Straw v. Jennings – US record label wins in distribution profits dispute

The disputed agreement

Blix is an independent US record label. It is the exclusive licensee of the worldwide rights to distribute Eva Cassidy’s music. In 1998, after releasing the multi-million-selling album Songbird, Bill Straw (Blix’s owner) entered into an agreement with Martin Jennings’ Hot Records group[2] to promote and distribute Eva Cassidy’s music in the UK and Australia. Hot was both a record label and distributor.

The parties agreed orally to split the profits from their joint venture equally. They subsequently varied this to allow Hot to take an additional 30% distribution fee, on the basis that the profit element of the distribution fee would be split equally with Blix. None of this was recorded in a formal written agreement. The parties subsequently fell out over sums payable to Blix, and the agreement was formally terminated by Blix in 2006.

Key areas of dispute

The main dispute related to Blix’s half share of the distribution profits, which it claimed amounted to around £1.6 million plus interest. Aside from various factual disagreements, the dispute turned on four main issues:

(a)           whether Blix was liable for any distribution losses incurred by Hot (to the extent that any were suffered);

(b)           the periods for which profits or losses should be calculated;

(c)           whether the court was in a position to determine the profit split, or whether the matter should be sent off for a full account to be taken; and

(d)           if the profit split could be determined, what it should be.

There were also separate disputes relating to:

• Blix’s claim for its unpaid share of net profits of the parties’ joint venture of around £175,000, which Hot claimed were subject to set-offs and time-barred; and
• Hot’s counterclaim for copyright infringement concerning compilation and sequencing, artwork, liner notes and track listings on Eva Cassidy albums, as well as a music video that the defendants claimed to have co-authored.

Factual evidence

Given the oral nature of the agreement, witness evidence was of central importance. The judge found Mr Straw to be an honest witness and described Blix’s other witnesses as helpful and straightforward. Conversely, the judge found Mr Jennings, Hot’s principal witness, to be “evasive in the extreme about all matters to do with money”, leading the judge to be very circumspect about all other areas of his evidence.[3]Hot’s other witness, an in-house accountant, was also described as evasive, but was given some credit by the judge for the honest, if somewhat startling, admission that the purpose of certain trust structures put in place by the defendants was to put assets beyond the reach of creditors, including Blix.

Decision

Issue (a): liability for distribution losses

The judge declined to imply a term into the oral agreement that Blix would bear half of any loss incurred by Hot in carrying out the distribution of albums. There was nothing uncommercial in an arrangement under which Hot bore any losses, and the judge did not need to imply a term to different effect in order to give the agreement business efficacy, nor was it obvious to imply such a term. This was because, in its capacity as a distributor (as opposed to its role as a record label), Hot was in no different position than a third party that was providing the same services and so would have to bear its own losses.

Issue (b): accounting periods

As for determining the accounting periods for ascertaining profits or losses on the distribution activities, the judge implied a term into the agreement, in order to give it business efficacy, that Blix would be entitled to receive payment from time to time during the course of the agreement. As Hot had provided distribution profit accounts in 2000 and 2005, the judge did not need to consider whether other accounting periods would be appropriate. The implied term meant, however, that at the end of each relevant accounting period Hot had no right to claw back future losses from profit distributions already made.

Issue (c): was an account required?

As to whether the court could and should determine any sums due under the distribution agreement or, alternatively, order an account of those sums, the judge considered whether the accounts provided by Hot in 2000 and 2005 were sufficiently accurate and reliable, taking into account his finding that at least the 2005 account had been prepared under Mr Jennings’ authority.

The judge found that these accounts provided the best evidence that was ever likely to be available, and that it was wholly unrealistic to think that an account would produce any better material on which a final determination of the sum due could be made. He rejected Hot’s argument that further figures (prepared in 2013 for the purposes of the trial and based on the defendant companies’ statutory accounts) showed that the 2000 and 2005 accounts were unreliable. Those statutory accounts had been subject to “extremely aggressive creative accountancy” and had been prepared for a different purpose.[4]It spoke “volumes” that the accuracy of the 2005 account had never previously been challenged by the defendants up until service of their defence in 2011.[5]

The judge found that Hot had an obligation to account to Blix for 50% of the distribution profit and should have done so many years ago. In the circumstances, he found that it would be a great injustice to Blix for there to be a further long and costly delay in payment and decided against ordering an account. In relation to certain sums that were open to doubt, there was a more proportionate way of resolving those uncertainties than by way of a full account (in light of the overriding objective under the court rules).The judge was also highly critical of the lack of disclosure provided by Hot on accounting issues. Although the judge had ventilated his concerns about Hot’s disclosure during the trial, it was not until the final day of proceedings that Hot produced numerous boxes of documents at court, by which time it was too late.

Issue (d): the amount of distribution profits and other sums due to Blix

In determining the amount due to Blix, the judge adopted the sum admitted to be due in the 2005 account as his starting point (c. £750,000).He then adjusted this sum by adding back various deductions and charges that Hot conceded should not have been made, including notional charges for Mr Jennings’ management time (c. £300,000), as well as significant sums spent by Mr Jennings on a country estate in Sussex and a property in Australia (c. £200,000).The judge could not determine on the limited information disclosed by Hot whether further sums earned in Australia should be repaid.

As to Blix’s claim for joint venture profits of circa £175,000, the judge awarded Blix the whole amount claimed – except for a small proportion of it, which he found was time-barred under the Limitation Act 1980.Key to his decision was an email from the defendants in which they agreed that circa £175,000 was due, but stated that £16,105 was owed to them. He also criticised the defendants’ failure to pay, stating: “It is but one example of Mr Jennings taking every step which was open to him to raise disputes in order to avoid the making of payments which were due.”[6]

Copyright counterclaim

On the copyright counterclaim, although most of the 17 claims were dropped immediately before the trial and two others during it, the judge dismissed all of the remaining claims and was highly critical of the defendants’ approach. He stated that the defendants’ counterclaims bordered on an abuse of process, as they had been raised simply as a “tactical manoeuvre”.[7]He noted that the defendants had ignored his repeated requests to provide even a ball-park value for their claims. A separate counterclaim, relating to assets created as part of the joint venture, was also dismissed.

Effect of Part 36 offers

The judge awarded Blix a total of £2.3 million in relation to the principal sums claimed, as well as interest and a payment on account of its costs.[8]Both interest and costs were greatly enhanced (including an award of indemnity costs) as a result of an offer that Blix had made in September 2012 under Part 36 of the Civil Procedure Rules, which Hot failed to beat. That offer had been repeated in May 2013 following the Jackson reforms, in order to take advantage of the £75,000 penalty sum now available to claimants under CPR 36.14(d).The judge held that the two offers could be looked at together, and that Blix did not have to elect to rely on one or the other. This is the first reported case on the effect of concurrent Part 36 offers of its kind. The defendants sought, but were refused permission to appeal this specific issue, but did not seek permission to appeal any other aspect of the judgment.

The judge did permit the defendants the opportunity to file evidence seeking to justify certain property refurbishment charges and depreciation costs, which they claimed should be taken into account in determining the sums due to Blix. He considered this to be a more proportionate method of dealing with these areas of uncertainty than by the taking of a potentially expensive and lengthy court-ordered account. Additionally, he ordered an account in relation to the distribution-related profits made in Australia, which had been impossible to determine given the lack of information disclosed by the defendants.

Comment

The oral nature of the agreement between the parties required the judge to determine whether certain terms should be implied into the contract. To do so, he applied the usual tests in the context of the rather complicated factual background. He also had to decide whether there should be an account. Where there was insufficient evidence on certain sums, he used his case management powers to find a more proportionate solution. In doing so, he was clearly concerned by the defendants’ behaviour and their lack of disclosure and, in particular, their delay in making payments to Blix.

Defendants should also be wary when considering bringing purely tactical counterclaims that have no independent merit, as the defendants in this case were heavily criticised for doing so. They should also be conscious that a failure to engage in meaningful and substantive settlement negotiations will, particularly after the Jackson reforms, not be viewed at all favourably by the courts: the defendants’ only pre-trial offer was a drop-hands settlement, whereas the claimants comfortably beat their two Part 36 offers.

Finally, given the judge’s ruling on the claimants’ concurrent Part 36 offers, it would be sensible for claimants in ongoing litigation that pre-dates the Jackson reforms to revisit any existing Part 36 offers, with a view to taking advantage of the penalty sum available under CPR 36.14