England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		12 November 2004

Mr Justice Pumfrey :

Introduction

1. This is an appeal by the defendant Decca Music Group Limited ("Decca") against the decision of Master Bowman dated 11 June 2004, refusing to grant an order staying the proceedings pursuant to section 9 of the Arbitration Act 1996 ("the 1996 Act"). Permission to appeal was granted by Lawrence Collins J. on 9 July 2004 having been refused by the Master, and an interim stay of the proceedings was then granted.
2. The action was commenced by claim form dated 10 March 2004. The claimants are three members of the Rolling Stones and the surviving members of the original group.
3. So far as material, the claim is as follows. On 28 July 1976, each of the members of the group, including the present claimants, entered into agreements in identical form with Decca and a Guernsey bank called Leopold Joseph & Sons (Guernsey) Limited ("Leopold Joseph"). In outline, the purpose of the agreements appears to have been to ensure that the royalties earned by the members of the group on recordings commercialised by Decca should be paid not to the members of the group but to Leopold Joseph. The agreements each contain a provision providing for an account by Leopold Joseph to each of them of the royalties so paid by Decca, Leopold Joseph's obligation to account arising only six years after the commencement of the operative provisions of the agreement. No doubt the purpose of the arrangement was in part fiscal in character, but that is not a matter with which I am concerned. The way in which the desired result was achieved is as follows. By clause 5(1) of the agreement each of the members of the group irrevocably authorised Decca to pay and account for the Royalty (as defined) to Leopold Joseph and required Decca to pay and account for any and all amounts of royalty due to the bank. Back to back with this obligation was an obligation on the bank to pay each of the members of the group in accordance with the provisions of the agreement. By clause 5(3)(i):

"Not later than the Due Date [1 August 1982] and each subsequent anniversary of the Due Date [Leopold Joseph] shall deliver to the Artist an account showing the sum which since the date hereof [28 July 1976] or since the Due Date or the immediately preceding anniversary thereof (as the case may be) has become payable by [Decca] on account of the royalty together with a reconciliation of the basis on which such sum was established."

4. Broadly speaking, the effect of the arrangement was to enable royalties to be held by the bank. Other provisions of the agreement provide for interest to be paid on the royalties accumulating in the bank. The arrangement appears to last for 25 years from the Due Date. To police the agreement, each Artist is given a right to appoint an auditor without showing cause. This right is conferred by clause 6 of the agreement, which is as follows:

"The Artist may cause each account delivered to him pursuant to clause 5(3) hereof to be audited by a leading Chartered Accountant appointed by him ("the Auditor") and [Leopold Joseph] and [Decca] or either of them (as the case may be) shall at their premises and during normal business hours and upon 14 days prior notice but not more than once in any one year make available to the Auditor any and all such books and records and other documents (whether or not similar to those enumerated) pertaining to the subject matter hereof which the Auditor may reasonably request for the purpose of performing his auditing duties."

5. Before this agreement had been entered into, rights to recordings made by the Rolling Stones for North America (the USA and Canada) had been acquired by one or more companies under the control of Allen Klein. This group of companies was collectively referred to before me as "ABKCO".
6. Having set out clause 6 of the 1976 agreement, the claimants allege that Decca subsequently entered into contractual arrangements with ABKCO, the details of which it is alleged the claimants do not have, to allow Decca to exploit Rolling Stones recordings in the USA and Canada pursuant to the rights acquired by ABKCO. The agreements were subsequently amended so as to revise the various royalty rates in respect of the recordings the subject of the 1976 agreements, and special provision was made by clause 5 of a written agreement dated 3 April 1985 between Decca and Leopold Joseph for the royalty payable in respect of the recordings in which the North American rights were vested in ABKCO. There is no dispute that the effect of the 1985 agreement is to oblige Decca to pay Leopold Joseph four-fifths of the royalties payable to ABKCO in respect of sales of records of the recordings made by Decca after 31 March 1983. The four-fifths figure is a "floor": application of the rates set out elsewhere in the agreement might otherwise produce a lower figure. Obviously, the Rolling Stones had a continuing interest in the sums payable by way of royalty to Leopold Joseph, and although not party to the 1985 agreement, their lawyers participated in its negotiation.
7. The right to audit has been exercised, and its effects are reflected in an agreement, referred to in the pleading as "the 1996 settlement agreement", which again adjusted the respective royalty rates and settled a claim arising in respect of the audit for the period 1 April 1983 to 31 December 1992. This agreement contains a further provision relating to inspection of books in clause 4, but there is a lively dispute between the parties as to the scope both of clause 6 of the 1976 agreement, of clause 4 of the 1996 agreement and of the effect of the latter upon the former. I merely note this, since it is no part of my function to form any conclusion as to the effect of these clauses.
8. The pleaded case is that the claimants have each sought to exercise the right of audit conferred by clause 6 of the 1976 agreement and for that purpose have sought the specified documents from the defendant and that the defendant has refused to supply any such documents. There is no doubt that the claimants seek to confirm that the sum upon which their floor royalty of four-fifths is computed is in truth "the royalties which [Decca] pay ABCKO in respect of sales of records of the recordings". The claimants have never seen all the agreements between Decca and ABCKO, and they wish to confirm that for example unreasonable sums are not being paid in relation to artwork so in effect transferring away from the royalties payable to ABKCO some of the sums which would otherwise be paid under that head. It goes without saying that I cannot know whether these suspicions are fanciful and unreasonable or well-founded. The question for me is whether, assuming the right to an audit and to the provision of documents alleged by the claimants, this action should be stayed having regard to the existence of the arbitration clause in the agreement to which I now turn.

The Arbitration Clause

9. The arbitration clause is as follows

7. Any and every dispute difference or question which may at any time arise upon under or in connection with or pursuant to this Agreement or touching or concerning the construction meaning effect validity or enforceability thereof or of any provision thereof or concerning any alleged determination or claim for rectification thereof shall be referred to a single arbitrator being a barrister of at least seven years standing to be nominated in default of agreement by the president for the time being of the Law Society and the Arbitration Act 1950 or any statutory modification or re-enactment thereof for the time being in force shall apply to any such arbitration PROVIDED ALWAYS that in the event of any claim by either of the parties hereto for breach of or otherwise arising out of or in connection with or pursuant to this agreement the sole obligation of the other party in respect of such claim shall be to pay such sum as may be awarded upon arbitration pursuant to this clause and such arbitration or award shall be a condition precedent to the institution of any action at law or in equity.

10. The claimants contend, and the Master appears to have accepted, that the claim as set out in the Particulars of Claim is not caught by the arbitration clause. If it is caught, they accept that the stay of the proceedings is mandatory. They do not suggest that any of the exceptions to the mandatory stay provided for by section 9 of the 1996 Act are relevant to his case.
11. Their argument in outline is as follows. It is plain that the arbitration clause restricts the remedies available in an arbitration to damages. Clause 6 of the agreement does not confer a mere "procedural" entitlement to see documents for the purposes of any claim, but confers a substantive right to conduct the specified audit with the specified materials. This audit is not contingent upon any demonstration by the claimants that there is, or might be, a deficiency in the account delivered to the respective member of the group pursuant to clause 5(3) and, accordingly, its non-performance does not sound in damages at all. Accordingly, the restriction upon the remedies available in an arbitration contained in clause 6 renders the arbitration clause inapplicable or inappropriate to an allegation of breach of clause 6. As a matter of construction, the arbitration clause would deprive clause 6 of all its substance and cannot extend to a breach of that clause and a mandatory stay need not be granted.
12. The contrary view is that the words of the arbitration clause are very wide; that the Scott v. Avery nature of the clause makes it quite plain that no cause of action accrues for breach of any provision of the agreement until after an arbitration; and the limitation to pecuniary remedies is irrelevant since as a matter of substance it is open to the claimants either to seek damages for breach or an account of royalties due under the agreement and payment of all sums found due upon such an account by way of arbitration, and the arbitrator would be bound in consequence of the provisions of clause 6 to require the production of all the documents which the claimants would obtain under clause 6 had there been no breach of it. The distinction which the claimants seek to draw between a merely procedural provision and one conferring substantive rights is illusory and since they will obtain in an arbitration all the information and documents which they would have obtained under clause 6 there is no reason why the arbitration clause should be taken as a matter of construction not to extend to a breach of clause 6.
13. I should also note that there was at least a suggestion in the submissions before me that there had been no breach of clause 6 on the part of Decca. That issue does not arise in this appeal, and I decline to consider it.
14. I turn to the construction of the arbitration clause. It falls naturally into three parts. Down to the proviso, the clause is in wide and familiar terms. The first half of the proviso limits the remedies from the arbitrator in respect of "any claim by either of the parties hereto for breach of or otherwise arising out of or in connection with or pursuant to this agreement" the second part of the proviso is a Scott and Avery provision which, as is well known, prevents the accrual of any cause of action for breach otherwise falling within the clause until after the arbitration. Given this structure, the questions are

i) What is the effect of the general words of the clause? Do they apply to a breach of clause 6?

ii) What is the effect of the proviso? Does it relate to an allegation of breach of clause 6?

iii) What is the effect of the Scott v Avery provision, if it is relevant at all?

15. So far as the general words of the clause are concerned, they could hardly be wider in their effect. Indeed, the words "in connection with" would in my view be sufficient to catch any allegation of a breach of clause 6. I am reinforced in my view of the inclusive nature of these words by the judgment of Bingham LJ (as he then was) in Ashville Investments Limited v. Elmer Contractors Limited [1989] Q.B. where he said this in respect of the words "in connection with":

"I do not find this language either vague or ambiguous. Any dispute or difference unconnected with the party's contractual relationship is not subject to the arbitration agreements. Any other dispute or difference is."

16. There is only so much that can be said about the width of the words employed by this arbitration clause. On the face of it, they are plainly wide enough to cover any dispute arising from an allegation of breach of clause 6.
17. The same goes for the words of the first part of the proviso. The remedies available in an arbitration are limited to a pecuniary sum. Again, these words are more than wide enough to cover a successful contention that there has been a breach of clause 6 of the agreement.
18. The real problem is whether the nature of the obligation of clause 6 is such that a breach is not capable of being compensated in damages with the result that there is, in effect, a repugnancy between the arbitration clause and clause 6. Put another way, can it be said that to provide only a pecuniary remedy for breach is to deprive clause 6 of its substance?
19. In my view, the Court should attempt to ensure if possible that an unqualified agreement of the kind represented by this clause is respected if at all possible. Mr Meade on the part of the claimants was disposed to submit that it was clear that the arbitration clause was in standard form while the provisions of clause 6 were obviously tailored to the particular circumstances of the parties. In the context of this agreement, I consider that submission to be erroneous. The inclusion in the context of an agreement of this sort of a substantial arbitration clause including a limitation of remedy must be taken to be a matter to which the parties have turned their attention. But in any event I consider that the suggestion that an award of damages following an arbitration in respect of a dispute arising out of clause 6 is a wholly inadequate remedy to be entirely misconceived. It seems to me that prima facie the measure of damages for breach of clause 6 should be arrived at as follows. If on an audit under clause 6 it would have been discovered that there had been an underpayment then the underpaid sum is the measure of damages. If on an audit under clause 6 it were to be discovered that there had been no underpayment, then damages would be nominal only. In either case, the question "what would an audit under clause 6 have discovered?" can only be answered by reference to the documents which would have been obtained by the auditor carrying on an audit in accordance with the clause. I understand this proposition to have been accepted by Mr Howe who appeared on the part of the defendants. It necessarily follows that disclosure in the context of the arbitration would involve disclosure of the documents which the auditor might reasonably have requested for the purpose of performing his auditing duties. Accordingly, the class of documents discloseable in the arbitration would be the class of documents provided to the auditor upon a consensual audit under clause 6.
20. Mr Howe submitted that the same result could be brought about by seeking an account before the arbitrator. That such an account is possible appears to have been accepted on previous occasions by these parties, and on the face of it the same observations as I have made in respect of a claim for damages for breach of clause 6 are applicable, save that the scope of the disclosure cannot, I think, be so directly related to the auditor's rights under clause 6.
21. In either case, there would be no question of the claimants having to demonstrate a deficiency in the accounts before they could claim substantial damages and so become entitled to disclosure of the material in question. The dispute referred to arbitration is the breach of the obligation to permit the audit on the materials to which the claimants are contractually entitled: and it necessarily follows that the materials to which the claimants are contractually entitled must be considered in the context of the arbitration.
22. It seems to have been assumed by the master that unless clause 6 was specifically enforceable it was a dead letter. His conclusions in paragraph 13 of his judgment were as follows:

"1. Clearly there is an effective arbitration clause to which, in principle, effect should be given. The real question is one of construction, and not necessarily of efficacy;

2. Clause 7 is certainly broadly drawn, but it appears to be about dispute resolution;

3. Notwithstanding its breadth, that does not necessarily lead to the conclusion that clause 6, which, if complied with, may lead to dispute, is to be regarded as a mere adjunct to the process of dispute resolution;

4. If compliance with clause 6 can be secured only through arbitration, then that will serve to further dispute and consequent expense rather than the reverse."

23. This does not seem to me to grapple with the main problem in the case as I have outlined it above. If the Master was seeking to suggest that this arbitration clause was merely a means of "dispute resolution" then that is unexceptionable, save that the disputes which it resolves include disputes relating to breach of clause 6. I do not find the Master's remaining conclusions helpful, and I consider that for the reasons I have given that a breach of clause 6 is to be arbitrated, and that in that arbitration the pecuniary remedy that will be obtained will depend upon whether the audit under clause 6 would or would not have revealed an under-payment0 of royalty to the claimants. That question cannot be investigated without making the documents that would have been made available in an audit under clause 6 available to the claimants, and it follows that the restriction on remedy contained in the arbitration clause does not deprive clause 6 of its substance.
24. There is therefore no reason why I should not give effect to the clear choice of an arbitral tribunal by the parties to this agreement. Since there is no other reason advanced why a stay under section 9 of the 1996 Act should not be granted, these proceedings must be stayed. I will hear counsel as to the appropriate order to costs if that cannot be agreed.