Music Contracts Undue Influence PDF

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Dr Paul Hughes...

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Music Contracts Undue Influence, Restraint of Trade and Illegality

Undue influence and restraint of trade •

Undue influence is an equitable doctrine that seeks to address the harm suffered suffered when one person takes advantage of a position of power over another person

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The restraint of trade doctrine relates to the imposition of excessive or unreasonable contractual restrictions on public policy grounds

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Some blurring of the distinction between the two in music contracts because both protect against overreaching by a stronger party when contracting with a weaker one

Contracts in Restraint of Trade •

Common law view is that contracts in restraint of trade : – injure the person involved by reducing their means of earning a livelihood; – deprive the public of the services of person in their useful capacities; – discourage industry and enterprise; and – restrict competition.

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Music contracts that are entered into with a view to exploiting the artist’s work, if oppressive, can instead stifle his/her creativity

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Is the doctrine concerned with quantity or quality of artistic output?

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What sort of interests does it seek to protect?

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Clauses in contracts in restraint of trade are prima facie void as being contrary to public policy unless the restraint is reasonable

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In Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 related to a non-compete covenant applicable for 25 years anywhere in the world following the sale of an international armaments business

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The clause was held not in restraint of trade

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Lord MacNaghten held as a general principle that the public have an interest in each person being able to carry on his trade freely as has the individual – “All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy …”

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Reasonableness is determined by: – the geographic extent; – the time period involved; – the nature of the business and the activity being restrained; and

– whether the restraint is reasonable, both in the interests of the parties and the public.

Restraint of trade Esso Petroleum v Harper's Garage (Stourport) Ltd [1968] 2 AC 269 per Lord Morris: “Every member of the community is entitled to carry on any trade or business he chooses and in such manner as he thinks the most desirable in his own interests, so long as he does nothing unlawful; with the consequence that any contract which interferes with the free exercise of his trade or business, by restricting him in the work he may do for others, is a contract in restraint of trade. It is invalid unless it is reasonable as between the parties.” Esso Petroleum v Harper's Garage per Lord Reid: “If a contract is within the class of contracts in restraint of trade the law which applies to it is quite different from the law which applies to contracts generally. In general unless a contract is vitiated by duress, fraud or mistake its terms will be enforced though unreasonable or even harsh and unconscionable ... ” Esso Petroleum v Harper's Garage per Lord Reid: “ … but here a term in restraint of trade will not be enforced unless it is reasonable. And in the ordinary case the court will not remake a contract: unless in the special case where the contract is severable, it will not strike out one provision as unenforceable and enforce the rest.” •

Esso Petroleum v Harper's Garage: an exclusive purchase obligation relating to petrol of 21 years’ duration: – was void as being a restraint of trade – in the absence of evidence of some advantage to Esso for which a shorter period would not be adequate

Contracts in Restraint of Trade •

Clauses in restraint of trade have been applied in the following situations:

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Contracts of employment - often characterised by inequality: Faccenda Chicken v Fowler [1986] ICR 297

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Contracts for the sale of a business, e.g. Nordenfelt case; and

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Contracts between manufacturers and traders or suppliers and resellers e.g. Days Medical Aids Limited v Pihsiang Machinery Manufacturing Co Ltd [2004] EWCA Civ 993

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If the person relying on the clause can show it is reasonable, the presumption of invalidity can be rebutted.

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The restraint must not be any wider than is reasonably necessary to protect the promisee’s interest such as a protectable proprietary interest (intellectual property rights, customer connections)

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The restriction must be of reasonable length in time and area

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Forster & Sons Ltd v Suggett (1918) 35 TLR 87 employer cannot prevent an employee from using his own skill after he has left even if that skill was learnt from the employer

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Atwood v Lamont [1920] 3 KB 571 five year post-employment covenant not divulge any secret manufacturing process learnt during employment upheld

A Schroeder Music Publishing Co Ltd v Macaulay [1974] 3 All ER 616 •

The restraint must be reasonably fair for both parties:

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A young and unknown song-writer contracted on a standard form non-negotiable contract with a music publishing company to work for them exclusively for five years with an automatic renewal of a further five year term if his royalties and advances exceeded £5,000

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The song writer assigned to the music company the full worldwide copyright in each musical composition and lyric he composed at any time during or before the agreement

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The song writer could not assign copyright in his work elsewhere during the term of the agreement

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The music company could terminate at any time on one month’s notice

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The song writer did not have a similar right of termination

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The publisher paid £50 as a general advance against royalties and when the first £50 was recouped from royalties a further £50 advance would be made

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However the music company was under no obligation to publish any of his compositions and he might not earn any royalties as a consequence

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The agreement was freely assignable by the company

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Held by the House of Lords:

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The agreement was in restraint of trade;

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It was unfair and unreasonable;

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There was no equality of bargaining power (take it or leave it contract);

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His works might never be published and he was enslaved by the agreement

Whilst the song writer was an unknown, there should have been a general obligations to use reasonable endeavours to publish his work and an earlier right of termination on the part of the song writer

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Per Lord Reid:

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“Any contract by which a person engages to give his exclusive services to another for a period necessarily involves extensive restriction during that period of the common law right to exercise any lawful activity he chooses in such manner as he thinks best. Normally the doctrine of restraint of trade has no application to such restrictions: they require no justification. But if contractual restrictions appear to be unnecessary or to be reasonably capable of enforcement in an oppressive manner, then they must be justified before they can be enforced.”

Zang Tumb Tuum Records Limited v Holly Johnson [1993] EMLR 61 •

Zang Tumb Tuum Records Limited (‘ZTTR’) was a recording company which, together with its affiliate music publishing company, Perfect Songs, brought proceedings against Holly Johnson, the lead singer of the group Frankie Goes to Hollywood

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The group had entered into both a recording contract with ZTTR and a publishing contract with Perfect Songs

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Holly Johnson was seeking to leave the group and to escape his contractual obligations on the grounds that the contracts were unenforceable as being too onesided and unfair

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The claimants issued proceedings seeking declarations that the contracts were valid and that the defendant was bound by a ‘leaving member clause’ that required him to enter into a new recording contract with ZTTR and precluded him from signing a contract with any other party

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Holly Johnson succeeded at first instance and the claimants appealed

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The Court of Appeal rejected the appeal, holding the recording and publishing contracts to be unfair and in restraint of trade, having regard to the following contractual provisions: •

Group members were bound individually and collectively for up to seven option periods with the agreement being capable of lasting eight to nine years

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The claimants were free to terminate the contract at any time but the group was bound to record exclusively for the claimants

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Although the group and band members were exclusively tied to the claimants, the latter were not so bound

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The claimants had the last word on all matters, including approval of compositions and recording cost expenditure

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The claimants had absolute discretion as to whether to release records and, whether or not records were released, copyright would remain in the claimants

Silvertone Records v Mountfield [1993] EMLR 152 •

The Stone Roses - a Manchester band formed in 1985

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The band signed a recording deal with Zomba Productions Limited (that was later assigned to Silvertone Records) and a publishing agreement with Zomba Music Publishing

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Stone Roses subsequently felt that the contracts and their relationship with the claimants were stifling their musical creativity

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In the litigation that followed, Humphries J held that the contracts were in unreasonable restraint of trade as harming the group’s musical output

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The recording contract •

Allowed the claimant company sole use of the masters in perpetuity

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Conferred the right to commence or discontinue production of records

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The group could not re-record any musical works embodied in the masters nor could they perform the music live if the performance might be recorded in any form

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The restraints were also unreasonable as the initial one year period was followed by six potential option periods exercised at the option of the company – this might result in a seven year term

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The recording contract was accordingly unenforceable and, as the two agreements were linked and had had to be entered into contemporaneously, both fell

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Per Humphries J:

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“Mr Prescott in his submissions strongly emphasised that the interference of the Court is based on reluctance to allow sterilisation of a creative man's output and the possibility of rendering someone compulsorily unemployed and unpaid, or virtually unpaid. … ”

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Per Humphries J:

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“ … However, I consider it is too simple to say as long as the artist has a living wage it matters not that his output can be completely sterilised. It may be permissible for a short time to absorb the output of the party or to prevent the party using its output other than strictly within the terms of the contract … ”

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“… But if an artist is effectively able to be prevented from reaching the public over a prolonged period I find it unrealistic to say that this is not a contract in restraint of trade. In this connection I note the words of Lord Pearce in the Esso case.

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“...if during the contract one of the parties is too unilaterally fettered so that the contract loses its character of a contract for the regulation and promotion of trade and acquires the predominant character of a contract in restraint of trade … ”

Panayiotou v Sony Music Entertainment (UK) Ltd [1994] EMLR 229 •

The burden of proving that, as between the parties, the restraint is reasonable lies on the promisee

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The burden of proving that, as far as the public interest is concerned, the restraint is unreasonable lies on the promisor

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Reasonableness is considered as at the time of the agreement

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George Michael (GM) had originally formed ‘Wham!’ with Andrew Ridgley, when both were young and inexperienced musicians

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On 25th March 1982 they had entered into an exclusive recording contract with Melody Shire Ltd (t/a Inner Vision)

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The 1982 agreement provided for the production of four singles and ten albums

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Inner Vision had a licence agreement with Sony and the 1982 agreement incorporated Sony’s then standard terms and conditions

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In 1983 GM and Ridgley were in dispute with Inner Vision, arguing that the 1982 agreement was unenforceable as being in restraint of trade

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The proceedings were compromised by a settlement agreement •

The 1982 agreement was revoked

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GM and Ridgley entered into a recording contract with CBS in 1984 that bound Wham! to deliver eight albums if CBS took up all its options over their work

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Wham! subsequently broke up and in 1986 CBS exercised its option against GM, acquiring his exclusive services as a solo artist

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GM renegotiated the terms of his recording contract with Sony (which had by now acquired CBS) and entered into an agreement on 4th January 1988

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The 1984 agreement ceased to have effect

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Under the 1988 agreement, GM was obliged to deliver three initial albums

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He delivered two but in February 1992, before delivering the third album, he was advised hat he could challenge the 1988 agreement as being void and unenforceable as it was an unreasonable restraint of trade

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GM also sought to argue that the 1988 agreement was in breach of EU competition law

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Two weeks later (also in February 1992), GM’s accountant wrote to Sony seeking an advance of $11 million dollars due under the 1998 agreement, which Sony paid

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GM repaid the $11 million advance two months before proceedings were issued in an effort not to be seen as having adopted the 1988 agreement

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Parker J held:

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The 1988 agreement did contain provisions that restrained trade

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He did not immediately consider their reasonableness

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Instead he considered public policy issues

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The court must balance freedom of contract with public interest in freedom to trade and must consider the background to the agreement and negotiations

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A standard agreement might be acceptable where there was equality of bargaining power

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Where: •

disputes had arisen and

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these had been settled

public policy favoured giving effect to the

settlement

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There was no inequality of bargaining power and claimant had had expert legal advice

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The 1988 agreement •

Was a renegotiation of the 1984 agreement

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This compromised by way of settlement the 1982 agreement that had been in dispute

public policy favoured giving effect to the

settlement

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The judge then considered the contractual provisions in terms of their reasonableness

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As to their reasonableness, duration, exclusivity and territorial reach were all key factors

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As to duration, this was to some extent within GM’s control as he could accelerate the term by delivering albums required under the agreement more quickly

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The judge appears to have ignored the fact that Sony might reject the albums on quality grounds leaving GM with a longstop date for the termination of the 1988 agreement of 15 years

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The judge regarded the restrictions as reasonably necessary for the protection of Sony’s legitimate interests and in line with the contractual benefits due to GM under the 1988 agreement

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Heavy emphasis on the commercial bankability and success of GM, rather than on artistic freedom and creativity

Lloyd’s Bank v Bundy [1975] QB 326 Lord Denning MR: There are cases in which the courts will set aside a contract, or a transfer of property, when the parties have not met on equal terms – when one is so strong in

bargaining power and the other so weak—that, as a matter of common fairness, it is not right that the strong should be allowed to push the weak to the wall “The English law gives relief to one who, without independent advice, enters into a contract upon terms which are very unfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infirmity, coupled with undue influences or pressures, brought to bear on him by or for the benefit of the other”

Undue influence •

Armatrading v Stone (unreported)

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Claimed her management contract was voidable as having been made under undue influence and being in unreasonable restraint of trade

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Solicitors drew up the management contract and billed defendant; thought they represented the defendant

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Defendant manager knew he had a duty to act in claimant’s best interest and that she trusted and had confidence in him

Undue influence and restraint of trade Armatrading v Stone (unreported) per Leggatt J: “[The defendant] seemed to have difficulty with the concept of conflict of interest and … that it was common sense that if something in the management contract was in the plaintiff’s best interests, it would not be in his.” •

Armatrading v Stone (unreported)

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Leggatt J cited Slade LJ in Lloyds Bank v Bundy – once influence existed independent legal advice was required; manager had taken advantage of claimant’s trust

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There were unjustified restrictions which were unreasonably onerous and an inequality of bargaining power

Elton John v Richard Leon James [1991] FSR 397 •

The plaintiffs’ primary claims were for the setting aside, on the ground of undue influence, of a number of disadvantageous publishing and recording agreements, the return of the copyrights in all compositions and recordings covered by the agreements and delivery up of all master recordings

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The copyrights involved were of 144 compositions and 169 song recordings, the retail sales value of which probably exceeded £200 million

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Per Nicholls J:

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“So, in short, and whatever be the precise form of words used, the substance of the two ingredients required before the court will set aside a transaction is, first, a relationship in which one person...