Freely Available British and Irish Public Legal Information
[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]
England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Columbia Tristar Home Video (International) Inc. v Polygram Film International BV [2000] EWCA Civ 32 (8 February 2000)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/2000/32.html
Cite as: [2000] EWCA Civ 32
[New search] [Printable RTF version] [Help]
Case No: QBCMF 98/0447 CMS3
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Tuesday, 8 February 2000
LORD JUSTICE STUART SMITH
LORD JUSTICE OTTON
and
LORD JUSTICE POTTER
- - - - - - - - - - - - - - - - - - - - -
COLUMBIA TRISTAR HOME VIDEO (INTERNATIONAL) INC. |
Appellant | |
- and - |
||
POLYGRAM FILM INTERNATIONAL B.V. (FORMERLY MANIFESTO FILM SALES B.V.) |
Respondent |
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Jonathan Sumption QC and Ms Helen Davies (instructed by Denton Hall, London, for the appellant)
Miss Barbara Dohmann QC and Ian Mill QC (instructed by Clintons, London, for the respondent)
Judgment
As Approved by the Court
Crown Copyright ©
Tuesday, 8th February 2000
LORD JUSTICE POTTER:
INTRODUCTION
1. This is an appeal from the order of Mr Justice Timothy Walker dated 13th March 1998, whereby, having determined certain preliminary issues in a judgment handed down on 5th March 1998, he ordered that the defendant (appellant) do pay to the plaintiff (respondent) the sums of US $3,995,044 and £30,221.00 with interest in agreed amounts of US $794,376 and £9,346.00 together with costs and dismissed the appellant's counter claim.
2. The appeal involves a dispute between the plaintiff/respondent ("Polygram") as licensor and the defendant/appellant ("Columbia") as licensee under an agreement dated 7th January 1991 ("the agreement"), a type of agreement known in the film industry as an "output agreement", made between Polygram, under its former name Manifesto Film Sales BV, and RCA/Columbia Pictures International Video, to whose rights and obligations Columbia have succeeded.
3. The appeal raises a question of contractual construction on undisputed facts.
THE BACKGROUND
4. An output agreement is a type of agreement whereby a licensee obtains the exclusive rights for a given period within a given territory in respect of a number or programme of films yet to be made, in return for a financial contribution in relation to each film in the form of a payment of agreed advances. The agreement in this case was one of a number of output agreements entered into by Polygram in respect of its substantial proposed programme of films. However, it was separately negotiated with, and initially drafted by Columbia. The purpose of the output agreements was to enable Polygram to have guaranteed revenues in place amounting to a substantial proportion (around 70%) of the budgeted costs of each production before it was authorised to proceed. This enabled 70% of the budget to be financed by banks, with Polygram finding the balance from its own resources. The agreement with Columbia related simply to the exploitation of the video rights of Polygram's programme of films within a limited territory; the advances provided were based on between 5% and 12½% of P&A spend (see further below) over a number of years.
5. Under the agreement Polygram conferred on Columbia a sole and exclusive licence of the video rights in UK, Eire, the Channel Islands, Northern Ireland and Gibraltar of all the films "produced acquired or controlled" by Polygram or its associated companies, "Propaganda" and "Working Title" and any third party programming to which they owned videogram rights and which commenced principal photography or were acquired before 31st December 1993. In return, Columbia were to pay to Polygram for the seven-year period of the agreement (1) an advance calculated in accordance with clause 10(a) of the agreement and (2) royalties pursuant to clause 11 of the agreement in respect of each qualifying film.
6. Although the agreement referred to pictures produced by Polygram, Polygram was, to the knowledge of Columbia, not to be the producer of any films to which the agreement applied. Nor was Polygram to be the theatrical distributors who were to be Rank Film Distributors Limited ("Rank"). Rank performed that role throughout the period of the agreement. Polygram's role was to act as sales agent for the exploitation of films made by Working Title, Propaganda (both of which were companies 49% owned by Polygram) and films made by unassociated third party producers to which Polygram had videogram rights. Columbia had no right to reject any of the films falling within the categories set out in the agreement and were required to pay a non-returnable advance in respect of them whether or not they were a success following release. Thus, Columbia took the risk of the success of each individual film in the programme, in the sense of the risk as to whether Columbia would receive royalties sufficient to recoup its advance. However, for those films which were successful, royalties were not payable until Columbia's receipts exceeded 115% of the advance.
7. Under clause 10(a) of the agreement, the amount of the advance payable in respect of each film was a multiple of the Budgeted Cost or Actual Negative Cost ("ANC") as defined, whichever was the lower. The principal constituent of ANC was the Direct Negative Cost i.e. the total of the production costs of the film as defined and listed in Exhibit `A' to the agreement. The multiple was determined by the amount actually expended on Prints and Advertising ("P&A") in promoting the film. The trigger for payment of an advance as specified in Clause 10(b) of the agreement, was the delivery of a statement of the ANC of the film and a budget for P&A. In relation to the amount of advance payable, there were five payment bands ranging from 5 to 12.5% of the Budgeted Cost or ANC depending on the amount of the P&A spend. The higher the P&A spend, the higher the multiple of the Budgeted Cost or ANC which was payable as an advance. The issues of construction arising on this appeal are immediately concerned with the provisions in the agreement for quantifying and verifying the basis and amount of advances paid or payable to Polygram under the agreement.
8. The agreement was stated to be made between Polygram as "Owner" and Columbia as "Licensee". Clause 1(a) provided that:
"(a) the programs ("Programs") which are the subject of this Agreement are ... all feature-length theatrical motion pictures produced acquired or controlled by Owner, Propaganda .. Working Title .., any successors in interest and their respective subsidiaries (collectively "Producers"), and any third party programming to which Owner Propaganda or Working Title control the Videogram .. rights in the Territory .. which commence principal photography or are acquired by any of them prior to December 31, 1993."
THE AGREEMENT
9. P&A was defined in Clause 6 of the agreement which provided as follows:
"6. Theatrical Release: Each program shall be deemed "Theatrically Released" in the Territory when released by Rank Film Distributors Limited (... or such other theatrical distributor as Licensee may reasonably approve) with a P&A (as defined below) expenditure of at least Fifty Thousand Pounds Sterling (£50,000).
"P&A" shall mean actual and direct out-of-pocket expenditures for the duplication of theatrical release prints and advertising, publicity and promotion costs payable to third parties (excluding any overhead or other internal costs) prior to and up until three (3) months following the initial theatrical release to the general public of the Program, i.e. not including "sneak" previews, test screenings, etc ..."
10. ANC was defined in Exhibit A to the agreement which set out a definition of Direct Negative Cost, and defined ANC as the aggregate of such costs plus a contingency. It provided as follows:
"Direct Negative Cost" shall mean the sum of all documented direct out-of-pocket costs and expenses actually paid by Owner to unrelated third parties in connection with the development, preparation, production, completion and delivery of a Program, such costs to include payments for acquisition of underlying rights, pre-production costs, fees and expenses (including development fees) for director, writers, actors, special effects personnel ... [an additional list of costs followed] ....
"Actual Negative Costs" shall be defined as the aggregate of Direct Negative Costs and (i) a contingency not to exceed ten per cent (10%) and, (ii) fees for executive producers and producers in the aggregate not to exceed ten per cent (10%), in each case of Direct Negative Costs."
It should be noted that, although the definition of Direct Negative Costs referred to sums "actually paid by Owner" it was conceded by Columbia and was common ground between the parties before the judge that it was not necessary that payment was by Polygram, but that "Direct Negative Cost" referred to the costs of production as defined in Exhibit A irrespective of the identity of the company making the payment.
11. The "Budgeted Negative Cost" upon the basis of which advances were
made was defined in Clause 1(c) by reference forward to Exhibit A as
follows:
"(c) the bonded budget for each Program shall be no less than One Million
Dollars ($1,000,000) with the contingency and producers' fees therein each
limited to ten per cent (10%) of Actual Negative Costs as defined in Exhibit A
("Budgeted Negative Cost"). A statement of the Budgeted Negative Cost for each
programme shall be provided to RCIV no later than commencement of principal
photography of such programme."
[The reference to RCIV is to Columbia].
12. Under Clause 10(a) of the agreement, Columbia were to pay to
Polygram as an advance for each film, an amount calculated as a percentage of
the Budgeted or Actual Negative Cost as follows:
"10. Advance:
(a) Licensee shall pay Owner as an Advance for each Program, the following
percentage of the Budgeted or Actual Negative Cost for such program, whichever
is lower ("payment basis") such Advance to be payable in Pounds Sterling or
Dollars ... based on the amount of P&A actually expended up to a maximum
Advance of One Million Two Hundred Thousand Dollars ($1,200,000) (the
"Advance") .... [a scale showing various percentages for the amount of P&A
actually expended was then set out].
The aggregate of One Hundred and Fifteen per cent (115%) of the Advances ....
shall be recoupable on a cross collateralised basis among the Programs in each
group ... from royalties .. from the Programs in each group. At the end of the
Term, if the actual amount recouped by Licensee for all Programs is greater
than the aggregate of the Advances paid for all Programs, Licensee agrees to
return the difference to Owner within sixty (60) days of the Expiry Date.
(b) the Advance for each Program shall be payable as follows; within seven (7)
days of the initial theatrical release of a Program, Licensee shall pay Owner
five per cent (5%) of the Payment Basis if the budgeted P&A for such
program is Seventy Thousand Pounds Sterling (£70,000) or less, and seven
per cent (7%) of the Payment Basis for all other Programs, provided that, (i)
Owner has delivered to licensee a statement of the Actual Negative Costs of the
Program and a budget for P&A ... If the actual P&A expended is over
Two Hundred Thousand Pounds Sterling (£200,000), Licensee shall pay the
additional amount of the advance due in accordance with (a) above, no later
than three (3) months after Theatrical Release, provided that sufficient
documentation (including certification from an officer of Owner) has been
presented demonstrating the actual P&A spent. In the event that Owner is
paid an Advance for any Program based on a certain budgeted level of P&A
and the actual P&A spent is less than the budgeted amount based on
documentation presented or an audit pursuant to Paragraph 17(d) and
consequently Owner has been paid a larger Advance for such program than was
due, such overpayment shall be deducted from the next Advance ... or if no
other advance is due such overpayment shall be promptly reimbursed upon demand
from Licensee."
13. The parties' obligations as to the maintenance of books and records for the
purposes of accounting between them was set out in Clause 17 of the
agreement which provided as follows:
"17. Accounting:
(a) Licensee shall maintain complete books and records with respect to the
videograms and will render to Owner, on a calendar quarter basis (within sixty
(60) days of the end of each quarter commencing with the quarter by which the
first revenues are received by Licensee, a true and correct statement in
reasonable detail of Gross Receipts and of Royalties ("statements") ... Any
statement not objected to within twenty-four (24) months of receipt by Owner
shall be deemed true and correct and binding upon Owner.
(b) Owner shall have the right for a period of two (2) years from the rendering
of each Statement, upon reasonable notice ... and for no longer than twenty
(20) days, to examine and to take copies and extracts from Licensee's books and
records as they pertain to the Videograms, for the purpose of determining the
accuracy of the statements ... if any such audit reveals a discrepancy of 10%
or more of the sums then shown to be due to Owner, Licensee shall pay the
reasonable costs of the audit.
(c) .....
(d) Owner shall maintain complete books and records with respect to the Actual
Negative Cost of each of the Programs and the P&A expended in connection
with the Theatrical Release of each of the Programs. With regard to the
P&A, Owner shall render to licensee on a monthly basis (within sixty (60)
days of the end of each month) commencing with the period during which the
theatrical distributor first expends P&A, a true and correct statement of
the P&A expended .. Licensee shall have the right upon reasonable notice
but no more often than once a year and for no longer than thirty (30) days to
examine Owner's books and records pertaining to Actual Negative Costs and the
P&A statements for the purpose of determining the accuracy of statements
furnished in connection therewith ...
(e) any amounts revealed to be due and owing to either party as a result of an
audit by such party shall be payable on demand by the other party with interest
..."
14. The agreement was expressly stated to be governed by English law. Although it was stated to be made and entered into between Owner (Polygram) and Licensee (Columbia), it was signed at its end by Working Title and Propaganda beneath a final clause which read:
"Working Title Films Ltd and Propaganda Films each agree to be bound by the
terms of the above Agreement as such agreement pertains to each of them."
THE DISPUTE
15. For a number of years the agreement operated satisfactorily in respect of
the release of some twenty-eight films. From time to time Polygram delivered
to Columbia statements of ANC, budgets and statements for P&A spend, and
invoices for the amounts claimed as due. These were paid by Columbia.
However, a number of the films proved unsuccessful in terms of royalties and in
September 1994, Columbia exercised its audit rights under Clause 17(d). In
December 1994, Columbia complained that there was insufficient documentary
evidence upon which to audit the P&A and ANC figures "as the information is
stored with third parties". In May 1995, Columbia asserted a breach of Clause
17(d) in that respect and gave notice that they were suspending their audit
until such time as Polygram could provide for examination "all such
documentation as is necessary for the purpose of determining the accuracy of
the statements ...". Columbia also ceased paying advances. In purported
justification for such cessation, Columbia adopted the position in relation to
Exhibit A, in reliance upon the words "expenses actually paid by Owner" that,
unless Polygram had itself paid the production costs no advance was
recoverable. Since Polygram was, to the knowledge of the parties, not to be
the production company, but the sales agent for other producers, these
proceedings were issued by Polygram claiming, inter alia, a declaration that
Columbia's contention was incorrect, (alternatively rectification in that
respect), in the face of which Columbia's initial position was abandoned: see
the concession referred to at paragraph 10 above.
16. However, other issues remained outstanding, in particular a counterclaim by
Columbia for recovery of the advances. Preliminary issues were ordered to be
tried by Mance J on 8th November 1996 defined by reference to
various paragraphs in the pleadings. As a preamble to the order, it was
recorded that counsel for Polygram had confirmed that, if Columbia was correct
in its construction of Clause 17(d), then Polygram had acted in breach of
contract. When those issues came before Walker J, he described them as being
essentially as follows:
"(1) What was the necessary trigger for the obligation to pay Advances under
Clause 10(b)?
(2) What documents did Polygram have to have or provide to comply with its
obligations under Clause 17(d)?
(3) The validity in principle of Columbia's counterclaim on the basis that
Columbia succeeded on either (1) or (2) or both."
THE JUDGE'S DECISION
17. As to issue (1) the judge found in favour of Polygram that all that was
required by way of documentation to trigger the payment of an advance was the
delivery of a "statement" of the ANC of the film concerned and a "budget" for
P&A. He rejected Columbia's case that Polygram had also to prove
documented direct out of pocket costs and expenses actually paid to unrelated
third parties in order to render payment due. That being so, it was accepted
that the sums of $3,995,044 and £30,221 were due as unpaid advances on the
basis of Polygram's construction of the agreement, subject to Columbia's
counterclaim for damages which depended solely on the outcome of Issue (2).
There is no appeal in relation to Issue (1).
18. As to Issue (2), Polygram's primary case (see paragraph 10(i) of the
Amended Reply), put shortly, was that the books and records it was obliged to
maintain and which Columbia were entitled to examine were of a limited nature,
it being neither the producer nor the distributor of film in question. Its
obligation was merely to maintain the books and records relating to ANC and
P&A spend it had actually received from third party producers and from the
distributors. It was not required to have complete records in relation to ANC
(i.e. of the individual items of Direct Negative Cost contained within the ANC)
or to the P&A spend documents for each film, these being in the hands of
the third party producers and the distributors. Although, in the case of
Propaganda and Working Title, each had agreed to be bound by the terms of the
agreement insofar as it pertained to them, and hence the underlying
documentation in respect of ANC would be available to Columbia in respect of
films produced by those two companies, that was a collateral right of
Columbia's which did not enlarge the obligation of Polygram in respect of books
and records. In the alternative, Polygram pleaded (see paragraph 10(ii) of the
Amended Reply) that Clause 17(d) required Polygram to procure for Columbia
access to third party records of expenditure by way of ANC and P&A spend
(and it denied that it was in breach of such obligation). Columbia on the
other hand, contended that Polygram was obliged to have in its possession, or
at least provide access to the full and complete records required for Columbia
to conduct the audit contemplated by Clause 17(d) and (e) i.e. complete books
and records with respect to ANC and P&A. That was the effect of its
pleaded case. However, before the judge Columbia also adopted the fall back
position that Polygram might fulfil its obligation by obtaining possession of,
or access to, such documents if they were in the hands of third parties.
19. The judge accepted Polygram's primary case. He had already found in
relation to Issue (1):
"The evidence established that in the ordinary course of events in the film
business the production company will produce the film, and the costs of
production will be the subject of very extensive paperwork. The evidence that
rooms full of documents are involved was not challenged. After production is
complete, the production costs will all be audited, in many cases externally
and in some cases internally ...
This last reference was to evidence of practice in the industry that, when
production of a film is complete the producer usually obtains an audit (and
usually by an external auditor) to verify production costs of a film for the
purpose of certification to financiers, completion guarantors and distributors
as well as to licensees such as Polygram. In relation to Columbia's
contentions, the judge stated:
"Columbia's case (as pleaded in paragraphs 24, 27 - with its reference to
information being stored with third parties - and 28 of the Counterclaim) was
that Polygram had to have the production records and P&A spend documents in
its possession. In the context of that plea, Polygram formally admitted by its
counsel at the hearing in November 1996 when the preliminary issues were
ordered, that if Columbia was correct in its pleaded construction of Clause
17(d), then Polygram had acted in breach of it.
17. At the hearing before me, however, Columbia put forward the case that
Polygram had to obtain possession of "or at the very least access to the full
and complete records required for Columbia to conduct the audit contemplated by
Clause 17(d). The obligation was put on the basis that "there should be"
complete books and records with respect to Actual Negative Cost and P&A.
The short answer to that in my judgment is that the Agreement (drafted by
Columbia) does not say that. The obligation is simply to "maintain" those
records which Polygram has; there is no obligation to obtain documents from
another party or to provide access to such documents. The obligation is to
maintain in a complete state the books and records which it has ....
19. I therefore hold that on the true construction of this agreement, Polygram
are right as to the scope of the obligation on them to maintain documents for
audit purposes. Nor in my judgment ... does this lead to an absurd result.
This is not a case where the natural and ordinary meaning of the word
"maintain" should be departed from because "one would nevertheless conclude
from the background that something must have gone wrong with the language" (per
Lord Hoffman in Investors Compensation Scheme -v- West Bromwich Building
Society [1998] 1 All ER 98 page 115c-d). The evidence was in the case of
Negative Costs the relevant records would have been examined by an auditor.
There is nothing absurd about reliance on audited costs without having to delve
deep into the source material. Working Title and Propaganda were bound by the
agreement, so that their records would also be available. As to P&A spend,
there was a considerable body of documentation available, the details of which
it is unnecessary to go into. It may be that Columbia's audit rights are less
extensive than they would like, but that is the agreement they made."
20. Since Columbia's counterclaim was dependent upon its success in relation to
either of Issues (1) or (2), on both of which the judge found in favour of
Polygram, Issue (3) did not arise. Accordingly judgment was given for the sums
already mentioned with costs to be assessed and the counterclaim was dismissed.
THE SUBMISSIONS OF THE PARTIES
21. First, Mr Sumption QC for Columbia accepted that it was at all material
times clear to both parties that none of the films covered by the agreement
would be produced or distributed by Polygram, and therefore Polygram would not
itself generate or hold the documentation which would vouch the costs of
production or P&A under clause 17(d). However, he submitted that that did
not mean that such documents were intended to be excluded from the obligation
of Polygram to maintain complete books and records with respect to ANC and
P&A. The parties could equally have contemplated that Polygram was in a
position to procure the fulfilment of its obligation by reserving itself the
right to obtain information and any necessary documentation from the producers,
or requiring preservation of such documentation in their hands available for
examination at Polygram's request. That being so, the proper interpretation of
Clause 17(d) is that it imposed an obligation on Polygram which could be
fulfilled either by Polygram personally maintaining or obtaining copies of such
records or vicariously by causing others to maintain such records and to afford
access to them in order to give effect to Columbia's rights of examination.
22. Second, Mr Sumption submitted that the construction favoured by the judge
emasculated the express purpose of the right of audit given to Columbia by
Clause 17(d) namely "the purpose of determining the accuracy of statements
furnished in connection with" ANC and P&A, the underlying commercial object
being to enable Columbia to protect itself against the risk of having overpaid
under statements which it had no opportunity to verify before payment.
23. Third, he submitted that the emphasis placed by the judge on the word
"maintain" as applying only to documents it received and as excluding any
obligation to obtain or provide access to the documents necessary for Columbia
to carry out an effective audit was misguided. Mr Sumption submitted that the
natural and ordinary meaning of "maintain" in the context of records is not
simply for the conservation of such documents as are received. It is the
equivalent of, and interchangeable with, the word "keep": see for instance, a
company's obligations to "keep" accounting records under s.221 of the
Companies Act 1985, which is referred to routinely in judicial decisions
as an obligation to "maintain" sufficient accounting records: see for instance
Secretary of State for Trade and Industry -v- Arif [1997] 1 BCLC 34 per
Chadwick J at 42, Re Firedart Limited [1994] 2VCLC 340 per Arden J at
347.
24. Fourth, Mr Sumption submitted that the judge gave no proper weight to the emphasis on "complete" books and records, which imposed an obligation to keep books and records sufficiently comprehensive in respect of their contents to enable a verifying audit to be effected, which in the light of the definition of Direct Negative Cost meant to verify the amount, nature and date of the payments made, and the fact that payment was to a third party. Mr Sumption did not seek to specify what particular types of document were required for this purpose. However, the parties were not at odds that, if Columbia's contention was correct, Polygram's obligation in respect of ANC documents extended to a substantial proportion of the "rooms full" of documents generated and retained by the individual production companies. Also that, in respect of P&A, while Polygram had ample documents to show the amounts which had been expended according to the distributors, it lacked the underlying documents passing between the distributors and third parties or otherwise verifying the monies paid out by the distributors which formed the basis of their accounting to Polygram.
25. Fifth, Mr Sumption criticised the heavy reliance placed by the judge on
the fact that the parties would have been aware that the ANC statements would
have been examined and verified by an auditor at the end of production. He
emphasised that, pursuant to Clause 17(d), it was Columbia's entitlement to
conduct an audit of the books and records for the purpose of determining the
accuracy of the ANC and P&A statements, whereas the production audit would
have been conducted by and for the purpose of the producer, by whose audit
Columbia had not agreed to be bound. Further, such audit would not have been
carried out under the terms of the licence agreement by reference to the
definition of ANC and hence the itemisation of Direct Negative Cost contained
within it. Finally, whatever the position in relation to audit of the
production costs, the P&A statements would not have been subject to any
such audit, an important matter, bearing in mind that small differences in the
actual P&A spend could result in a substantial difference in the amount
payable as a result of the scale of payments set out in Clause 10(a).
26. Miss Dohmann QC for Columbia submitted that the judge's reasoning was
correct. By way of preliminary, she emphasised the matrices or commercial
circumstances surrounding the agreement and within the contemplation of the
parties at the time it was made, to which the judge attached importance in
coming to his decision. These were (i) the knowledge of the parties that,
despite the formula adopted in Clause 1 of the agreement, Polygram would not be
the producer of any of the films the subject of the agreement. (ii) The
company producing each of the relevant films would generate and retain in its
possession rooms full of documents relating to the costs of the production,
including a vast amount of invoices and vouchers of all kinds. (iii) Those
costs would in the ordinary way be audited either externally or internally in
an audit which would verify the Direct Negative Costs of the production. (iv)
Working Title and Propaganda, which were to be the producers of some or all of
the relevant films, were to be bound by the agreement so that their production
records would be available to Columbia. (v) Polygram was not to be the
theatrical distributor of any of the films to which the agreement applied: that
role was to be performed by Rank or some other approved distributor. (vi) It
would be Rank or such other distributor and not Polygram which in the first
instance incurred the P&A expenditure in relation to each film. (vii)
Polygram would reimburse the distributor the amount of its P&A expenditure,
against documents provided by that distributor verifying the amount it had
spent. To the above matters, Miss Dohmann added the fact that it was in
evidence, and not disputed, that it was unusual in the film industry for actual
production costs to be less than the budget.
27. In relation to Mr Sumption's submissions, Miss Dohmann submitted that there
was no good reason to regard Columbia's right of audit as emasculated by the
judge's construction. So far as ANC was concerned, it was a key part of the
judge's findings that, in the ordinary course of events in the film business
the production costs would have been audited already (see para 19 above) and
that, so far as the individual underlying costs making up the aggregate of ANC
were concerned, there is no reason to suppose that, at the time of the
agreement, Columbia would have anticipated any need to undertake a further
audit in terms of detailed vouching in relation to the original documents. As
to P&A, in relation to the twenty-eight films contained in the programme,
Polygram held all the material documents (including invoices) in respect of the
last eight, and, in respect of the earlier films (twenty in number), it had the
Rank royalty statements, advertising schedules, print contracts, spreadsheet
analyses. It lacked the invoices, but Rank had agreed with Polygram it would
make these available to Columbia.
28. Miss Dohmann further submitted that the judge had been correct to place
reliance upon the word "maintain" and to hold that Clause 17(d) should not be
construed so as to include in the books and records required to be maintained
those documents which, according to the expectation of the parties at the time
of the agreement would be retained in other hands. If that were correct, then
it would follow that the right to examine Polygram's books provided for in
17(d) was similarly limited.
DISCUSSION
29. It seems to me plain that if one restricts oneself to the wording of the
contract, construing it without reference to any of the surrounding
circumstances relied on by Miss Dohmann, Mr Sumption's arguments are to be
preferred. On the face of it, Clause 1 of the agreement anticipates films
produced by (a) Polygram itself ("Owner"), (b) Propaganda and Working Title
(collectively referred to with Polygram as "Producers") and (c) Third Party
Programming, i.e. films produced by unassociated third party producers. It is
clear in those circumstances that each or any of (b) and (c) would, if
producing a film under Polygram's programme, be the company actually paying
out, and therefore in possession of the vouching documents relating to, the
Direct Negative Cost itemised in Exhibit `A'. Nevertheless, Clause 17(d)
unequivocally imposes the obligation to maintain complete books and records in
respect of ANC (the principal element of which is the items making up the
Direct Negative Cost) on Polygram alone and without qualification. This seems
to me no more than a corollary of the logic which drove Polygram to assert and
Columbia to agree in relation to Exhibit `A' that the Direct Negative Cost
expressed as "all documented direct out-of-pocket costs and expenses actually
paid by Owner to unrelated third parties ..." was a reference to all
such costs paid by the actual producers. Again, although it was no doubt plain
that the P&A expended would be expended throughout by Rank as distributors,
a similar obligation to maintain complete records was imposed on Polygram in
respect of P&A.
30. In deciding the question of the extent of the books and records covered by
the obligation, I agree with Mr Sumption that the judge's emphasis on the word
"maintain" as largely providing the answer was misplaced. Nor does it seem to
me that the answer lay simply in looking to see what documents Polygram in fact
had in its possession. The ambit of the obligation to maintain complete
books and records can best be ascertained by looking first at its immediate
context and, second, at the purpose for which the books and records are to be
kept. As to the first, it seems to me plain, that used, in an accounting
context in relation to items of cost, it plainly extends to contemporary
documents relating to such items, such as invoices, receipts and other vouching
documents. As to the second, the purpose of 17(d) is to protect the interests
and serve the purposes of Columbia rather than Polygram and, in particular, to
support Columbia's right of audit of such books and records for the purpose of
determining the accuracy of statements furnished to and paid by Columbia in
connection with the ANC. In such a context, Columbia, as the auditing party,
would need to see invoices and documents vouching the actual payments made to
third parties in respect of the production costs itemised in Exhibit `A'. At
the same time, there was nothing inherent in the obligation to require Polygram
personally to keep such documents in its possession in order to sustain
Columbia's right to examine them, provided that Columbia was afforded access to
them when requested for the purposes of such examination.
31. I would construe the obligation of Polygram to "maintain" complete books
and records in the sense of "maintain by itself or through others" or
"maintain or cause to be maintained", such books and records
unless there are strong contrary reasons for doing so. I now turn to see
whether a different conclusion is directed by the commercial background to the
agreement, as found by the judge and supported by Miss Dohmann.
32. I do not consider that the fact that the parties knew that Polygram was not
itself to be the producer of any of the films is persuasive given that, despite
that knowledge, an agreement was entered into which described and treated it as
if it were. It is clear that the parties anticipated that the principal
producers concerned would be Propaganda and Working Title who were closely
associated with and 49% owned by the Polygram group of which Manifesto Film
Sales was part. That being so, so far as Clause 17(d) was concerned, an
obligation on Polygram to maintain complete records of the production costs
would cause no difficulty. So far as the agreement also contemplated that its
terms would extend to films produced by unassociated third parties, it could
equally have been that the parties contemplated that Polygram on entering into
any third party agreement and/or as a condition of authorising a third party
production to start, could and would require that the records relating to
production costs be preserved by the producer for copying and/or access and
inspection by Polygram if required during a period sufficient to cover
Polygram's obligation vis-a-vis Columbia under Clause 17(d). If that is so,
the fact that the documents would be substantial in number would be neither
here nor there. The question of bulk might well be influential in whether or
not Columbia decided to take advantage of its right of audit in respect of ANC
(particularly bearing in mind the rarity of production costs being lower than
the budgeted costs on the basis of which the advances were paid); however, it
is not in my view an indication of whether Columbia wished to reserve to
itself a right of audit if it subsequently wished to question individual items
of production costs.
33. Nor, do I attach the same importance as the judge to the likelihood that a
producer's audit would have been carried out immediately post-production for
the purpose of obtaining finance. While it is clear that the parties must be
taken to have been aware that such an audit was customary (i) it is not
universal and, indeed, was not followed in respect of several of the films the
subject of the agreement; (ii) insofar as the audit might, according to the
practice, have been internal rather than independent, Columbia may well not
have been content to be bound by such an audit but rather would have wished to
preserve and, if necessary, rely on its rights under 17(d) and (e). In a
paragraph concerned with Columbia's right to audit records in respect of
production costs or, indeed, elsewhere in the agreement, it would have been
easy and sensible to provide for Columbia to be bound by the findings of such
an audit had that been the parties' common intention.
34. It is of course the position that, by an additional provision at the end of
the agreement, Working Title and Propaganda themselves agreed to be bound by
the terms of the agrement `as such agreement pertains to each of them', and
this additional provision weighed with the judge. I consider it highly
debatable whether the provision is apt to apply to the obligation in 17(d) at
all, that obligation being expressly applied to the Owner (i.e. Polygram) and
not to Working Title or Propaganda either by name or under the title
"Producers" accorded to them in Clause 1 of the agreement. It appears to me
more likely that the additional provision was designed to apply to obligations
imposed upon Working Title or Propaganda as producers in Clause 1(b) and in
respect of rights licensed under Clause 2 (by reference back to Clause 1(a)),
which clauses it is not necessary to set out here. But even were that not so,
I do not think that the addition to the contract provides assistance in
relation to the construction of Clause 17(d). Quite apart from the `Owner'
point, it seems to me likely that the addition of Working Title and Propaganda
as signatories to an agreement stated to be made between Manifesto (Polygram)
and Columbia was by way of a general `belt and braces' provision; it could not
in any event apply to cover records held by unassociated third party producers,
or records of the P&A spend effected by the distributors. Clause 17(d), as
it seems to me, takes a global approach to all those matters by simply imposing
the obligation of record-keeping upon Polygram.
35. So far as P&A spend is concerned, the judge referred to a `considerable
body of documentation' being available, adding that it was unnecessary to go
into detail. For the purposes of the appeal, Miss Dohmann produced a list of
the documents made available by Polygram for audit in respect of P&A
expenditure, this list suggested that the only relevant documents which were
not in possession of Polygram, but were held by Rank, were the invoices
underlying the royalty statements and other documents forwarded to Polygram by
Rank in respect of the first twenty films, referred to at paragraph 26 above.
There is nothing before us, and it does not appear there was anything before
the judge, to suggest that, in imposing an obligation upon Polygram to maintain
complete records in respect of the P&A spend, the parties did other than
suppose that Rank would keep complete records themselves and make them
available at Polygram's request.
CONCLUSION
36. I would therefore hold on Issue (2) that, in respect of ANC and P&A,
the obligation of Polygram to maintain complete books and records under Clause
17(d) extended to documents evidencing (a) the expenditure on the individual
items of Direct Negative Cost as defined in Exhibit `A' to the agreement and
(b) expenditure upon the individual items of cost making up the actual P&A
spend as defined in Clause 6 of the agreement. In this respect, I would also
hold that, in the case of any such documents in the possession of producers or
distributors, the right of Columbia to examine such books and records as
provided in Clause 17(d) would be satisfied by Polygram if and insofar as
Polygram afforded access to such documents at the place where they were located
for the period and the purpose set out in Clause 17(d).
37. That being so, the question raised by Issue (3), which did not arise
following the judge's decision in relation to Issue (2), now requires an
answer. However, that is not an exercise which this court is in a position to
perform. At the hearing before Mance J, Polygram conceded that, if Columbia's
then pleaded contention was correct, Polygram had been in breach of their
obligations under clause 17(d). However, that contention was then confined to
Columbia's assertion that Polygram had to have the relevant records in its own
possession. Polygram has never conceded that, if (as I would hold) it may
discharge its obligations of record keeping through others to whose records it
procures access for Columbia for the purposes of its audit, then it is
nonetheless in breach. Indeed, Polygram expressly denied breach on that basis
when, prior to the hearing before Walker J, it amended to that effect (see
paragraph 10(ii) of the Amended Reply).
38. We have not been concerned with the question of breaches by Polygram, nor
whether, or to what extent, such breaches may have been rectified by the
agreement of Rank or any third party producers to make their records available.
Nor is it apparent, if breach is demonstrated, whether any substantial damage
has been or will be sustained by Columbia. Because the judge found in favour
of Polygram on Issue (2), he gave summary judgment for the unpaid advances due
under his decision on Issue (1). Whilst the answer I would give to Issue (2)
removes the clear-cut basis upon which the judge gave summary judgment, for the
reasons I have just indicated there yet remains the question whether Columbia
is able to demonstrate an arguable defence or an issue to be tried sufficient
to avoid summary judgment for at least part of the unpaid advances,
alternatively the imposition of some condition by way of leave to defend.
Those will now be matters for further consideration by Walker J.
39. I would therefore allow the appeal so far as the judge's decision in
relation to Issue (2) is concerned and would invite submissions from the
parties as to the form of order appropriate to be made for the further disposal
of the matter.
LORD JUSTICE OTTON: I agree.
LORD JUSTICE STUART SMITH: I also agree.
Order: Appeal allowed with costs as appended to Appellant's skeleton
argument and the form of draft.