England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(Mr. Justice Whitford)

		Royal Courts of Justic
		26th July 1989

LORD JUSTICE DILLON: The plaintiffs in this action Zang Tumb Tuum Records Ltd. ("the recording company") and Perfect Songs Ltd. ("the publishing company") appeal against the Order made by Whitford J. on 10th February 1988 after the trial of the action and counterclaim.

The issues argued before us on the appeal, not all of which have to be decided, raise questions -

(1) as to the true construction of certain clauses in

(a) a recording agreement made on the 1st September 1983 between the recording company and five young men the Defendant Mr. Holly Johnson and Messrs Peter Gill, Mark O'Toole, Brian Nash and Paul Rutherford - who were the members of a pop group called Frankie Goes to Hollywood ("the Group") and

(b) a publishing agreement dated the 11th May 1984 and made between the publishing company and the members of the Group other than Mr. Rutherford.

(2) as to whether the recording agreement and the publishing agreement were or either of them was, unenforceable against the defendant as being in unreasonable restraint of trade

(3) as to whether the defendant had, before he purported to exercise such right, waived any right he might otherwise have had to object to the recording agreement or the publishing agreement on the grounds of unreasonable restraint of trade and

(4) as to the basis for and scope of an enquiry as to damages which the judge awarded the defendant on his counterclaim.

Certain preliminary matters must be appreciated before I come to the terms of the recording agreement and the publishing agreement.

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In the first place, though the publishing agreement is dated 11th May 1984, the agreement signed then merely replaced a publishing agreement in the same terms which had been made between the same parties on 1st September 1983, but had been lost. The publishing agreement can therefore be treated as if made on 1st September 1983 . The publishing agreement is of course a separate agreement from the recording agreement, but before either agreement was entered into it was made plain to the Group that the recording company would not enter into the recording agreement with the Group, unless the members of the Group other than Mr. Rutherford entered into the publishing agreement with the publishing company.

In the second place, the recording company and the publishing company are sister companies whose only directors and shareholders at all material times were Mr. Trevor Horn and Miss Jill Sinclair, who were married to each other in 1980, though Miss Sinclair continues to use her maiden name for business purposes.By 1983 Mr. Horn had considerable experience, and a very high reputation, as a producer of records of pop music but the recording company was newly formed and its recording of the Group under the recording agreement was Mr. Horn's first independent venture in record production.Miss Sinclair had considerable administrative experience in relation to the production of records: her father and brother ran a recording studio and she had joined that on the administrative side in 1977.

In the third place the members of the Group were in 1983 young men in fairly humble circumstances and of little business experience. Some of them were apprentices and others on supplementary benefit. They had however a manager, a Mr. Bob Johnson, who was no relation to the defendant. They were little known to the general public, but had performed occasionally on television and radio, and it was as a result of seeing and hearing them that Mr. Horn asked Miss Sinclair to get in touch with Mr. Bob Johnson and she consequently did so. The defendant was lead singer of the Group, and there seems no doubt that he was the member of the Group with the greatest talent and potential.

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To make a success in the world of pop music the Group needed to make records which would sell well. They therefore needed a recording company since, as the judge has explained in his judgment, the making of a record is a highly complex matter, involving very sophisticated and expensive equipment. In view of Mr. Horn's reputation, they very much wanted that he should produce their records, although it seems that there was at least one other small recording company which would have been prepared to do so. In the upshot, the approach by Miss Sinclair to Mr. Bob Johnson led to negotiations and these led to the recording agreement and the publishing agreement. In the negotiations the Group were represented by Mr. Bob Johnson, and they had the assistance, so far as it could go, of an experienced solicitor, Mr. Gentle of Gentle Matthias & Co.

There is no suggestion in this case that Mr. Horn and Miss Sinclair or anyone else exercised undue influence over the Group or acted fraudulently or in bad faith. What is said is that the terms of the recording agreement and publishing agreement put forward by the recording company and the publishing company, even after such concessions as were made during the negotiations, were so one-sided and unfair that consistently with the principles applied by the House of Lords in Schroeder Music Publishing Co. Ltd. v. Macaulay [1974] 1 WLR 1308 they cannot stand and cannot be enforced against the defendant.

In that case Lord Diplock at 1315H put the question to be answered as "Was the bargain fair?" He went on:

"... the test of fairness is, no doubt, whether the restrictions are both reasonably necessary for the protection of the legitimate interests of the promisee and commensurate with the benefits secured to the promisor under the contract. For the purpose of this test all the provisions of the contract must be taken into consideration."

Lord Diplock also agreed with Lord Reid's analysis and conclusions. Lord Reid had said at 1310 A-B:

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"....in a case like the present two questions must be considered. Are the terms of the agreement so restrictive that either they cannot be justified at all, or they must be justified by the party seeking to enforce the agreement? Then if there is room for justification, has that party proved justification - normally by showing that the restrictions were no more than what was reasonably required to protect his legitimate interests".

Lord Reid's analysis of the agreement in Macaulay's case includes the following at 1313C - 1314B:

"The public interest requires in the interests both of the public and of the individual that everyone should be free so far as practicable to earn a livelihood and to give to the public the fruits of his particular abilities. The main question to be considered is whether and how far the operation of the terms of this agreement is likely to conflict with this objective. The respondent is bound to assign to the appellants during a long period the fruits of his musical talent. But what are the appellants bound to do with those fruits? Under the contract nothing. If they do use the songs which the respondent composes they must pay in terms of the contract. But they need not do so. As has been said they may put them in a drawer and leave them there.

No doubt the expectation was that if the songs were of value they would be published to the advantage of both parties. But if for any reason the appellants chose not to publish them the respondent would get no remuneration and he could not do anything. Inevitably the respondent must take the risk of misjudgment of the merits of his work by the appellants. But that is not the only reason which might cause the appellants not to publish. There is no evidence about this so we must do the best we can with common knowledge. It does not seem fanciful and it was not argued that it is fanciful to suppose that purely commercial consideration might cause a publisher to refrain from

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publishing and promoting promising material. He might -think it likely to be more profitable to promote work by other composers with whom he had agreements and unwise or too expensive to try to publish and popularise the respondent's work in addition. And there is always the possibility that less legitimate reasons might influence a decision not to publish the respondent's work.

It was argued that there must be read into this agreement an obligation on the publisher to act in good faith. I take that to mean that he would be in breach of contract if by reason of some oblique or malicious motive he refrained from publishing work which he would otherwise have published. I very much doubt this but even if it were so it would make little difference. Such a case would seldom occur and then would be difficult to prove.

I agree with the appellant's argument to this extent. I do not think that a publisher could reasonably be expected to enter into any positive commitment to publish future work by an unknown composer. Possibly there might be some general undertaking to use his best endeavours to promote the composer's work. But that would probably have to be in such general terms as to be of little use to the composer.

But if no satisfactory positive undertaking by the publisher can be devised, it appears to me to be an unreasonable restraint to tie the composer for this period of years so that his work will be sterilised and he can earn nothing from his abilities as a composer if the publisher chooses not to publish. If there had been in Clause 9 any provision for entitling the composer to terminate the agreement in such an event the case might have had a very different appearance. But as the agreement stands not only is the composer tied but he cannot recover the copyright of work which the publisher refuses to publish."

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In the present case, the recording agreement defines the term "the Artist" as meaning the .five members of the Group. But Clause 14.1 provides that although the recording agreement covered the engagement of the Artist primarily as a group performing under the name "Franke Goes to Hollywood" it shall nevertheless extend to and does include individually each and every person who was at the date of the recording agreement or might during the term thereof become a member of the Group. All provisions were to apply and be binding upon each member of the Group jointly and severally.

Further relevant provisions of the recording agreement are as follows:

By Clause 1 the Artist undertook as and when required by the recording company during the Term (as later defined) to perform record and deliver to the recording company fully edited and mixed Masters sufficient to constitute the Minimum Recording Commitment as specified in Clause 4. The Artist agreed to record such compositions at such time and studio as the recording company should designate after consultation with the Artist until in the recording company's opinion a commercially and technically acceptable Master should have been obtained. The Recording Budget, the producer and the composition to be recorded by the Artist were to be decided in consultation between the recording company and the Artist but in the event of any dispute the opinion of the recording company was to prevail.

By Clause 2 the Artist granted and assigned to the recording company the sale and exclusive rights throughout the world in respect of the Masters to manufacture records therefrom and to sell/release and otherwise deal with the same or to refrain therefrom as the recording company should in its absolute discretion think fit. In addition the copyright in the Masters and all records therefrom throughout the world was vested solely in the recording company.

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By Clause 5 the Artist entered into a range of under- takings with the recording company including undertakings

(a) during the Term not to render any services with or without others to any person firm or company whereby such services might be recorded in any form for the purpose of the manufacture and release of records in any part of the world and

(b) for a period of 5 years immediately following the expiry of the Term not to perform any musical composition recorded by the Artist for the recording company under the recording agreement whereby such performances might be recorded in any form for the purpose of the manufacture or sale in any part of the world of records embodying such performances.

By Clause 6 the Artist warranted and represented to the recording company that the Artist would not during the Term directly or indirectly appoint authorise or permit any party other than the recording company to manufacture and sell records embodying performances of the Artist.

Under Clauses 8, 9 and 10 the Artist was to receive certain royalties and advances and there were to be half yearly accountings for royalties. The precise details do not matter, but it should be noted that the advances ranged from £2 50 on the signing of the recording agreement and £250 upon delivery by the Artist of the Masters constituting the first single to be recorded by the Artist under the recording agreement, to substantial sums, amounting from £5,000 to £30,000 on delivery of successive albums. It should also be noted that under Clause 9.1 the recording company was entitled to deduct and retain from all royalties (if any) payable to the Artist under the recording agreement all unrecouped advances and recording costs.

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Under Clause 12.1 the recording company agreed to pay as a non-returnable but recoupable advance against any royalties payable to the Artist a contribution towards the Artist's recording costs.

By Clause 18 it was recorded that the recording company had not made and did not make any representation or warranty with respect to the extent of the sale of records embodying Masters. Conversely the Artist recognised and acknowledged that the sale of records was speculative and agreed that the proper and reasonable judgment of the recording company and its subsidiary and affiliated companies licensees or franchise holders in regard to any matter affecting the sale distribution and exploitation of the records was to be binding and conclusive upon the Artist.

By Clause 20 it was provided that the recording company might assign all or any of its rights under the recording agreement or the benefit of that agreement to any person firm or company provided that the recording company should remain primarily liable to meet its obligation under the recording agreement.

Against that very stringent background, the crucial provisions of the recording agreement are, in my judgment, Clause 3 which (as amplified by Clauses 13.3 and 17.12) provides for the length of the Term of the Agreement, Clause 4 which provides for the Minimum Recording Commitment, and the provisions in Clause 14 which attempt to deal with the situation where, as happened, a member of the Group left the Group.

Clause 3 provides:

3. TERM

3.1 The term of this Agreement shall commence on the 1st day of May 1983 and shall continue for an initial period ending on the 30 th day of November 1983 ("the Initial Period") and for the additional period(s) if any for which such term may be extended consequent

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upon the Company's exercise of one or more of the options granted to the Company under the provisions of Clause 3.2 below.

3.2. Artist hereby irrevocably grants to Company options to extend the Term of this Agreement for Two (2) separate and successive Option Periods and Five (5) separate and successive Contract Periods (each such option when exercised being referred to herein as the "First, Second Option Period, Third, Fourth, Fifth, Sixth and Seventh" Option Contract Periods respectively).

By Clause 13.3 and 17.12 a contract period means the longer of 12 calendar months or until 120 days from the date of delivery of the Minimum Recording Commitment for that period. There is no separate definition of an "option period" as opposed to a Contract Period or Option Contract Period, and in my judgment Mr. Carr, Q.C. for the appellants is right in submitting that the Option Periods are to be treated as Contract Periods.

Clause 4.1 provides:

4.1 The Artist shall record for the Company that number of masters embodying the Artist's Newly Recorded Performances during each Contract Period sufficient to constitute during:

(a) Initial Period - One Single

(b) First Option Period - One Single

(c) Second Option Period - One Single

(d) Third Option Contract Period - One Album

(e) Fourth Option Contract Period - One Album

(f) Fifth Option Contract Period - One Album

(g) Sixth Option Contract Period - One Album

(h) Seventh Option Contract Period - One Album

By Clause 4.3 the number of Masters to be recorded during each Contract period under Clause 4.1 is the Minimum Recording Commitment for the period.

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Clause 14(1)(b) provides that should any member of the Group cease during the Term to be a member thereof the recording company may at its election terminate the recording agreement so far as it relates to such leaving member(s) or all parties to the recording agreement. That option was never exercised. Clause 14.2 however, contains further provisions as follows:

14.2 IT IS AGREED that:

(a) If during the Term any additional party joins the Group whether or not any of the existing members shall cease to be members such existing members shall procure that the joining party(ies) agrees to be bound by all of the terms and conditions of this Agreement before any further recordings are undertaken.

(b) If any member of the Group whether present or future shall subsequently leave the group and the Company elects to terminate this Agreement as to such leaving member only then this Agreement will automatically continue in full force and effect as to the remaining members of the Group.

(c) If the Company elects not to terminate this Agreement in so far as it relates to any individual leaving member then this Agreement will automatically remain in full force and effect as to the remaining members of the Group and such individual leaving member will if requested to do so by the Company enter into a separate agreement with the Company on all the same terms and conditions as are set out in this Agreement.

It will be necessary to go into the facts in some detail later in relation to the question of waiver and the judge's order directing an enquiry as to damages. For the present, it is sufficient to say this. The Group made an initial single 'Relax' with the recording company which was highly

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successful There was then a second single 'Two Tribes' which was almost as successful. There was. then a first album in fact a double album - 'Welcome to the Pleasure Dome', which was also highly successful. The recording company exercised its options under Clause 3. By then, July 1985, the defendant was unhappy at the high costs of the making of these records, which the recording company was recouping from the royalties due to the Group. The recording cost of the first single had been roughly £26,000 and the recording cost of the first album no less than £394,000. The point had been taken that the recording agreement and the publishing agreement were void and unenforceable on grounds of unreasonable restraint of trade and there had been some correspondence between solicitors. Against this background a second album was recorded, starting in mid-November 1985. At the same time the defendant's relations with the other members of the Group broke down. The Group's part in the making of the second album was completed by the end of April 1986, but Mr. Horn continued reworking it from April to September 1986. It was finally released in November 1986. It had been the common hope that the recording costs of the second album would be approximately half the costs of the first, since the second was not a double album. In the event, however, the costs of the second album came out at approximately £760,000. In July 1986 there was a meeting and in September there was further correspondence between solicitors. Though a couple of singles (taken from tracks in the second album) were completed in February 1987, the Group had done no recording work since April 1986, and by March 1987 the Defendant had virtually ceased to be a member of the Group. Nothing further happened on either side until in July 1987 the defendant's solicitors wrote asserting that the recording agreement and the publishing agreement were unenforceable, in so far as unperformed, because in unreasonable restraint of trade. The appellants countered by issuing the Writ on 5th August 1987 claiming that both agreements are valid and enforceable and claiming also that the defendant, as the leaving member of the Group, was bound to enter into a fresh recording agreement with the recording company under Clause 14.2 of the

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recording agreement and on the terms, so far as unperformed, of the present recording agreement.

So far as the recording agreement is concerned, the judge held that it was indeed unenforceable as an unreasonable restraint of trade, and he also held that Clause 14.2 was void for uncertainty.

Clause 14.2 is not very happily drafted and is difficult to apply. I have reservations about the judge's conclusion that it is void for uncertainty. Without having heard counsel for the defendant, I am attracted by Mr. Carr's submission for the appellants that the effect of Clause 14.2 obliges the defendant to enter into a fresh recording agreement binding him personally, but separately from the other members of the Group, to obligations parallel to those of the recording agreement in so far as unperformed. The result would be that in, say, the Fifth Option Contract Period the obligation of the members of the Group other than Mr. Johnson would be to record for the recording company an album of their own, without Mr. Johnson, as their Minimum Recording Commitment, while Mr. Johnson would be separately bound to record for the recording company a separate album of his own as his Minimum Recording Commitment.

It is not however necessary to reach a firm conclusion as to whether Clause 14.2 bears the construction Mr. Carr puts forward or is void for uncertainty, since I am of the firm view, as hereinafter appears, that the recording agreement as a whole is unenforceable because it is an unreasonable restraint of trade. Mr. Carr concedes that, if the recording agreement as a whole is unenforceable, clause 14.2 cannot help him since its enforcement would involve requiring the defendant to enter into a fresh agreement which is itself unenforceable. But it is pertinent to the oppressiveness of the recording agreement that if Clause 14.2 bears the construction Mr. Carr puts forward it would have the consequences (1) that if the defendant, having left the Group, wants during the Term to form a new group with new partners

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he can only do so if his new partners are acceptable to the recording company and are prepared to agree with the recording company to be bound by all the outstanding terms of the recording agreement and conversely (2) if the other members of the Group, having lost the defendant, want another lead singer, they can have one only if they find one who is acceptable to the recording company and is prepared likewise to agree with the recording company to be bound by all the outstanding terms of the recording agreement.

On the general validity of the recording agreement, I find its provisions as to the duration of the term grossly one-sided. The members of the Group are to be bound, collectively and individually, in the discretion of the recording company, for up to seven option periods after the seven month initial period, if the recording company chooses to exercise its options under Clause 3. Each option period is to be for at least one year and possibly for up to 120 days or a third of a year more. It is an agreement which could well last eight or nine years and during all that time, when their earning potential would be likely to be at its highest, the members of the Group would be bound to record only for the recording company. But the recording company itself is free to terminate its obligations at any time by not exercising the next option.

However much weight is put on the words "proper and reasonable judgment" of the recording company in Clause 18 and however much it is implicit in Clause 1 that the recording company will act not merely honestly but reasonably in approving compositions for the Group to record, in choosing the producer of the records and in deciding what is a commercially and technically acceptable Master, and in spending no more than is reasonable on recording costs, the last word is necessarily given to the recording company on all these important matters. The band of reasonableness on all such matters is likely to be wide. Moreover under Clause 2 the recording company is given a purportedly absolute discretion to refrain

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from releasing records, and even if they are not released the copyright in the records will remain in the recording company.

Though the members of the Group are exclusively bound to the recording company the recording company is not exclusively bound to them. It was obviously envisaged that the recording company would make and release records of other Artists. This could well affect the scope and timing of the promotion by the recording company of the Group's records, a factor recognised by Lord Reid in Schroeder v. Macaulay as cited above.

Pop musicians are promoted by the sales of their records, and obviously a recording company has difficulty in promoting a little known group when there are so many others seeking fame and fortune. Stringent provisions such as many of those in the recording agreement may be justifiable in an agreement of short duration. But the onus must, in my judgment, be on the recording company to justify the length of the Term and the one-sidedness of the provisions as to its duration in this recording agreement.

Two factors are mentioned by Mr. Carr as justifications. First it is said that for every one record issued by a recording company which is a hit and a financial success there are nine issued which are failures.Consequently, it is submitted, it is reasonable and in the interests of the music industry and of all engaged in that industry, that the Artists whose records are successful should be tied to the recording company so that the recording company's share of the profits of these Artists' successful records should compensate the recording company for the costs of other Artists' unsuccessful records. Secondly it is said that a second record of an Artist's music will have better chances of success if a first record of another composition of that Artist was successful. So, it is submitted, the recording company will not truly get the full fruits of a successful first record unless the recording company has the right to make the second record and so on. These arguments can feed on

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themselves, and lead logically to a submission that every recording agreement should last, at the recording company's option, for the whole lifetime of the Artist. But the criterion of validity is the objective test of reasonableness, judged as at the date when the agreement was made. By that criterion such validity as there is in the two factors relied upon by Mr. Carr does not justify, in my judgment, anything like so long and one-sided a Term as that provided for by this recording agreement.

I agree therefore with the conclusion of the judge that the recording agreement is void as an unreasonable restraint of trade. I stress again the points made by Lord Reid in Schroeder v. Macaulay.

I leave over, for the moment, the question of waiver and turn to the publishing agreement, which imposed further restrictions on the defendant, this time in favour of the publishing company.

The publishing agreement is made between the publishing company and the members of the group other than Mr. Rutherford. These members of the Group are defined as 'the Composer'. There is however no provision in the publishing agreement comparable to Clause 14 of the recording agreement which provided that the recording agreement should extend to and include individually each and every person who was or became a member of the Group. One question that arises is whether such a result can be achieved by interpretation and construction of the publishing agreement, and in particular of Clause 1 thereof. Clause 1.1 provides:

1.1 IN CONSIDERATION OF THE SUM OF Five thousand pounds (5000 pounds) (the receipt of which is hereby acknowledged) and of the undertakings of the Publisher to make the payments to the Composer hereinafter specified the Composer undertakes and agrees throughout the Term of this Agreement to submit to the Publisher every lyric and/or composition and part thereof which he may compose during the Term either in his own name

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or under a nom-de-plume and whether by himself or jointly or in collaboration with any other, person or persons including without limitation those specified in the First Schedule hereto and made part hereof (all such compositions and lyrics being herein collectively referred to as "the Works").

The works specified in the First Schedule, which incidentally included "Relax" and "Two Tribes", the subjects of the first two singles under the recording agreement and some of the songs included in the first album, included some songs which had been composed by some only of the four members of the Group named as "the Composer".

The judge held that Clause 1.1 only applied in relation to future works not specified in the first Schedule, to future works composed during the Term by all four members of the Group defined as "the Composer", with or without others. It therefore did not apply to what is really in dispute, viz the works composed by the defendant on his own after he had left the Group. Mr. Carr invites a more purposive construction of an ill-drawn agreement, and submits that there is an absence of commercial sense in a construction which catches future works composed by the four named members of the Group, with or without others, but does not catch future works composed by some only of the four members of the Group.

I see force in this submission, but do not find it necessary to reach a conclusion since I agree with the judge that the publishing agreement is, in the circumstances and like the recording agreement, void as an unreasonable restraint of trade.

Apart from Clause 1.1, the key provision of the publishing agreement is Clause 1.3 whereby the Composer assigns to the publishing company the whole of "his" copyright and interest present future or contingent whatsoever and wheresoever in all the works to hold the same unto the publishing

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company throughout the world for the full period of copyright etc. .Conversely by Clause 6.6 the Composer agrees that throughout the Term of the publishing agreement the Composer will not submit to or compose for any person firm or company other than the publishing company any musical composition and any words and/or lyrics of or for any compositions. The Term of the publishing agreement is defined in the second schedule to it. It is for an initial period of one year from 21st September 1983 with a sole and exclusive and irrevocable option for the publishing company to extend the term for two additional periods of two years commencing upon the expiration of the initial period of one year. There is thus a total of five years in all - now expired - at the option of the publishing company.

The publishing agreement puts an obligation on the publishing company by Clause 3 "to use its best endeavours in so far as is reasonably practicable to exploit or cause to be exploited and administered the works". Moreover there is in Clauses 4.1 to 4.3 a somewhat rudimentary provision for the reassignment of unexploited works. The rights in any of the works which shall not have been exploited by the publishing company in any way within three years from the date of the expiration of the Term shall be reassigned by notice within six months following the date of three years from the expiration of the Term provided that no exploitation of the work specified in such a notice shall have taken place in any part of the world within a further period of three months from the date of receipt of such notice by the publishing company.

Despite these provisions, the effect of the publishing agreement is that the defendant cannot perform any of his own compositions which fall within the scope of Clause 1.1 without the consent of the publishing company as the owner of the copyright worldwide in such works.

I can see no reasonable justification for such an additional restriction on the defendant being required if the recording company is to be persuaded to enter into the very

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stringent recording agreement.That is particularly so if I am right that the recording agreement is itself an unreasonable restraint of trade.

Accordingly I agree with the judge that the publishing agreement is unenforceable.

I turn therefore to the question of waiver.

This point was taken for the first time by amendment of the Reply and Defence to Counterclaim at the trial. Leading counsel then appearing for the plaintiffs put the point on the basis that it would be unjust to the plaintiffs and unconscionable to allow the defendant to resurrect the claim that the recording agreement and publishing agreement were unenforceable on grounds of unreasonable restraint of trade as was done by the defendant's new solicitors' letter of 23rd July 1987, in view of all that had happened since the point was first raised by solicitors for the Group in 1985. This the judge rejected on the facts.

In this court Mr. Carr seeks to put the point more widely. He submits that it is enough for the plaintiffs if, after the point had been raised by the Group's solicitors and the defendant was therefore aware of it, the group had "affirmed" the agreements, i.e. treated them as still in operation. As to that, the judge said at one point in his judgment that "after the original complaint there was nothing amounting to an afirmation of the contract." I think he must have meant that in the context of the way the point was being put to him by counsel, viz that it would be unjust or inconceivable to allow the defendant to take the point.

In my judgment, if there is to be a defence on these general lines, whether it be termed waiver, or laches or estoppel or whatever, to a claim that a contract is unenforceable because it is in unreasonable restraint of trade, it must be a defence on equitable grounds in the light of all the circumstances of the case - not a defence by mere rule

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of thumb that the point was not finally and irrevocably insisted on at the earliest possible moment. I would for my part (as did Nicholls J. in the not wholly dissimilar case of John v. James decided on 29th November 1985 but unreported) take the law as formulated by Lord Selborne L.C. in Lindsay Petroleum Company v. Hurd [1873] 5 A.C. 221 at 239 as follows:

"Now the doctrine of laches in Courts of Equity is not arbitrary or a technical doctrine. Where it would be practically unjust to give a remedy, either because the party has, by his conduct, done that which might fairly be regarded as equivalent to a waiver of it, or where by his conduct and neglect he has, though perhaps not waiving that remedy, yet put the other party in a situation in which it would not be reasonable to place him if the remedy were afterwards to be asserted, in either of these cases, lapses of time and delay are most material. But in every case, if an agreement against relief, which otherwise would be just, is founded upon mere delay, that delay of course not amounting to a bar by any statute of limitations, the validity of that defence must be tried upon principles substantially equitable. Two circumstances, always important in such cases, are the length of the delay and the nature of the acts done during the interval, which might affect either party and cause a balance of justice or injustice in taking the one course or the other, so far as relates to the remedy."

I would refer also, as did Nicholls J. to the comment of Lord Blackburn in Erlanger v. New Sombrero Phosphate Co. [1878] 3 A.C. 1218 at 1279 that "I have looked in vain for any authority which gives a more distinct and definite rule than this; and I think, from the nature of the inquiry, it must always be a question of more or less, depending on the degree of diligence which might reasonably be required, and the degree of change which has occurred, whether the balance of justice or injustice is in favour of granting the remedy or withholding it."

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The point of unreasonable restraint of trade was first taken in a letter of 5th July 1985 from Messrs Eaton & Burley, solicitors for the Group to Messrs Helliwell Rodwell & Co. solicitors for the recording company and the publishing company. Reference was made in the letter to the disappointment of the Group at the very low financial return to them to date, notwithstanding the enormous success enjoyed throughout the world by their singles records and the long-playing record. It was stated that the Group had been advised that the two agreements were unreasonably in restraint of trade, and liable to be held unenforceable.

That letter was accompanied by a separate letter of the same date marked "without prejudice" which put forward proposals for renegotiation of the two agreements. The writer referred to a meeting which had been held in May 1985, and said - sensibly in my judgment - "I stressed at our meeting however that I was very anxious to explore every avenue rather, than see the matter come to litigation ... court action is not a course I would advocate, without first exhausting negotiations between the parties, hopefully conducted in a sensible business manner ending up in a situation fair to both sides."

Further correspondence followed, with indications of a readiness to negotiate on both sides, and a suggestion that there should first be an "artistic" discussion between Mr. Horn and the members of the Group. It is unnecessary to go much into detail. In a letter of 18th September 1985, at a time when according to the letter the members of the Group were in Ireland with a view to preparing for the second album, Messrs Eaton & Burley put forward certain "requests for revision" of the agreements for Messrs Helliwell Rodwell's comments and expressly stated: "We must make it clear, however, that the invitation to comment on the enclosure must not be construed in any way as a waiver of our client's contentions that the Agreements are unreasonably in restraint of trade and unenforceable." That phase of the correspondence ended at the end of October 1985, with a suggestion that Mr. Pope, the then mananger of the Group, and Miss Sinclair should arrange a meeting to be attended by the solicitors.

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On or about 11th November 1985 the Group began recording sessions at studios in Holland to record the second album. The sessions lasted four to five weeks. We were told that because of the rift between them the defendant attended at different times from the other members of the Group. It had originally been intended that Mr. Horn himself should be the producer of the second album, but in the event a Mr. Lipson was the producer and the defendant, though possibly put out, acquiesced in this.

The defendant gave important evidence at the trial - Day 10 pages 53-4 - that when in Ireland before the recording of the second album began the members of the Group had had discussions with their manager, Mr. Pope, and had felt that if they pushed too hard with the renegotiations or went into litigation, Mr. Trevor Horn's services would be withdrawn for the second album "and as we were not wholly confident, we decided not to continue with that line, or not go into litigation yet." That is a very important factor on the issue of waiver. What is more important, however, in my judgment, is that there is nothing to suggest that any one on the plaintiffs' side supposed that because recording had begun in Holland the question of renegotiating the agreements had been abandoned. At the time of the recording in Holland there were ample royalties coming in from the distributors of the earlier records, and the Group's share of those royalties covered the recording costs then being incurred on the second album. Moreover so far from the commencement of the recording of the second album indicating that the parties were making a fresh start to go ahead on the original terms, the rift between the defendant and the other members of the Group made it increasingly unlikely that there could be future cooperation. Miss Sinclair did say in evidence - Day 12 page 4E - that when recording on the second album began she thought that the Group had abandoned their claims that the contract was in restraint of trade and that the recording costs were excessive; but there is no finding of the judge that she genuinely thought that, and so far as the recording costs are concerned it is, in my judgment, highly improbable.

Page 21

After the recording in Holland, there was further recording in London, but the Group's part in., the making of the second album was completed by the end of April 1986. From April to September Mr. Horn was engaged in improving the records with the assistance of Mr. Lipson by the use of sophisticated equipment in London so as to satisfy Mr. Horn's technical and artistic standards. It is over this period from April to September that some £500,000 of the £760,000 approximately of the recording costs for the second album were incurred. The second album was ultimately released in November 1986.

In the meantime there was a long meeting in July 1986 between Miss Sinclair, Mr. Pope and the parties' solicitors to discuss and endeavour to renegotiate various of the outstanding points. This seems to have been, effectively, the meeting that had been proposed in the correspondence of the previous October. Correspondence between solicitors followed. In a letter of 16th September 1986 Mr. Rodwell of Messrs Helliwell Rodwell stated that he "assumed" that the Group had been advised that the original contention of the potential unenforceable nature of the agreement was ill-founded; but in response in a letter of 29th September 1986 Mr. Eaton of Messrs Eaton & Burley maintained his assertion that as they presently stood the agreements were not enforceable. There was no contention for the plaintiffs at that time that the point about the unenforceability of the agreements on grounds of restraint of trade had been waived or abandoned despite what Mr. Eaton wrote. On the contrary the picture as I see it is that there had been desultory renegotiation of the terms of the two agreements from July 1985 and during that process both sides realised that each side was reserving its position on all points in the event that, as happened, agreement was not reached. On the facts there was nothing at any time which could be described as an unequivocal representation by or on behalf of the defendant that he had decided not to proceed with his claim of unreasonable restraint of trade.

Page 22

After the release of the second album in November 1986 nothing further relevant happened until .the defendant's solicitors' letter of the 23rd July 1987 which precipitated the issue of the writ. In my judgment there is nothing in these facts to render it unjust to the plaintiffs or unconscionable for the defendant to assert the unenforceability of the two agreements on grounds of restraint of trade. Accordingly in my judgment the plaintiffs fail on the question of waiver, laches or estoppel or however else it may be termed.

I should mention that in the course of his opening of the appeal Mr. Carr indicated a separate point to the effect that as the two singles, "Relax" and "Two Tribes" and the first album had been produced more speedily than the timetable in Clause 4 of the recording agreement for Minimum Recording Commitments envisaged, the parties were to be treated as having made by conduct a fresh agreement with a shorter and less objectionable timescale or as having produced by estoppel a situation which mitigated the rigours of the recording agreement. As however no such point was taken in the court below, or had ever been pleaded, we ruled that the point was not open to the plaintiffs in this court.

There remains a question as to the enquiry as to damages which the judge awarded the defendant on the counterclaim.

The defendant asserted that the recording company's recording costs for all the records released, which were recouped out of the Group's share of royalties, were grossly excessive. The recording company conceded, particularly in the evidence of Miss Sinclair, that there was a duty on the recording company "to spend no more than is reasonable." In relation to the first two singles, "Relax" and "Two Tribes" and the first album, the judge's finding was that he was not satisfied on the evidence that the recording costs were excessive. So far as these records are concerned, that is the end of the matter. But the judge took a different view in relation to the second album, and awarded the defendant an enquiry as to damages.

Page 23

The order, as drawn up by the office without reference to the parties' solicitors, directs an inquiry on the defendant's counterclaim "as to the damages (and interest thereon) to be paid by the First Plaintiff to the Defendant by reason of the First Plaintiff's breach of the implied term of the said recording agreement that the First Plaintiff would keep the recording costs of the second album within reasonable limits". What the judge actually said however, at page 47 of his judgment, was that he was prepared to make an order "as to damages if any suffered by [the defendant] by reason of any excess expenditure by way of recording costs for the [second] album."

Mr. Carr for the recording company asks that the form of the order as drawn up be varied to accord with the words actually used by the judge. By contrast Mr. Cran Q.C. for the defendant submits that the judge has actually found that the recording company was in breach of the implied term, or alternatively that if the judge has not found that the recording company was in breach the judge had no jurisdiction to direct any inquiry as to damages at all. Mr. Cran complains that to vary the order to accord with the words actually used by the judge would greatly extend the scope of the inquiry - though this for my part I do not see - and he submits that it was the duty of the judge to make a finding on the material before him as to the amount which would have been a reasonable amount for the recording costs of the second album.

I would interpose that this issue is unaffected by the conclusion of the court that the recording agreement and the publishing agreement are unenforceable for reasons of restraint of trade. Despite that conclusion the recording company remains accountable to the members of the Group for the Group's share of the royalties and receipts, as they come in, from the records which have actually been made and distributed under the recording agreement. The recording company must equally remain accountable if from the Group's share of royalties the recording company has wrongly deducted excessive amounts in respect of unreasonably high recording costs in respect of the second album.

Page 24

After his finding that he was not satisfied that the recording costs on the two singles and the first album were not excessive, the judge went on to say, at page 46 F-G, that the position on the second album was to his mind entirely different in regard in particular to the £500,000 of expenditure which took place after the recording in Holland. He then said, however, that Mr. Cran had sought to persuade him to name a figure, but he was not so persuaded. He commented that in the counterclaim the defendant was only seeking an inquiry as to damages, and he awarded that by the words I have indicated.

Logically the judge could not have decided that the recording company was in breach of the implied term to keep the recording costs within reasonable bounds, if he did not know both the actual recording cost incurred on the second album and the amount which would have been the reasonable recording cost. Notwithstanding the general principle that nominal damages can be awarded for a breach of contract even if no actual damage has been suffered, in a context such as the present breach and damage march together; there will only have been a breach if excessive recording costs have been charged against the Group, and if that has happened actual damage will have been suffered by each member of the Group.

As I read his judgment, the judge thought it likely that the recording costs in respect of the second album had been excessive and unreasonable, particularly in relation to the £500,000 or some part thereof. But he could not name a figure and so could not be sure. Therefore it was appropriate to grant an inquiry as to damages on the basis he indicated in his judgment. That was, in my view, a sensible course which the judge was entitled to take. I do not believe that it increases the burden or scope of the inquiry, because it is implicit in the application for the inquiry as to damages that whoever takes the inquiry will have to consider in detail what parts of the recording costs were reasonable and what parts excessive and unreasonable.

Page 25

Accordingly I would vary the order as drawn up in relation to the inquiry as to damages, so as to refer to "an Inquiry as to the damages if any (and interest thereon) to be paid by the First Plaintiff to the Defendant by reason of the breach if any by the First Plaintiff of the implied term" etc. Subject to that variation I would dismiss this appeal.

LORD JUSTICE MANN: I have had the advantage of reading in draft the judgment of Dillon L.J. I agree with it. For the reasons which he gives I would dismiss the appeal.

SIR JOHN MEGAW: I agree with the order proposed by Dillon L.J. for the reasons given by him, both as to the dismissal of the appeal and the variation of the wording of the order on the counterclaim.

Appeal dismissed with costs