West Is West Distribution Ltd v Icon Film Distribution Ltd

This is a dispute between the Claimant producer and the Defendant distributor which arose, following the successful release in cinemas, of the film “West is West” (“the Film”). The main agreement between the parties is an Acquisition Agreement of 9 September 2009 (“the AA”). The facts and contractual arrangements are complex but not much in dispute.

The Claimant seeks damages for losses which it claims it suffered as a result of the failure of the Defendant, following termination of the AA and in breach of its clauses 11.2 and 14, to deliver up materials relating to the Film to enable the Claimant to continue distributing DVDs. It seeks payment of sums which it says that the Defendant improperly deducted as Distribution Expenses. The Claimant also seeks payment of £1.1m or an account of sums received from what it says were unauthorised sub-distributors UMO, Spafax and Phantom. Finally it seeks a cost indemnity for proceedings it contends that it had to bring against the Defendant to protect its rights under the AA. All the claims are denied.

The parties produced 11 bundles of documents for the trial and I heard evidence from 5 witnesses. Ms Leslee Udwin gave evidence for the Claimant. The Claimant also relied on the statement of Mr Peter Dutton of the Movie Partnership Limited. He gave his statement but for commercial reasons regrettably declined to give evidence. Ms Estelle Overs, consultant General Counsel, Mr Osman Mustafa, consultant Chief Financial Officer, Mr Raymond Primett, Head of Home Entertainment and Mr Ian Dawson, Chief Executive Officer gave evidence for the Defendant. All the witnesses were honest and doing their best to help the Court.

The litigation has been long running and acrimonious (Ms Overs has made six witness statements). That may explain some of the points still being taken by both sides. At a Case Management Conference the Deputy Judge directed that the trial be based on a List of Issues rather than the pleadings. I shall come to that list at the end as it seems more logical to follow the approach of Counsel to the issues at the trial.

I take this from the “Story” in the Claimant’s opening skeleton argument which I have edited and changed in some respects. In 1998 Ms Leslee Udwin produced a commercially and critically successful film called “East is East”. In 2008 she decided to produce a sequel called “West is West” and the Claimant was incorporated. Ms Udwin was approached by the Defendant which was interested in distributing the Film and decided to appoint it as the UK distributor and Icon Entertainment International (“IEI”) as the international sales agent. In the course of discussions the Defendant promoted its subsidiary Icon Home Entertainment Limited (“IHE”) to distribute the DVDs of the Film. IHE was named in the subsequent agreement as a pre-approved sub-distributor of the DVDs of the Film.

The discussions did not mention Universal Music Operations (“UMO”) with whom the Defendant had made a Distribution Agreement on 10^th October 2008. Under this the Defendant had appointed UMO to provide and procure exclusive distribution services to the Defendant in respect of all “Products”, defined as all videos which might after 1^st March 2007 be owned or controlled by the Defendant or licensed to the Defendant and/or acquired for distribution by the Defendant. The Defendant was to ensure that no videos were to be sold otherwise than by way of invoice by UMO and was prohibited from distributing videos or appointing anybody else to do so during the currency of the Distribution Agreement. This agreement was the means by which the Defendant dealt with the logistics and invoicing of sales to retailers which it negotiated in-house.

The Defendant had also entered into Distribution Agreements dated 17^th August 2009 with Spafax and Phantom Media, whereby they agreed to licence to those parties the Airline Rights in the Film for BA and BMI respectively. This was the only way in which the rights could be licenced to the airlines which had appointed these companies to deal with such matters. The Agreements were not expressly disclosed to the Claimant. In the AA, the pre-approved sub-distributor of the Film’s airline rights was named as Miracle Communications Limited.

On 9^th September 2009 the parties entered into four agreements:

The Acquisition Agreement contained a set of Deal Terms (“the DTs”) and a set of General Terms and Conditions (“the GTCs”), as well as a Schedule of Definitions.

By the AA the Claimant as licensor granted to the Defendant as licensee;

“the sole and exclusive right during the Term to advertise, promote and exploit the Rights as set out in clause 4 below ... on the Distribution Terms and other terms and conditions (all as defined herein) in the Deal Terms and Schedules (together the “Acquisition Agreement”)”.

The Rights were defined to include, in addition to the Theatrical Rights, the Airline Rights, Home Video Rental Rights, Home Video Sell-through Rights and Subscription Video on Demand Rights (“SVOD”) but not the Pay TV Rights. The licensee was expressly precluded from exploiting the SVOD rights for one year after the first theatrical release in the UK (i.e. not before 25^th February 2012).

Under Clause 8 (distribution terms), the licensee was entitled to 75% of the Home Video Gross Receipts Rental Income and of the Home Video Gross Receipts Sell-Through Income as defined but had to pay the Distribution Expenses out of its share. It was also entitled to keep 50% of the Video On Demand Gross Receipts from the SVOD Rights.

The licensee was also entitled to recoup any unrecouped theatrical Distribution Expenses from the receipts for the video rights. All sub-distribution fees were to be borne by the licensee from its share of the Gross Receipts.

Clause 10 of the Deal Terms pre-approved a number of named sub-distributors and provided that:

“The appointment of any other sub-distributors for any of the Rights shall be subject to consultation between the Licensor and the Licensee.”

In Clause 11 the parties acknowledged the rights set out in the BBC Licence Agreement dated 26^th August 2009, whereby the BBC held back the SVOD and Pay TV Rights for 12 months from the theatrical release date. These and the other “Rights” are to exploit the Film directly to a wholesaler or retailer for direct sales/rental to the public. “Receipts” means the price of each video sold by the licensee direct to the wholesaler or retailer for onwards sale or rent directly to the public. The Claimant argues that receipts from an unauthorised sub-distributor do not fall within those definitions.

Clause 1.1 of the General Terms provides that only the Rights as set out in Clause 4 of the Deal Terms in the AA are licensed to the licensee. Under Clause 1.1(x) the licensee is entitled to recoup all “Distribution Expenses” (which relate to the theatrical rights) “in the exercise of the rights herein” (but such expenses cannot be recouped from receipts which are generated outside the terms of the AA).

By Clause 5(viii) the licensee warranted that it would:

“fully indemnify the Licensor ... from and against all costs, claims, damages, expenses, fees, actions or proceedings (including without limitation reasonable outside legal fees) whatsoever from any breach or non-performance by the licensee of any of the warranties, representations and undertakings contained herein.”

Clause 7.2 provides that the licensor should be the owner of any Licensee Created Materials.

Clause 10 contains the Accounting Provisions. Within 60 days from the end of each calendar month from the theatrical release, the licensee was to furnish to the licensor and the BBC a statement. The statement was to show the Gross Receipts, Itemised Distribution Expenses incurred, the number of videos manufactured, sold, rented and returned and the Royalty due to the licensor. The licensee was to pay the amount shown as due to the licensor within 28 days of receipt of an invoice together with VAT thereon into the Collection Account. The licensee was to maintain “separate books of account relating to the proceeds of its exploitation of the Rights and the Distribution Expenses incurred”. The licensor was entitled on 28 days’ notice to appoint a chartered accountant to examine the licensee’s books.

Under Clause 11, if a party is materially in breach of any of its obligations under the AA, the other party can serve a notice to that effect and terminate the AA on 14 days’ notice. In that event, the licensee is obliged to put all materials related to the Film at the disposal of the licensor and all monies due to the Licensee from the exploitation of the Film are deemed to be assigned to the licensor. Clause 14 also provides that, upon the termination of the AA, the licensee is to cease exploitation of the Film and immediately deliver all materials supplied by the licensor or made by the licenseeto the licensor.

The Film was shown at various film festivals during 2010 – Berlin (February); Cannes (May); Toronto and London (October). The posters and trailers were designed and produced by Anna Butler for IEI.

The Film opened in UK cinemas on 25^th February 2011. It was a box office success and ultimately took £2.7m at the box office. In April the Defendant sought the Claimant’s approval to sub-licence SVOD Rights to British Telecom and iTunes and, after consultation with the BBC and the investors, Ms Udwin gave her approval. On 26^th May and again on 21^st June Claimant enquired about its share of the theatrical royalties. The answer was that the majority of the theatre revenue would be in the June statement due on 31^st July. The DVDs went on sale in mid-June. They went well, selling 46,100 copies in the first two weeks. By the beginning of July no statements had been received from the Defendant. On 6^th July the Defendant said that it should be in a position to furnish the March and April statements “next Monday” and to ensure that these would be sent on an ongoing regular basis. On 8^th July the Defendant sent inadequately detailed statements for the periods ending on 31^st March and 30^th April.

On 20^th July the Defendant approached the BBC with a proposal to buy out the Pay TV and SVOD rights. By 21^st July it had a draft Heads of Terms for a deal involving those rights with Lovefilm involving an undisclosed minimum £400,000 fee for West is West. The BBC held out for £225,000 for them to give up their rights, which the Defendant agreed on 26^th July. On 22^nd and 26^th July the Claimant pressed the Defendant for payment of the £207,000 shown due on the March statement and for details of the Lovefilm deal before approving it. On 26^th July the Defendant told Bank Leumi of the proposed Lovefilm deal to be provided as collateral. The attached payment schedule showed the minimum payment for West is West as £400,000. On 27^th July Ms Udwin recorded that Mr Mustafa had agreed to send her the May statements and the breakdown of the UK distribution costs and answers to questions re the international sales expenses. On the same day the Defendant sent the Claimant details of the proposed Lovefilm deal and said that the fee would be “north of £300,000” and asked for Ms Udwin’s approval. Mr Mustafa then sent the May statement and corrected it the following day.

That was the last statement provided by the Defendant until after service of the Notice of Termination in December. It showed £125,000 due to the Claimant. The Claimant agreed to the Lovefilm deal (though without sight of the full terms, which had not been provided despite requests). On 2^nd and 10^th August the Claimant chased the Defendant for details of the Distribution Expenses (P&A). On 9^th August the Claimant invoiced the Defendant for £125,699 plus VAT of £25,139 pursuant to the May statement. On 22^nd August the Claimant, not having received the details of the UK Distribution Expenses, gave notice of intention to appoint an auditor, thereby prompting the Defendant to supply the P&A statement the next day. On 2^nd and 8^th September the Claimant asked for the statement for June (due end August) and full breakdowns of various items in the P&A Schedule and asked that the latest invoice be paid. On 13^th September the Claimant had to ask again and pointed out that £41,524 VAT on the previous invoice had not been paid either.

By this point the statements, the payments and the VAT were all overdue. Towards the end of September the Defendant started to conduct a parallel negotiation with Lionsgate for the sale of the SVOD and Pay TV rights. This was to involve Lionsgate paying £5m for the Defendant’s titles on terms that West is West was free and available for SVOD exploitation. The Defendant agreed terms in principle with Lionsgate without the knowledge of the Claimant or the BBC.

The VAT was payable to the Revenue by the end of October. The Claimant pressed for payment repeatedly but payment was not made until 3^rd November.

On 28^th November the Defendant entered into binding Heads of Terms with Lionsgate conferring SVOD rights with effect from 5^th January 2012 with an estimated title licence fee of £474,600. On 29^th November 2011 the Guardian published an article saying that the Defendant was giving up UK film distribution, was axing jobs in London and was in talks to sell its back catalogue. Those constraints continued to affect the Defendant. On 8^th December the Claimant asked for a date when it would be convenient for the auditor to come and audit the Defendant’s books. The Defendant resisted this and kept putting the auditor off. On 12^th December the BBC asked the Defendant what the Lionsgate deal meant for West is West. On 16^th December, not having received the distribution statements due at the end of August, September, October or November, the Claimant served Notice to Terminate the AA on the Defendant for breach of clause 10.1 of the AA and requiring return of materials as provided for in that agreement.

The Defendant made immediate and strenuous efforts to persuade the Claimant to change its mind and instantly paid what was due. Following the Notice to Terminate, the Claimant decided that distribution of the Film would be via a new (and comparatively small) distributor, The Movie Partnership. The Movie Partnership charged a 20% commission and an additional 5% administration charge. This left 75% for the Claimant, apparently a better deal would have been available from a larger distributor.

On 3^rd January 2012, the Claimant’s solicitors wrote to Ms Overs, informing her that SVOD and Pay TV exploitation had been continuing notwithstanding the Notice to Terminate. The email reiterated the position in relation to material breach and the transfer of the “materials” under the AA. On 3^rd January 2012, the BBC continued to press the Defendant in relation to the deal which the BBC still understood to be a proposed deal with Netflix.

On 4^th January 2012, Cineserve (who were responsible to the Defendant for the delivery of the technical materials necessary for the production of DVD and BluRay material) informed the Defendant that the Claimant had been in contact to ask for the delivery of the “materials” under the AA. The Defendant suggested that Cineserve should not respond at all and should compile a list of all materials held for the Film. On 5^th January 2012, the Movie Partnership then set out what steps needed to be taken to ensure that there was a transfer of the distribution, which included a transfer of existing DVD stocks and closing the LoveFilm deal.

On 9^th January 2012, the Claimant’s solicitors wrote to Ms Overs of the Defendant asking for contact details for the relevant persons at NetFlix, having already emailed on the same day setting out what consents had been given for SVOD exploitation, but noting that the LoveFilm deal had not been disclosed as there was said to have been a non-disclosure agreement. On 10^th January 2012, the solicitors followed up with an email explaining that the distribution statements served by the Defendant were not agreed, that the Netflix deal represented a fundamental breach of the AA, and rejecting the suggestion that the Claimant and the BBC had agreed to any SVOD deal in principle, rather than specifically the Lovefilm deal.

The email then asked the Defendant to inform sub-distributors of the termination of the AA, of the assignment of the rights to pay, and indicated that a retrospective licence might be granted to Netflix. It also indicated that there was a disagreement about the scope of the “Materials” to be transferred. By a response on the same day, the Defendant set out its position, which was that it had paid for the DVDs and therefore they would not be transferred, and that Cineserve had been asked to compile an inventory of materials delivered. This was followed up by an internal email from Ms Overs seeking information from various sources in relation to winding up the relationship. Cineserve provided the Defendant with a list of materials that day, and the laboratories at which they were created. This was followed up by a spreadsheet with a complete list of materials held.

It is common ground that the AA terminated on 10 January 2012. An email of 11^th January 2012 from Mr Primett explained to the Defendant that the Film was part of several ongoing marketing campaigns and that it would be tidier for sales to continue to the end of February 2012. On the same day, the Claimant’s solicitors emailed reiterating that they expected the Defendant to comply with its post-termination obligations. On 12^th January 2012, the Claimant emailed Cineserve to ask about the whereabouts of various materials and for a list of materials. This was explicitly to include all materials whether created by Icon or not. Cineserve sought advice from the Defendant which again suggested that Cineserve should not respond. On 13^th January 2012, the Defendant’s then solicitors wrote and disputed the validity of the Notice to Terminate, accepted nonetheless that the AA came to an end on 10^th January 2012, and set out what steps had been taken by Icon post-termination. The letter went on to explain that the Claimant would not be entitled to use materials which included the Icon trademark. On 13^th January 2012 the Defendant suspended further distribution by UMO. On 19^th January 2012, the Claimant arranged for the authoring materials to be transferred to Arts Alliance Media. Further correspondence ensued.

On 24^th January 2012, the Claimant’s solicitors wrote to the Defendant pointing out that the Film was being shown on the Netflix site. It was unclear whether this followed an agreement between the Defendant and Netflix or LionsGate and Netflix. This elicited a copy of the agreement in redacted form.

On 24^th January 2012, the Defendant sent out letters to sub-distributors informing them of the termination of the AA. On 6^th February 2012, Ms Leslee Udwin asked Cineserve for details of the whereabouts of the DVD and BluRay masters which did not appear on the spreadsheet of materials. Their absence was explained by Cineserve on the basis that the Defendant had paid for them. The Defendant again advised Cineserve not to reply. This was chased again by Koch Media, a company appointed by The Movie Partnership. Access to those materials was again refused by the Defendant including also the DVDs held by UMO.

On 15^th February 2012, LionsGate became aware that they had been granted rights to the Film in breach of the BBC rights and asked the Defendant whether this was true. On 21^st February 2012, Leslee Udwin discovered the identity of the authoring house for the DVD and BluRay masters. On 28^th February 2012, The Claimant’s solicitors wrote a letter to LionsGate asking for financial detail of the deal done. That dispute was the subject of an injunction application issued by the Claimant on 29 February which was settled by an agreement between the parties and the BBC dated 8 March.

On 6^th March 2012, the Defendant wrote to UMO. It explained that “the home video and DVD units for the Film distributed and sold by Universal remain the property of Icon”, and requested that no stock be transferred to third parties. The stock levels held by UMO on 9^th March 2012 were 3,061 DVDs and 2,142 Blu Rays.

On 9^th March 2012, the BBC wrote setting out what deal was intended to be done to settle the LionsGate injunction. As part of that arrangement, an audit was agreed to and Malde & Co were agreed as auditors on 13^th March 2014. The Defendant agreed to contribute to costs of the audit in the event that it was found to owe any further money. Icon paid the amount agreed to be due arising out of LionsGate (£314,640 (+VAT) to the Claimant and £112,500 (+ VAT) to the BBC).

The DVD masters were located at Arts Alliance Media by 14^th March 2012. By 15^th March 2012 Arts Alliance Media had a DVD-R of the Film, and was expecting the BluRay later that day. The estimate was that the supply chain could therefore be filled by the second week of April, or sooner if the stock was available quicker. The new DVD and BluRay versions were sent for replication on 20^th March 2012. By 22nd March 2012, it was hoped that the DVD would be re-released on 1^st April 2012.

In the course of the audit, Malde & Co asked a series of questions which led to the issue concerning UMO Spafax and Phantom.

Claim for Damages for Breach of Clauses 11.2 and 14 of the AA. This depends on whether the Claimant was entitled to serve notice to terminate the AA under 11.2. The Claimant says that the breaches of the accountancy provisions were egregious and fundamental and therefore “material”. Without the Distribution Statements the Claimant could not invoice the Defendant for its share of any of the receipts. The question is to be answered at the time the notice was served and not at the time statements were subsequently provided.

The Defendant says that it has always accepted that it was late in providing some of the monthly accounting statements due under the Agreement. However, this was not a material breach of the Agreement within the meaning of Clause 11.1(iii) of the AA.

Mr Campbell for the Claimant submitted that the legal approach is as follows. Mr Gaunt QC for the Defendant did not disagree. Whether a breach is “material” or not depends on the nature of the agreement and all the circumstances, including the consequences of the breach and the consequences of termination for the party in breach. A breach need not be repudiatory to be material but a higher threshold is required where (as here) there is no provision for a cure notice, and therefore no opportunity to remedy the breach before termination-see Crosstown Music Company LLC v Rive Droite Music Ltd[2009] EWHC 600 (Ch) at [99] (Mann J).

Mr Campbell submits that in fact, the breaches relied on by the Claimant in the termination notice were very quickly cured. The accounting position was brought up to date by a cumulative statement issued on the same day that the termination notice was sent and the Defendant paid the amount due without waiting for an invoice. In truth, the delays complained of were administrative delays, and the outstanding sum revealed by the cumulative statement (£16,637) was minor in the context of the sums involved in exploiting the Film. The parties cannot be taken to have intended that a unilateral right to terminate would arise in those circumstances.

Decision. I reject the Defendant’s claim that the notice was invalid. This was not a will or some lease requiring a strict formulation. The notice clearly told the Defendant that the Claimant was terminating and why it was doing so. The obligation to provide accounts seems to me to be obviously material and fundamental. The Claimant would obviously need that information to know how the project was going and to get paid. The Claimant had none of the relevant knowledge and the Defendant had all of it. As the events showed, without compliance the Claimant was vulnerable. Without that information it could not prepare invoices and get paid. The fact that, as it happened, the sums generated were comparatively small is irrelevant as is the fact that the matter was immediately remedied after the notice had been given. The matter is to be judged at the date of the notice. The chart produced in Ms Udwin’s evidence is telling. The fact that the persistent failure to comply with the term may have been an administrative error is also irrelevant. Certainly the impression which the Claimant reasonably formed was that its rights were being flagrantly ignored to assist the much larger Defendant’s cash flow.

It is, as I see it, unnecessary to go into the question of whether there were other repudiatory breaches not mentioned in the termination letter on which the Claimant was entitled to rely. Mr Campbell skilfully sought to distinguish between terminating a contract for breach under a specific contractual provision and doing so by accepting a repudiatory breach under the general law of contract. There is a distinction but I do not see that it should prevent the well known principle in Boston Deep Sea Fishing-v-Ansell (1888) L.R.39 Ch D 339 CA applying to both situations thus enabling the Claimant, if necessary, to rely later on breaches coming to light after notice had been given.

The Claimant claims damages for losses caused by what it says was the Defendant’s obstruction of its attempts to continue to distribute DVDs after 10^th January 2012 in refusing to hand over its stock of DVDs and to let the Claimant have the masters to create new ones. The Defendant says that these were not “materials” which it was obliged to hand over as that expression included only materials delivered to it, not those which it created. The Claimant says that the lacuna of 3 months (January, February, March 2012) before it could get the new DVDs back on the shelves killed the sales. The Defendant had estimated £300,000 worth in 2012 and £500,000 worth in 2013 to 2015, but sales dropped after the termination date.

The Defendant rejects the claim that it was somehow responsible for a “disruption” in sales of DVDs. It refused to deliver up only DVDs which it had manufactured at its own cost but which were not yet sold to retailers and which bore its own trademark. It put at the disposal of the Claimant all materials necessary to create new DVDs. It did not interfere with the many DVDs which were already sold to retailers and in circulation for sale to consumers at the date of termination. The Defendant says that any losses suffered by the Claimant arose from its failure to act responsibly and commercially in arranging an orderly handover to a suitable replacement distributor. Neither the DVD stock-in-hand nor the DVD masters were “materials” within the meaning of that clause. Instead, they were “Videograms”; a term separately defined and not used in the definitions of either “Delivery Materials” or “Licensee Created Materials”. Mr Campbell says that they were not “Licensee Created Materials” as is shown by the separate “Standard Terms – Home Video Rights” in the AA which provide for a post-termination sell-off period inconsistent with the suggestion that the Claimant would (under clause 7.2 of the GTCs) already own DVD stock as “Licensee Created Materials”.

Decision. The Schedule of Definitions does not define “materials” only Delivery Materials and Licensee Created Materials. Little is gained by elaborate extrapolation from other expressions in the contractual documents which amalgamate sets of standard wordings. Close analysis produces contradictory results. It is true that DVDs are within the definition of “videograms” and that the Standard Terms for Home Video rights permit the Licensee to sell them off in the last six months of the Term but only if the AA has not been validly terminated before the end of it. The Term did not end before termination. Moreover any inconsistency between this provision in a Standard Term and that in the AA should be resolved in favour of the AA. More fundamentally it seems to me that the undefined materials must be broader than the two defined but limited materials terms. It thus covers all materials whether Delivery, Licensee Created or any other type of materials- including those that may also be Videograms. In short “all materials…made by the Licensee” means just that and, as I see it, includes the DVDs which are the subject of dispute.

What happens then is less clear. The Defendant has to “immediately deliver” the materials to the Claimant but may instead destroy them and provide a certificate of destruction. This suggests two things. First the parties to the contract clearly contemplated that termination by notice would mean that the Licensee would have to hand over or destroy materials for which they no longer had the intellectual property rights. In that context while harsh that sort of provision is neither penal in the sense that it is unenforceable nor uncommon. It is also clearly spelled out, so the Defendant was in breach in refusing to deliver the materials to the Claimant. Secondly the word “deliver” does not seem to me to be so clear and explicit that it necessarily entitles the Claimant to resell entirely for its own benefit and treat as its own (as opposed to simply keep off the market or sell after reaching terms with the Defendant), material which was made by or at the expense of the Defendant. Had the material been delivered then the parties might have had a debate about that- but it did not happen. It follows that I do not accept the Defendant’s fall back position that if the items were “materials”, then Clause 11.2(i) is unenforceable as a penalty, in obliging the Defendant to deliver up, free of charge, items which were (as is common ground) manufactured at D’s expense. Mr Campbell relies on Ms Udwin’s concession in cross examination that the Claimant’s interpretation of clause 11.2(i) could be seen as “punitive”. To a fair minded lay person giving commendably frank evidence it can be so seen but, as a matter of law, for the reasons I have given, I do not consider that it is.

Mr Gaunt for the Claimant points out that the supply from UMO had been cut off on 13^th January when the Defendant had suspended distribution by UMO, so there was a break in the supply chain for 2½ months because the Claimant was unable to obtain the masters and create new DVDs. A break in supply and consequent uncertainty on the part of retailers was bound to have affected sales.

He relies on the late supplemental statement of Ms Udwin. The charts she produces show that once existing stocks had run down by the end of January, the sale figures slumped and remained depressed thereafter. The figures of the Official Charts Company show that sales fell drastically from the 6^th week of 2012. From around 1500 to 2000 a week sales fell suddenly to the low hundreds as the termination of the AA took effect. That is unlikely to be coincidence. While sales of units fall away it is clear from the evidence that they do not usually do so as fast. Ms Udwin has sought to quantify the loss of sales by reference to “comparables” and the Defendant’s previous estimates. An email of 16 December 2011 from Estelle Overs, sent in an effort to persuade the Claimant to stay with the Defendant gave an estimate, apparently obtained from Mr Dawson or Mr Primett of £300,000 gross income for DVD sales in 2012. The Claimant seeks damages of 80% (its share of receipts under the deal with TMP) of £746,940 based on lost sales of 186,735 units at a unit price of £4. Ms Udwin takes as comparables the figures for two other films with similar box office success “Four Lions” and “In the Loop”.

Mr Gaunt suggests that since that estimate for sales in 2012 was £300,000 and in 2012 only about 20,000 units were sold the measurable loss is over £200,000. Comparison of the Film with the performance of “In The Loop”, the most relevant comparable shows that in the relevant period (weeks 31 to 83) the Film sold 13,088 units while In the Loop sold 64,589 units, a shortfall of over 50,000 units.

The Defendant says that even if it was obliged to deliver up the DVD stock and or masters, the Claimant has not proved that failure to deliver was responsible for the post-termination decline in DVD sales. It points out that the Claimant has presented no evidence from any expert, or even from anybody who was actually involved in post-termination DVD sales, as to whether there was actually a post-termination disruption in DVD supply, how any such disruption impacted sales or why any such impact was irreversible. Mr Campbell says that Mr Dutton’s witness statement gives an implausible and incoherent account of problems being caused both by the Claimant’s “withdrawal” of stock from the marketplace, and retailers being left with too much stock. Mr Gaunt himself places little reliance on it either.

The Defendant points out that Ms Udwin conceded that she has no experience in DVD distribution or retail, does not know what action her replacement distributor (TMP) or sub-distributor (Koch) took to promote the title to retailers or what communications took place (if any) regarding stock between the various parties. Further she did not know whether stock remained on retailer shelves and withdrew her witness statement allegation that the Defendant’s actions “effectively meant that DVDs of the Film were removed from the retailers floor space”.

Mr Dawson (corroborated by Mr Primett) gave evidence that there was no reason that any temporary disruption in supply would harm total sales so long as an appropriate distributor had continued to promote the title. Mr Dawson (who, the Claimant acknowledged, has relevant experience and expertise) gave largely unchallenged evidence that TMP and Koch were inappropriately small-scale and inexperienced distributors and that larger distributors would have been interested in taking over the title.

The Defendant says that there is no plausible evidence of the quantum of loss. Ms Udwin’s supplementary statement asserts (on the basis of conversations with un-named industry experts) that DVD sales can be projected with accuracy based on a “formula”. But she could not say what that formula was – and, when pressed, conceded that sales prospects would vary by distributor and depend on various other circumstances (e.g. whether cast members went on to become more famous in other roles). Ms Udwin’s evidence calculates lost revenue on the basis of two films which were distributed neither by Icon nor by TMP/Koch, and one of which (Four Lions) was surprisingly and unusually successful on DVD, on a unit price (£4) which was not the average unit price charged by TMP/Koch (£1.58), with a royalties split which there was no reason to believe would have been charged by the distributor of the ‘comparator’ films; and with no breakdown of applicable costs and expenses.

The Defendant says that if there was any loss caused the Claimant wholly failed to mitigate by acting in a commercially reasonable manner. Ms Udwin failed to engage with proposals for a managed handover/sell-off period. She failed to use the materials which were made available on 20January to manufacture new stock. Ms Udwin conceded such replacement stock could, if required, have been produced by early March 2012 from the materials made available by the Defendant in January. Ms Udwin failed to replace Icon with a distributor of similar or greater size and experience and appointed TMP/Koch without seeking any ‘pitch’ or sales projections from either those companies or any other potential options.

Mr Campbell submits that the most likely explanation for the decline in sales is that TMP and Koch simply did a poor job in promoting the title post-termination in a tough market thus justifying the reservations about TMP expressed by the BBC prior to their appointment (which Ms Udwin acknowledged) and Ms Udwin’s decision later in 2012 to press for Koch’s removal and to give TMP what she described as a “whipping”.

Decision. The Claimant can only recover as damages the loss caused to it by the fall in sales due to the breach by the Defendant in failing to release the masters. The Claimant has to prove that loss. It is difficult to see any additional loss caused by the Defendant’s failure to release about 5,000 DVDs and Blu Rays which would need alteration before being released with altered trademarks. There is no evidence of that loss so the real issue is the masters. If the masters had been released promptly then there would have been no breach. The fact that it would have been technically possible to create new masters without those which the Defendant withheld is not relevant even though the Claimant now accepts that that would have been possible. It was reasonable for the Claimant to wish to create new masters from the old ones which it was entitled to receive from the Defendant under its contract. The Defendant did not point this option out to the Claimant which understandably wanted to approach the issue in the conventional way and was under no duty to search out other ways of doing this at the time.

There was as a result a gap in supply caused by the Defendant’s breach. I accept the evidence of Mr Primett that usually, and as was offered in this case, this gap is minimised or eliminated by agreed cooperation between the parties in their mutual financial interest. But the Claimant was still entitled to insist on its contractual rights and the Defendant’s view that this was unreasonable overlooks the real and wholly justified concerns by the Claimant about the way it had been treated in the preceding months.

The evidence of Mr Dawson and Mr Primett is that the sales shortfall was caused entirely by the failure of the Claimant to agree to an orderly handover and its actions in both acting in an unconventional way and also engaging small and unsuitable distributors who did a very poor job. They are truthful witnesses of fact expert in their field but not technically expert witnesses. They necessarily lack the independence and detachment of court experts. Their views were also necessarily general. A large distributor (like a large law firm) may genuinely but mistakenly believe that it can do the job better than a smaller one. Their honest impression is no more than that. There is no detailed evidence of how far if at all the new distributors failed to do the job properly. It seems that the Defendant opposed the use of expert evidence on this issue so that their criticism of its absence from the Claimant is inappropriate. But this still leads to a difficulty for the Claimant in proving its case. Ms Udwin freely accepted that she has no technical expertise in this area. Mr Dutton’s statement is unsatisfactory for the reasons identified by the Defendant. It also carries little weight as his loyalty to his client did not extend to giving evidence. There are signs that the BBC had doubts about the new distributors and Ms Udwin herself was disappointed with them. The Claimant’s evidence is limited to Ms Udwin’s last minute supplemental statement. But there is some solid material in that showing the drop in sales and the performance of the comparables- although “4 Lions” was not, on the evidence, relevant. But there are uncertainties in any exercise with comparables.

On the available material I conclude that there was a drop in sales caused by the gap between when the masters should have been released and when the Claimant obtained them. The £300,000 estimate was gross, probably overstated given the purpose for which it was provided and based on what Icon, an established big name with a wealth of expertise could have achieved without interruption. The loss of sales was also, more probably than not, contributed to by the actions of the Claimant in not managing the problem in a way which a larger and more expert organisation would have done and in appointing distributors who were not in the first rank (and who readily offered the Claimant better terms than were available from the more established names ). I emphasise that at this point I am concerned with causation of the loss, how far it was caused by the breach, not with mitigation of damage where one holds the Claimant to a lower standard.

It of course for the Claimant to prove its damage. It has proved that there was a loss but it is difficult to quantify what it was. That difficulty would still have existed to a degree if the evidence had been more extensive and reliable given the uncertainties of the exercise. Commercial common sense suggests that the absence of the masters would have caused some permanent loss of sales initially but that in the medium to long term that would not have been the case. So I do the best I can as follows. I limit the loss to 2012. I am not satisfied that more than 50% of the loss of sales in 2012 was attributable to the Defendant’s breach. I put the amount of loss sales at 50,000. The average price per sale was £1.58. The Claimant would have recovered 80% (or is it 75% given the admin fee?) of those sales through the Movie Partnership. I provisionally assess the damages on that basis but am conscious that I may have misunderstood some of the detail so I will welcome submissions from the parties on that.

There is a dispute about the treatment of three heads of expenditure which the parties should have been able to sort before now. Amounts which have been deducted by the Defendant as if they were “Distribution Expenses” under the AA, are (i) £27,429 for trailer costs, (ii) £9,320 for poster costs, and (iii) £14,035 costs for the London Film Festival. The Claimant says that they should not have been deducted.

Trailer and poster costs. The Claimant says that the governing agreement for trailer and poster costs is the Sales Agency Agreement which I listed at the outset and to which it was not strictly a party. The Agreement was between the Claimant and IEI which was obliged to produce the trailer and poster and incur the costs under Clause 13.1. The parties had a cap on those costs, in the amount of USD$150,000 under Clause 7.2. Any spending in excess was the subject of an express prior approval condition. The Defendant (as UK and Eire agent) had free access to IEI’s poster and trailer by reason of Clause 9 of the Deal Terms of the AA. Poster and trailer costs were therefore to be recouped by IEI, not the Defendant, and were subject to a cap in the governing agreement, the Sales Agency Agreement.

The Defendant disputes that the relevant costs should have been dealt with as international expenses under the Sales Agency Agreement. It says that the relevant expenses were incurred in relation to the promotion of the Film in the UK, and were therefore properly Distribution Expenses under the AA. Mr Mustafa’s evidence was that the relevant posters and trailers were used first by the Defendant in the UK market, and then by IEI in the international market. Accordingly, their cost was apportioned equally as the Defendant’s expenses under the AA (reflecting UK use) and as IEI’s expenses under the Sales Agency Agreement (reflecting international use). The Claimant is not able to dispute that as a matter of fact and to do so would have involved disproportionate expense. It follows that the Claimant’s claim on this aspect fails.

London Film Festival costs. The Claimant says that these costs are governed by the IPA. Festival costs were not to be incurred without the prior approval of the “Approvers” as defined in the Clause 8 of the IPA. There was no approval for the London Film Festival.

The Defendant relies on the evidence of Mr Mustafa and Mr Dawson that the costs of the London Film Festival were Distribution Expenses under the AA because they were incurred in order to promote the Film in the UK market (and not by IEI in order to promote the Film in the international market). The definition of “Distribution Expenses” in the AA expressly includes (at point (iii)) costs relating to “film festivals”.

There was some interesting but very general evidence about which markets are promoted by film festivals and when. From the limited material available it seemed that the answer was not as dogmatic as the Defendant’s witnesses asserted. On the limited evidence put forward the London Film Festival did not just promote UK sales but international sales as well and I conclude that the film festival costs should be split like the others.

Under this head the Claimant seeks more than £1 million. It is an unattractive claim.

The Claimant says that three entities (Universal, Spafax and Phantom Media) were appointed as sub-distributors and that these appointments took place without consultation. The Claimant says that as a result all money received by the Defendant from those entities was otherwise than under the AA. As a result the Defendant was neither entitled to deduct any Distribution Expenses from such sums, nor entitled to retain any share of such sums as royalties.

The Claimant says that all three companies were sub distributors. The UMO Distribution Agreement is called a “Distribution Agreement” and required UMO to provide exclusive distribution services. Under it UMO was to invoice the purchasers and pass title to the goods. The Claimant says that UMO was clearly a sub-distributor. Similar submissions are made about Spafax and Phantom.

Mr Gaunt argues as follows. On the true construction of “Home Video Gross Receipts” the receipts from sales made by an unauthorised sub-distributor do not fall within it. Since clause 4 of the Deal Terms only entitled the Defendant to 75% of “Home Video Gross Receipts” (whether rental income or sell-through income), it follows that the Defendant is not entitled to claim 75% of the income which does not fall within that expression. The AA granted the Defendant the right to exploit the defined Rights in the Film subject to certain limitations. It did not grant the right to do so otherwise. The exploitation of the Film via UMO was not granted and receipts from UMO were therefore outside the terms of the AA. Those receipts were nonetheless earned by exploiting the Claimant’s property and the Defendant is obliged to account. Since the Defendant acted outside the terms of the AA, it was neither entitled to 75% of the receipts nor to set off the theatrical expenses under the cross-collateralisation clause. Further, the Defendant was intended to hold the Claimant’s share of the monies generated by the sale of DVDs on trust to pay them into the Collection Account: see Inter Party Agreement, clause 9. In respect of such monies it was in the position of a fiduciary. It cannot be in a better position as a result of being in breach of the AA by employing unauthorised sub-distributors.

In some last minute tactical magnanimity the Claimant has accepted that it should give credit for some £344,000, put as the Defendant’s cost of earning the money. That acceptance followed a concession by Ms Udwin, yet another sign of her integrity as a witness.

Mr Campbell responds that the Defendant has never denied the requirement to account in respect of a 50% share of monies received from Spafax and Phantom Media and a 25% share of monies received through Universal (those figures being the shares due under clause 8 of the DTs for, respectively, “Airline/Ship Rights from Non-Theatrical Gross Receipts” and “Home Video Sell-Through Rights from Home Video Gross Receipts Sell-Through Income”). It has done so. The Defendant has also absorbed some £344,222 in the form of the costs of manufacturing and shipping DVDs, deducting such costs from its share of Home Video Sell-Through Income.

Mr Campbell points out that the Claimant seeks a startling windfall of more than £1m at the Defendant’s expense because of the alleged failure to consult in circumstances where the Claimant had no right to veto the relevant appointments and does not suggest that it would have objected (or even had grounds to object) to the arrangements with any of the relevant third parties. He submits that the parties cannot have intended such dramatic, unfair and uncommercial consequences. On a proper construction of the AA, it is plain that they did not. Clause 10 does not provide for any consequences of a failure to consult. The natural interpretation, therefore, is that any failure is (at most) a breach of contract which is capable of giving rise to a claim for damages if resulting loss can be established on standard principles. Clause 10 does not contain any suggestion that a “sub-distributor” will not be a sub-distributor within the meaning of the AA if there is a failure to consult. Neither clause 10 nor any other provision of the AA draws a distinction between “valid” or “authorised” sub-distributors and “invalid” or “unauthorised” sub-distributors. Had that been the parties’ intention, it could readily have been expressed. On the contrary, the other relevant definitions in the AA consistently refer to income received from D’s “licensees” or “affiliates”, without any distinction between those which have been consulted upon in accordance with clause 10 and those which have not- see, in particular, the definitions of “Home Video Gross Receipts Sell-Through Income” and “Non-Theatrical Gross Receipts”. Those definitions do not use the language of “sub-distributor” at all. The result is that a “sub-distributor” which has not been consulted upon is nevertheless a “sub-distributor”. And in any event, even if there is such a creature as an “invalid” sub-distributor, amounts received by the Defendant from such an entity are still within the scope of the AA because they are amounts received from a “licensee” or “affiliate”.

The Defendant also says that the companies were not “sub-distributors”, a term not defined in the AA (an omission which in itself suggests that the parties did not have in mind a breach of clause 10 having such dramatic consequences). The Defendant says that the concept was intended to capture a third party allowed to exploit specific Rights in the world at large without any further involvement by the Defendant. It was for that reason that clause 10 imposed an obligation to consult in respect of sub-distributors other than those listed. On that basis Spafax and Phantom Media were not properly sub-distributors because they were not granted the ability to exploit the Airline Rights (which were the Rights in question for each of them) to the world at large, without any further involvement by the Defendant. Instead, the “Additional Terms” section of Schedule A of the Defendant’s agreement with each of them made clear that they were granted the Rights only in respect of specific airlines (British Airways/Open Skies in the case of Spafax, and BMI in the case of Phantom Media). It simply happened that the airlines in question dealt through Spafax and Phantom.

Mr Campbell says that Universal was not a sub-distributor because its role was limited to delivering DVDs to retailers, and raising invoices for such deliveries, on the specific instruction of the Defendant and in fulfilment of agreements reached directly between the Defendant and retailers.

The Defendant asserts that there was in any event consultation. Clause 10 does not prescribe any particular manner of “consultation”. Ms Udwin was notified of the sale to British Airways (Spafax) and BMI (Phantom Media), and of the sums involved, by email dated 11 July 2011 for $70,000 and $11,000 respectively. The fact that the names of the underlying airlines were used, rather than their purchasing agents, is of no substance. In respect of Universal, Mr Dawson’s evidence is that he repeatedly discussed their role with Ms Udwin, from as early as February 2011.

Decision. As a matter of construction it does not seem to me, essentially for the reasons given by Mr Campbell, that the appointment of a sub distributor without consultation can lead to the drastic consequences for which the Claimant contends. The Defendant did not have to obtain the Claimant’s consent, only seek its approval. The consequences of a failure to consult are not spelled out. In the ordinary way they would be limited to the damages caused by the breach, in most cases likely to be modest or non existent. If the parties had intended a draconian result of the kind claimed by the Claimant this would have been spelled out in the AA. The other points made by Mr Campbell on construction are also sound. There is no claim for damages, no doubt because the Claimant suffered no loss.

The clause contemplates first those distributors who have been approved in the AA and secondly future ones who will be the subject of consultation before appointment. It has in mind sub distributors whom the Defendant wishes to appoint to fulfil functions like its own. It is as I see it pointless to debate aridly whether UMO is or is not technically a sub-distributor. It probably is – for that is what it calls itself – but on the facts consultation about its appointment under the clause would have been a formality. UMO was in practice an integral part of the Defendant’s distribution arrangements and its remuneration was in effect at the Defendant’s cost. There was an honest difference of recollection between Mr Dawson and Ms Udwin about whether the matter was discussed. The probabilities favour the recollection of Mr Dawson. He had no reason not to mention this and UMO was a trademark on the units. So on balance I find that there was in any event a degree of consultation albeit of course after the UMO agreement was in effect. I would also in this context find that since Ms Udwin had been told of the deal with the airlines, which could only have been done through the distributors, there had in effect been consultation about that too.

Sometimes arguments about construction feature examples of absurd results which might follow in other cases if a particular approach is followed. This is a case where the obvious absurdity is actually present and there is no need to speculate about other situations. These three arrangements were obviously in the interest of the Claimant. There is no evidence that it would have objected to the appointment of any of the alleged sub-distributors. It would have been daft to do so. Nor does it plausibly allege that it has suffered any damage as a result of their appointment.

There is a dispute about the effect of the indemnity in Clause 5(viii) of the GTCs which provides in relevant part that the Licensee will “fully indemnify the Licensor ... from and against all costs, claims, damages, expenses, fees, actions or proceedings (including without limitation reasonable outside legal fees) whatsoever from any breach or non-performance by the licensee of any of the warranties, representations and undertakings contained herein.”

The Claimant points out that the Defendant entered into the Lionsgate Agreement in November 2011 at a time when they were not entitled to do so (because the SVOD and Pay TV rights were “held back”) and when the BBC or the Claimant were in a position to bargain for the release of those rights. It was therefore necessary for the Claimant to bring proceedings for an injunction to restrain the Defendant from disposing of or dissipating monies received from Lionsgate and for a declaration that the monies were held for the benefit of the Claimant. The proceedings were settled by the Consent Order of 8^th March 2012 and the Deed of 13^th April 2012 on terms that the Defendant was to pay £474,600 to the BBC, 10% of which would then be passed on to the Defendant. The balance was then split between the Claimant and the BBC with the Claimant receiving £314,640 and the BBC receiving £112,500. Mr Gaunt says that the Claimant is entitled to be indemnified under clause 5(viii) against the costs of bringing proceedings up to that point.

The Defendant submits that there should be no order as to costs, in circumstances where no injunction was granted, but instead a tripartite agreement (involving the BBC) was reached. The Defendant’s position is that such an agreement would always have had to be negotiated as a matter of commercial necessity and the application was riddled with flaws. It was brought in the Queens Bench rather than the Chancery Division, contrary to the mandatory terms of CPR 63.13 regarding claims involving intellectual property rights, the relief sought included a peculiar form of freezing order, in the absence of any evidence of an intention to dissipate, without any of the necessary safeguards (including a properly fortified cross-undertaking) and various mandatory orders which were vague and/or onerous and disproportionate.

Mr Campbell has some objections to the indemnity. He points out that the indemnity at clause 5(viii) is limited to costs etc arising “from any breach or non-performance by the Licensee of any of the warranties, representations and undertakings contained herein”. The relevant “warranties, representations and undertakings contained herein” are those contained in clause 5 itself (which is headed “Licensee Warranties and Representations and Undertakings”). The only potential relevant warranty, representation or undertaking is that in clause 5(ii), which is an undertaking that the Licensee shall “agree that the Film remains at all times the property of the Licensor, subject to the privileges and licenses herein licensed to the Licensee”. The Defendant’s actions in entering the agreement with Lionsgate did not manifest any disagreement as to the ownership of the Film. D’s witnesses were clear that it was always their intention to obtain approval of the deal, and to pay both the BBC and the Claimant in accordance with the terms of the structure which had been agreed in principle in relation to the previously proposed, materially identical sale to LoveFilm.

He also argues that the indemnity insofar as it relates to legal costs is limited to “reasonable outside legal fees”, and must in any event only be read as covering “actions or proceedings” properly taken in response to any breach by the Defendant. He then explains why he says that the application to the court and the undertakings sought were inappropriate.

Decision. This issue arises from the consent order of 29 February 2012 which simply adjourned the application and reserved the costs. Neither I nor any other judges were concerned with the application at the time or ever had an opportunity to understand the issues. Yet I am now being asked to do so more than three years after the events in question. I decline to look at the matter except in broad terms. If the parties had wanted a more detailed evaluation of the costs merits they should have obtained it at the time or at least brought the matter on sooner.

The Defendant had not respected the Claimant’s rights in the respects I have identified. (In contrast, apart from the issue of the DVDs and the masters where there was a disagreement in good faith about the legal effect of the clause, the Defendant was scrupulous in its handing of the termination itself). It had not disclosed what it had been doing in breach of the AA, however well intentioned its motives. It was in breach and the Claimant considered, rightly or wrongly, that there was no sign of it putting things right without compulsion. An injunction was applied for which produced terms by which the Defendant met the Claimant’s concerns sufficiently for the hearing not to proceed and clearly resulted in an outcome advantageous to the Claimant. If the Defendant had objections to the form of or motivations behind the injunction application it could have contested it but chose not to do so.

I conclude that the application was justified and sprang from a dispute under the contract within the scope of the indemnity. The fact that an application relies on the alleged insolvency of the Defendant does not take it out of the indemnity. The application became complicated by other issues arising in the bitter disputes between the parties. Taking into account all the submissions I have seen and heard and the fact that some aspects of the matters raised in the settlement were probably beyond the indemnity and within the discretion granted by the CPR, I conclude that the Claimant should have 75% of the costs of the reserved application. There will be no order as to the balance. I leave to a costs judge any questions about what was or was not reasonable outside lawyers’ fees under the indemnity.

The Claimant was entitled to terminate the AA on the grounds set out in the notice. The Claimant is entitled to damages for the loss suffered as a result of the Defendant’s failure to deliver the master tapes but these will be for much less than is claimed. The Claimant’s claim about sub distributors fails. The claim in relation to poster and trailer costs fails but the festival costs will be split half and half. The Claimant will receive 75% of the disputed costs of the application in 2012 and there will be no order as to the balance.

I have attached the List of Issues below. Some of the questions are irrelevant and the answers to the others are probably obvious. Some, if not agreed, such as interest are best dealt with orally. If answers are required one by one then Counsel are directed to agree these as far as possible and raise any disputed matters at the hand down.

I shall be grateful if Counsel will, not less than 72 hours before hand down of this judgment submit a list of corrections of the usual kind and a draft order, both preferably agreed, together with a note of any issues they wish to raise at the hearing.

I am grateful to Counsel and to the solicitors for the admirable way in which this case was presented and prepared.

When and how did the Acquisition Agreement (AA) come to an end?

Irrespective of who terminated the agreement, does D have a liability (1) in tort or (2) for breach of (a) fiduciary duty or (b) tortuous duty as express trustee for loss of profits?

What (if any) damages, in respect of losses caused post-termination by the disruption of DVD/Blu Ray sales, did C sustain by D’s breaches (if established) of obligation?

Did C take reasonable steps to mitigate loss for any breaches under (3) above?

In relation to D’s accounting obligations:

In relation to D’s dealing with Netflix/Lovefilm/Lionsgate:

Did D appropriately allocate International Poster and Trailer Costs, and London Film Festival costs under the AA?

Did D appropriately account for:

On what basis should interest be awarded on any sums found due from D to C?