Domino effect – Four Tet allowed to add heads of claim in dispute with his label

Background

Mr Hebden entered into an exclusive recording agreement in 2001 with the defendant, Domino Recording Company Ltd.  Under the agreement, he was required to deliver certain master sound recordings to Domino and assigned the copyright in those to Domino.  In return, Domino released the masters and paid him royalties.

The artist issued a claim against Domino in the IPEC in December 2020.  He alleged that the label was in breach of its contractual obligation under the agreement to account properly for royalties relating to streaming and digital downloads.  He sought a declaration as to the true construction of the agreement, as well as monetary relief capped at £70,000. 

In November 2021, Domino:

•  offered to pay all the damages and costs sought in the artist’s original particulars of claim;
•  informed the artist that it: (a) had instructed digital service providers to withdraw the masters (i.e. so they could no longer be accessed by the public); (b) would no longer exploit the masters digitally; and (c) would not agree to the 50% rate claimed by the artist for exploitation; and
•  required that the proceedings should be stayed, failing which it would apply for dismissal.

Mr Hebden considered Domino’s withdrawal of the masters from digital release and refusal to exploit them digitally in the future to be a fundamental breach of the agreement.  So he applied for permission to amend his particulars of claim to plead those actions as further breaches of contract and to include additional claims.

Domino denied the alleged breach, applied for strike-out and/or summary judgment and, perhaps unsurprisingly, did not agree to the proposed amendments.

Proposed amendments

Ms Pat Treacy, sitting as a judge in the Chancery Division, considered the proposed amendments and the relevant clauses of the agreement, in particular clauses 2 (term), 4 (release commitment), 14.8 (notice) and 16 (approvals).  She categorised and summarised the proposed amendments as follows.

Duty to exploit / duty of good faith

• Under clauses 4.1 and 4.2 of the agreement, Domino had an express “continuing obligation to use reasonable endeavours following release to exploit the masters … by all then-industry-standard means, in the UK and in the Major Markets respectively".  The artist also pleaded an equivalent implied obligation.
• There was an implied obligation on the label to act in good faith in relation to the exploitation of the masters under the 2001 agreement.
• Those obligations were each a condition of the agreement and of the copyright assignment.
• The exclusive recording term of the agreement ended in around November 2005 (this was not disputed), but the defendant’s obligations relating to payment of royalties and the release commitment continued after that date, until terminated by repudiatory breach. 
•  Following the alleged termination by fundamental and repudiatory breach, the copyright in the masters had reverted to the artist.  Alternatively, Domino’s conduct was a renunciation of the agreement, which it should not be permitted to remedy, and so the copyright in the masters reverted to the artist.
• The artist also alleged new breaches and claimed that such breaches resulted in the termination of the agreement.

Right to buy or to require a licence

The artist also argued that, if he failed in his claim of repudiatory breach and irremediable renunciation, he should be able to rely on clauses 4.3 and/or 4.4, such that he should be entitled to buy the copyright in the masters under clause 4.3 and/or to require a licence of the copyright under clause 4.4.

Restraint of trade / copyright infringement

In the alternative, if his case on continuing exploitation obligations failed, the artist also sought permission to plead restraint of trade or copyright infringement.

Legal arguments

Express duty to exploit

Domino argued that any construction that attempted to impose a continuing obligation to exploit the masters was “untenable in the light of the wording of the contract and its clear and ordinary meaning”.  The word "release" described a commercial launch as opposed to a continuing exploitation, and that would have been obvious to the parties and their lawyers at the relevant time.  Domino noted that, while the obligation to release required a “genuine commercial release”, which could not be satisfied by a momentary release and withdrawal, it did not involve a continuing obligation to exploit.  Domino sought to rely on Panayiotou v Sony Music Entertainment (UK) Ltd,[2] particularly in relation to Mr Justice Parker’s summary of the recording industry in the 1990s, in which he commented it was rare for a record company to accept a positive obligation to exploit after release.  In addition, the defence relied on the specific wording of the agreement, as clauses 4.1 and 4.2 provided that "release" must happen "within specified time frames", and failure to do so could lead to termination of the recording term.  This wording was inconsistent with Mr Hebden’s proposal of a continuing obligation to exploit.

Mr Hebden submitted that the label’s construction of clauses 4.1 and 4.2 was absurd and would entitle Domino to satisfy its release obligations “by placing one CD on a shelf briefly and then removing it again”.  He argued that without evidence the court could not decide what a “genuine commercial release” requirement would have involved in 2001.  The findings from Panayiotou represented only a summary of the factual position as understood in the early 1990s and was not significant for the position in the early 2000s.  Nonetheless, he said it was arguable that releasing the material digitally and then withdrawing the masters from digital service providers was inconsistent with the concept of a “genuine commercial release”.

Implied duty to exploit

Domino argued that an assignment of copyright does not convey with it an implied obligation to exploit, and that the implied term pleaded failed the necessary tests for implying a term.  Domino referred the court to three authorities.

(a)             In Nichols v Amalgamated Press,[3] the Court of Appeal found that the assignment by a composer to a music publisher of the copyright in songs involved no implied obligation on the publisher to publish the songs.

(b)             In Schroeder Music Publishing v Macaulay,[4] the House of Lords held that the assignment by a composer to a music publisher of the copyright in musical works composed over a considerable period did not mean that the publisher could not simply place the compositions "in a drawer and leave them there".  Although Nichols and Schroeder both involved music publishing agreements, Domino asserted that “the principle that there is no implied obligation to exploit must apply at least as strongly to assignments where the copyright assigned is only that in the sound recording”.

(c)             In John v James,[5] the claimants sought rescission of publishing and recording agreements under which they had assigned the copyright in compositions and recordings.  The claim was based on undue influence, and the defendants contended that the agreements included an implied term to use reasonable diligence to exploit the works.  Nicholls J said the express terms of the recording agreement tended against such interpretation and held that, even if the term were implied, the obligation would have been “so loose and imprecise that it would have afforded the claimants little protection”.

Mr Hebden countered that the implied obligation satisfied all of the necessary tests for implying a term, namely that the obligation proposed was: (i) fair and reasonable in the light of the state of the music industry at the relevant time and the nature of the obligations involved; (ii) required for business efficacy of the contract (or was indeed obvious), on the basis that an obligation requiring mere initial release (and nothing more) would produce absurd results; and (iii) entirely consistent with clauses 4.1 and 4.2 on their proper construction.  As to the authorities relied on by Domino, Mr Hebden disputed their weight and argued that the three cases were distinguishable and related to different agreements and factual circumstances; accordingly, the jurisprudence lacked clarity, and the court should not refuse permission to amend on a summary basis.

Duty of good faith

Domino argued that the pleading was not properly particularised and had no prospect of success.

Conversely, Mr Hebden stated that the pleading was sufficiently clear, and further clarification could be provided if necessary; indeed, Schroeder had expressly contemplated the possibility of implying such an obligation in appropriate circumstances.  Overall, Mr Hebden believed that this case plainly fell within Schroeder, especially in light of the potential bad faith involved in the circumstances in which the application arose.

Decision

Consistency

First, Treacy J briefly considered whether there was an incoherence in Mr Hebden’s pleadings due to inconsistency with the original pleading. 

•  Domino understood the original pleading to allege that digital exploitation of the masters by download and streaming was in breach of the agreement.  It maintained that the subsequent draft pleading was so contradictory as to be incoherent, as it did not make sense for the artist to allege that both the digital exploitation and the cessation of such exploitation were in breach of the agreement. 
• The artist insisted that the two pleadings were entirely consistent and had simply been misunderstood by Domino.  The original pleading related to breach by a failure to pay royalties at the appropriate contractual rate for digital exploitation, whereas the draft pleading related to breach by failure to use reasonable endeavours to continue to digital exploitation. 
• Treacy J observed that, if this issue were to become relevant at trial, then the varying interpretations of the parties may require further consideration.  Nonetheless, she found no obvious inconsistency between the pleadings such that permission to amend should be refused on grounds of incoherence or self-contradiction.

Duties

Treacy J concluded that it would not be appropriate to refuse Mr Hebden's request to amend his case to plead that the agreement should be construed as including “an express continuing obligation to use reasonable endeavours to exploit the masters by all then-industry-standard means or that, in the alternative, such an obligation should be implied”.  She could not conclude summarily that the draft pleading faced no real likelihood of success, and she drew the same conclusion for the proposed amendment relating to an implied duty of good faith.

To resolve the disagreement on the meaning of the release commitment in the agreement and what a “genuine commercial release” may have required at the relevant time, evidence would probably be needed. Although Panayiotou provided background on this, Treacy J was not content that she sufficiently understood the factual context (including any probable changes to the music industry between the 1990s and 2000s) and so could not find that Mr Hebden's draft amended case had no realistic prospect of success, or that it was merely fanciful.

Treacy J could not surmise that the authorities precluded the possibility that a recording agreement could be interpreted to require continued exploitation, including potentially on the basis of a good-faith obligation.  Given that each of the authorities could potentially be distinguished (as mentioned by Mr Hebden), the law was not sufficiently clear to determine this point on a summary basis, and it could not be concluded that the proposed amendments were clearly unsustainable.

As for the requirements to be satisfied for implying terms, Treacy J was not convinced that Mr Hebden had no realistic prospect of establishing that those conditions could, if necessary, be satisfied.  Without a greater understanding of the factual position of the music industry at the time, Treacy J could not infer that it would have been unfair or unreasonable to expect the defendant to undertake continuing obligations – or that it was unarguable that an obligation to act in good faith could be considered fair and reasonable.  It was uncertain, on the evidence provided, whether the proposed terms to be implied were not, at least, possibly necessary to make the agreement work effectively.  Digital distribution was a part of the parties' relationship under the agreement, and the parties did discuss specific aspects of digital distribution.  So it was not unarguable that a continuing obligation to exploit digitally was consistent with the express terms of the agreement.  In addition, Treacy J did not find the proposed obligation to act in good faith to be so inconsistent with the express terms of the agreement as to be unarguable.

Evidence

Finally, turning to proportionality and the overriding objective, it was not clear whether the amendments proposed would require substantial factual evidence (although some evidence would be required).  Taking into account the potential consequences for Mr Hebden of refusing permission to amend, Treacy J considered that the court was required to grant permission to amend the pleadings in the interests of justice.

Reversion of copyrights

Next Treacy J considered the artist’s argument that the copyright in the masters had reverted (or should revert) to him, either by operation of law or via an alternative route (such as a claim in equity, restitution or unjust enrichment). 

• Mr Hebden stated that the concept that termination for repudiatory breach restores to the parties any rights that are not "rights unconditionally acquired" was well established.  Although no authorities were provided to the court mirroring the circumstances of this case, Mr Hebden relied on Crosstown Music Co LLC v Rive Droite Music Ltd[6] to assert that there is no firm rule against reversions of copyright.  He also submitted that the assignment of copyright under the agreement was conditional on the label’s fulfilment of its continuing obligations, and express provisions in the agreement made clear that the assignment itself was not unconditional.
• Domino said the proposed pleadings were “nonsensical” and had “no prospect of success at trial”.  It maintained that, although some aspects of the agreement were ongoing, the obligation to release or promote the masters did not survive the term and any other interpretation would be inconsistent with clause 4 of the agreement.  Nonetheless, Mr Hebden's sole remedy for failure to release was provided for clauses 4.3 and 4.4, and he could not terminate the agreement for breach unless he served the required notice and the label subsequently failed to take steps to remedy the notified breach. Domino proposed that Mr Hebden’s stance on legal reversion was based on a misreading of Crosstown.  It was not disputed that a reversion of copyright could take place where it was contractually provided for: the issue in dispute was whether such a reversion could take place purely by operation of law.
•  Treacy J sympathised with Domino’s submissions, commenting that the authorities provided by Mr Hebden “seemed unlikely ultimately to support the conclusions he sought to draw as to reversion at law”.   Yet the “arguments were made with some conviction”, and so Treacy J could not conclude that they were “fanciful or clearly unsustainable”.  Taking into account her findings regarding the proposed amendments as to breach and given that the arguments on this point would not require significant evidence at trial, Treacy J again found that it would not be appropriate to refuse Mr Hebden permission to amend his particulars of claim, and that, on balance, the overriding objective was best served by permitting the amendment. 

Restraint of trade / copyright infringement

Taking into consideration the requirements of Part 17 of the CPR and the overriding objective, Treacy J considered it inappropriate to grant Mr Hebden permission to introduce a new case on restraint of trade. This was partly because of the significant legal difficulties that the case would face, and partly because of the difficulties that Mr Hebden would face in obtaining a useful remedy likely to give the claim utility in the context of the action as a whole.  Treacy J also considered the probable disproportionate cost and time burdens on the parties, the additional pressure on court resources and fairness for other litigants.

As Treacy J decided that the restraint-of-trade claim would not be included in the case, Mr Hebden’s copyright-infringement claim, which presupposed that the agreement was void from the outset, could not possibly succeed, and so permission for that proposed amendment was also refused.

Strike-out / summary judgment

Given that the proposed amendments in the application were refused for the restraint-of-trade pleadings but granted for the other grounds, there was no need to address the defendant’s application for strike-out and/or summary judgment.

Comment

It is worth noting that, due to the complexity of the case, the parties discussed whether it should be transferred into the Chancery Division.  Yet Mr Hebden insisted that he could only afford to continue the litigation if it remained in the IPEC.

Labels might be surprised that, although sceptical, the judge did not rule out a reversion of copyright in this case.  Historically, labels have taken great pains to ensure that, even if a recording term can be terminated, the copyright in the masters would always remain with the label.  Most labels consider themselves the “producer” in the copyright sense, and so the first owner of the copyrights in any event.  As such, even if a concession of that sort were made to an artist (which is unlikely to happen in a conventional record contract), a label would generally expect any right for an artist to require a re-assignment to be governed by express contractual terms, and not to be an automatic result of an alleged breach, but subject to notice and in any event subject to a cure period.

This case also turned on a pervasive issue in recording contracts, i.e. the extent to which a label is (or is not) required to release the artist’s recordings.  Labels have historically succeeded in giving rather limited assurances to artists about releases, as the labels have usually taken the position that the decision to release a given record, and the extent of release, is ultimately a matter for the label’s commercial discretion.  That can be particularly relevant in the case of an exclusive recording agreement where the recordings are yet to be made, as there is no guarantee that the future tracks will be hit records, even for an established artist with a strong reputation.  And then the decision to keep distributing a record has traditionally been viewed by a label as a further matter of commercial judgment, as public demand for a given recording can often wane over time.

Artists with some clout have often pushed for at least some form of core commitment (e.g. a specified means of release within defined key territories), and perhaps some lighter-touch assurances about minor territories.  But the literal contractual commitment has usually been a one-off release commitment per album, and a continuing release obligation has not typically formed part of conventional recording contracts.  Labels often point to a de facto comfort for the artist that it is very much in the label’s interest to exploit recordings (and to keep exploiting them) to get a good return on its investment in production, marketing and distribution costs. 

So labels might be alarmed if specific release commitments start being interpreted by the courts as imposing wider and/or ongoing release obligations.  Artists might consider, on the other hand, that digital release commitments can be relatively less onerous (and less risky) for labels than physical distribution, and may welcome some form of implied assurance that their tracks will at least remain available for streaming and/or downloads.

So it will be interesting to see whether this case proceeds and, if so, what a court might find.  It is worth noting here that, so far, the IPEC has only given a rather qualified appraisal: the finding that the artist’s proposed amendments were considered “not merely fanciful” does not necessarily mean that the artist would eventually succeed in his arguments over release duties. 

Also, the meaning of a recording contract is inherently a question of fact in each case, which means that, even if the artist were to succeed, it would arguably not set a precedent for recording contracts more generally – especially historic contracts, which each need to be assessed in accordance with the factual matrix that existed at the time of entry into the contract.

Written for Entertainment Law Review.