyright implies a permission, or consent, or licence in the person giving the engagement to use the material in the manner and for the purpose in which and for which it was contemplated between the parties that it would be used at the time of the engagement.”
Consider the position where the liner notes or track notes were written by a third party. For instance, the liner notes to American Tune were credited to Ms Bligh. Assume that she was and is the owner of the copyright in respect of those notes and assume, for the purposes of the argument, that she was paid for producing them. There can be no doubt, in my mind, that the JV parties were entitled to use the notes in relation to the sale and distribution of the album for which they were written. Not only is that true in relation to sale and distribution within the scope of the JV; it would also be true if, following the termination of the JV, there had been agreement between the parties to the present action that each of them should, thereafter, be entitled to manufacture, sell and distribute further copies of the album in their own territories and to use the notes in the future outside the scope of the JV. Part of the commercial arrangement with Ms Bligh involved an implied licence to make use of the notes in this way: that is what the persons paying her were buying from her. Whether use for an entirely separate purpose – for instance publication in a book – is a different question which it is not necessary to answer.
A number of people, including Mr Straw and Mr Jennings and members of staff, had input into the packaging of EC albums, including the artwork and liner and track notes. They also did so for consideration – in the case of staff their salaries, in the case of third-party contractors their fees, and in the case of Mr Straw and Mr Jennings their contractual rights (and in the other direction their obligations) under the JV. Even assuming joint ownership of copyright in the compilation and sequencing, liner notes and track notes, there can be no doubt, on the evidence, that there was a licence or consent (from Mr Straw and Blix to the Defendants and from the Defendants to Mr Straw and Blix) to use the copyright material for the purpose of manufacturing, marketing and selling the relevant EC albums. This extended not only to such activities in the UK and Australia in the context of the JV. It extended to the use of such material by Mr Straw in, for instance, North America or anywhere else he chooses to distribute the albums. He did so in North America during the currency of the JV without any objection.
In my judgment, the implied licence or consent did not come to an end with the termination of the JV. It would be very odd if it did. The manufacture, marketing and selling of albums in, for instance, North America was not in any way linked to the JV. It is not easy to see why an implied licence or consent (if it existed at all, which in my view it clearly did) to use the material in North America should be restricted to the period of the JV. The use after the end of the JV was not a new and uncontemplated purpose.
Mr Jennings’ evidence in effect conceded that the relevant material produced by staff or third parties could be incorporated into both Hot and Blix versions of an album which could then be used (whether within or outside the JV) to market and sell the album so long as it was possible to do so. I can see no reason to adopt a different approach in relation to material produced by Mr Straw or Mr Jennings.
Infringement. Closely linked to this defence to the copyrights claims is the defence that there has been no infringement. The only concrete example which has ever been given related to the “Over the Rainbow” video clip, in respect of which the copyright infringement claim has now been abandoned. However, the purpose of the preparation of the album packages was to be used for the purposes of such sales as well as sales in the UK and Australia of the Hot versions. Since there is no other allegation of infringement, it follows that if the licence or consent defence is a good one, as I think it is, then so too is the “no infringement” defence. In contrast, if the licence or consent point is one which cannot be taken, then further sales of the Blix versions would result in breach of copyright.
Loss. I have found it difficult to see what loss the Defendants might have suffered as a result of the alleged infringement or to see what compensatory award they might be entitled to. This would be so even if Mr Jennings had a valid copyright claim in relation to all of the remaining disputed claims; it is even more so if the only infringement relates to the track notes for a single album, American Tune. I asked Mr Vinall on a number of occasions to tell me what his clients’ case on this is. It seemed to me to be bordering on an abuse of the court’s process to raise this counterclaim as simply the tactical manoeuvre which it appeared to me to be in the absence of anticipation of a more than nominal favourable pecuniary result. He was unable to obtain instructions which might indicate the sort of level of recovery which his clients even hoped, let alone expected, to achieve. Be that as it may, it is very difficult to see what damage the Defendants might have suffered.
Mr Vinall has devoted nearly two pages of his written closing submissions to this point referring me to the three approaches to assessing compensation established in General Tire v Firestone [1976] RPC 197:
The first approach only applies where the owner of the copyright sells products embodying the copyrights, when he will be compensated for the loss to his business. That is not the present case since the Defendants have no licence to use the EC catalogue and no opportunity to use the relevant copyright material.
Where the owner licences the copyright to others, he will be compensated by the licence fee that would have been payable in comparable circumstance; in effect, the infringer will have to pay by way of compensation that which he would have had to pay for a licence. That, again, is not the present case.
Where the owner has no intention of exploiting the copyright, compensation will assessed by reference to the reasonable royalty on the basis of a hypothetical transaction between a willing licensor and licensee (whether or not the actual owner would in reality have been willing to grant a licence).
It is that third approach which Mr Vinall submits should apply in the present case. He has not identified, and certainly does not rely on, any other approach. So I will deal with the question of loss on the basis of that third approach.
Mr Vinall’s submission is that it is accordingly necessary to construct a hypothetical transaction between a willing licensor and a willing licensee. That would require expert evidence as to the terms on which compilers and authors of track notes generally license their works.
Suppressing the gasp for breath which that submission provokes in me on the facts of the present case (in contrast with the correct theoretical approach which it relies on), and before dealing with it, it is right to record, as Mr Vinall submits, that the threshold for ordering an enquiry as to damages is a low one. I do not dissent from what is said in Copinger at paragraph 21-199 but note that in that paragraph it is stated that if the court is “satisfied that an enquiry would be fruitless, it may refuse to order one”. Low value is not, according to Mr Vinall a reason for refusing an enquiry; the court has various means of promoting proportionality as set out by Jacobs LJ in Reed Executive plc v Reed Business Information Ltd [2004] EWCA Civ 159; [2004] RPC 40:
“However I do think that the court, where it thinks the damages are likely to be negligible or small, can use its case management powers to stop things getting out of hand. It can, for instance, require the claimant to put in a statement of case together with supporting evidence before requiring the defendant to do anything. The cost in money and time of that is likely to cause a claimant who in reality has little to gain to think twice. Again the court can order the trial of quantum to be on paper only unless a case for cross-examination is made out. Disclosure can be restricted or even done away with. A time limit for the hearing can be imposed. All these things are ways of case-managing the problem.”
That is no doubt a sensible approach in some cases. But the present case is not one where the court thinks the damages are likely to be negligible or small. If I am right that the only valid claim relates to the track notes of American Tune, I can be certain (and not merely think) that the claim will be negligible. We are talking about a payment of at most, in my view, the amount which the JV would have paid a third party to produce appropriate track notes. Whilst I do not suggest that anybody could have sat down and produced these notes at the drop of a hat, it is obvious that a person experienced in writing these sorts of notes could have produced a perfectly satisfactory set (not of course precisely in Mr Jennings’ words) without difficulty. This is especially so as the raw material would have been available to the hypothetical writer just as much as it was to Mr Jennings. The indication is that a small sum would be involved. Such evidence as there is came from Mr Straw who identified a Mr Howlett (an ex BBC radio producer and writer) as the author, on his own, of two full sets of liner and track notes for Time After Time and Wonderful World. He was paid a flat fee of £500 for the worldwide rights for each sets.
In the context of the present litigation, I regard the ordering of an account in relation to infringements based on the ownership of the track notes for American Tune as a wholly disproportionate exercise and not one which can or should be ameliorated in one of the ways, by way of case-management, suggested by Jacob LJ. Whether I would take the same view if Mr Jennings were correct in all his remaining copyright claims, I do not need to decide. But what I can say is that if an account were to be ordered, the case would be one crying out for just that sort of case-management.
In summary on the copyright issues, I dismiss the counterclaim so far as it relates to the non-abandoned copyright claims other than the track notes for American Tune. I would decline to make an order for an account on the basis of the only valid copyright claim, namely the claim in relation to the track notes for American Tune. That makes it unnecessary to decide whether Mr Straw and Blix should be able to run their case on implied licence and renders what I have said about it merely obiter and not part of my actual decision.
Assets created for the purposes of the JV
The remaining claim relates to assets created for the purpose of the JV. In practice, as I understand it, this means assets paid for by the JV the only example of which is the contractual licence to use the original video, “Over the Rainbow”. The Defendants have not identified any other asset which it is alleged has been acquired using funds of the JV or which should otherwise be treated as an asset of the JV. They are not entitled to a roving (or perhaps I should say fishing) enquiry.
As to that video, the relevant facts are these. Mr Straw (as licensee) entered into an agreement with Mr McCulley (as licensor) with an effective date of 8 March 1999 in relation to certain EC Over the Rainbow video footage. Mr Straw was given a (non-exclusive) licence to use the video footage in a promotional video. A flat fee of US$9,000 was payable. The term of the licence was in perpetuity. The licence was governed by law of Maryland. The fee was reimbursed to Mr Straw by Hot and then charged as a JV expense. The result was that the JV obtained the benefit of the licence for the purpose for which it was obtained (and the only purpose authorised by the licence) namely to make a promotional video (including the right to upgrade the quality and to edit the promotional video to various lengths for different outlets).
On 1 May 2002, Mr Straw entered an agreement with Mr McCulley and the Cassidy family under which Mr McCulley assigned his rights in certain material (including but going far beyond the “Over the Rainbow” video footage) to the Cassidy family, not to Mr Straw or Blix. The assigned material would become subject to the existing licence between Mr Straw and the Cassidy family relating to the use of the EC catalogue (which Mr Straw was then exploiting in the UK and Australia by way of the JV). The consideration for the assignment was an agreement by Blix to pay the royalties described in the agreement with regard to the commercial exploitation by Blix (or its distributors, licensees or partners). The arrangements involved an advance of royalties.
In due course, the Defendants reimbursed a part of the advance, and subsequently that was treated as a joint venture cost so that it was deducted when calculating the Net Profit Share. Mr Hunter says that the portion of the advance that was not deducted from Blix’s half of the joint venture profits was both recouped by Hot from Mr McCulley royalties and treated by Hot as a JV expense, so that in fact Hot recouped more than it paid in this regard. He relies on what Mr Straw said in cross-examination which is the only evidence there is going to this point. Whether there has been a precise and proper accounting does not matter so far as the issue under consideration is concerned. In essence, the advance (which it must be remembered was an advance on royalties, not an additional capital sum to acquire the rights) was paid by Blix. The advance was apportioned between territories (to reflect that the material was for the benefit of EC rights worldwide and not just in the territory of the JV) and the part apportioned to the JV territories was then divided 50/50 as a JV expense.
One thing is absolutely clear in my view which is that the benefit of this licence agreement was not an asset of the JV any more than the benefit of the original Straw/Cassidy licence became an asset of the JV. What in fact happened was that the relevant rights were assigned to the Cassidy family with those rights then becoming subject to the Straw/Cassidy licence. The rights under that latter licence were then subject to the JV so far as concerns the UK and Australia. Any royalty payable to Mr McCulley during the course of the JV would fall, in part, to be borne as a JV expense. The fact that an advance on royalties was made does not affect the principle. If the whole of the advance was not matched by actual royalties payable during the term of the JV, it may be that the Defendants would have some sort of claim for an account in relation to the excess of the advance over the royalties. But that is not how the case has been put.
I therefore dismiss that part of the counterclaim which seeks to impose a trust or some proprietary claim in relation either to the rights assigned to the Cassidy family or the licence granted to Blix by the agreement dated 1 May 2002.
Disposition of Counterclaim
The counterclaim is dismissed.
Orders on the claim
Mr Straw and Blix are entitled to orders for payment in the sums of £758,127 to reflect the figures contained in the April 2005 Account. This figure should be adjusted to remove as deductions Mr Jennings’ management charges and the items in respect of lost Asian and Irish sales. In addition, it may be that some adjustment should be made to the figure for the expenses of £341,135 in respect of Redlands and A$94,164 in respect of Annandale. The adjustments could be in either direction: in favour of the Defendants if it said that more expenses should be deducted than were shown in the April 2005 Account and in favour of Mr Straw and Blix if some or all of the expenses shown were capital rather than income expenses. And there may need to be some adjustment in respect of depreciation.
I said earlier that I would return to the just way of dealing with those last points at the end of this judgment. I now do so.
As to Redlands and Annandale, it seems to me that there is a very strong case that a substantial part, and perhaps even the whole, of the expenditure which Mr Stewart included should be excluded. The same would go for any other expenditure on Redlands or Annandale which Mr Stewart left out of the Account altogether – although I would be surprised if amounts which Mr Stewart left out altogether could now be said to be deductible. However, I cannot say for certain that nothing is deductible. These expenses are discrete matters and should not force Mr Straw and Blix into a position where an account has to be taken in relation to the whole enterprise.
As to depreciation, this was a matter which came up at a very late stage and I am far from satisfied that Mr Straw and Blix have had a proper opportunity to deal with it. Even if depreciation is in principle to be allowed as a deduction, the Defendants have not identified what claims they are entitled to make or quantified those claims.
In my judgment, the Distribution Profit share should be calculated, initially, on the basis that the sums referred to above relating to Redlands and Annandale should be disallowed as overhead expenses (using the same conversion rate for the latter as was used for the April 2005 Account). If the Defendants wish to challenge disallowance of any part of that amount on the basis that some or all of it should be apportioned to income or should be allowed as a deduction for some other reason, or if they wish to say that other expenses in relation to Redlands or Annandale should be included in the distribution accounting, then they must serve a notice to that effect on Mr Straw and Blix within 28 days of my order following this judgment, specifying in what part of the expenditure on Redlands or Annandale (whether appearing in the April 2005 Account or not) is properly to be allowed as a deduction, the reason why it is deductible and the amount of the deduction claimed. Directions can then be given for the determination of the issues. The fact that some or the whole of the amounts are said by the Defendants to be deductible or that additional items should be included should not be allowed to result in delay in the order for payment of the rest of the Distribution Profit taking effect.
The Distribution Profit should also be calculated, initially, on the basis that no depreciation charge is allowed as a deduction. If the Defendants wish to claim that some deduction should be allowed under this head they must, again within the same period of 28 days, serve a notice identifying the items and amounts of depreciation claimed. Again, directions can then be given for the determination of the issues which arise. And as in relation to the Redlands and Annandale expenditure, the order for payment of the balance of the Distribution Profit should not be prejudiced.