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Date Posted: 03:23:29 06/03/03 Tue
133 Enforceability of agreements with individuals generally
In negotiating agreements with individuals, particular care must be taken, even where the individual is legally represented, to eliminate the possibility of the agreement being unenforceable by reason of its being in restraint of trade, or by reason of its being entered into as a result of undue unfluence or duress.
[215]
134 Superior bargaining power
In A Schroeder Music Publishing Co Ltd v Macaulay1, a distinction was drawn between standard form contracts made freely between parties bargaining on equal terms and standard form contracts which had not been the subject of negotiations between the parties or approved by any organisation representing the interests of the weaker party, but had been dictated by the party which enjoyed superior bargaining power. The court held that in contracts of the latter kind no presumption existed that their terms were fair and reasonable, and the court had to consider all their provisions to see whether the bargain made was fair. In determining whether the bargain made was fair, the court would consider whether the restrictions were both reasonably necessary for the protection of the legitimate interests of the person requiring them and commensurate with the benefits secured to the person accepting the restrictions under the contract. Where restrictions in an agreement combine a lack of obligation on the part of the person requiring them with a total commitment on the part of the person accepting the restrictions which might result (as in the Schroeder case) with, say, a composer earning nothing from his abilities if the composer’s publishers chose not to publish the composer’s works, it would follow that the contract was in unreasonable restraint of trade and therefore void.
1 A Schroeder Music Publishing Co Ltd v Macaulay [1974] 3 All ER 616, [1974] 1 WLR 1308, HL.
[216]
135 Unconscionable bargains
In Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd1, Lord Pearce stated that ‘it is important that the court, in weighing the question of reasonableness, should give full weight to commercial practices and to the generality of contracts made freely by parties bargaining on equal terms’2. In A Schroeder Music Publishing Co Ltd v Macaulay, Lord Diplock stated that ‘if one looks at the reasoning of 19th century judges in cases about contracts in restraint of trade, one finds lip service paid to current economic theories, but if one looks at what they said in the light of what they did, one finds that they struck down a bargain if they thought it was unconscionable as between the parties to it, and upheld it if they thought that it was not’3. Where one party’s bargaining power is sufficiently great for that party to dictate that it will only contract on pre-specified non-negotiable terms (what Lord Diplock referred to in the Schroeder case as a ‘take it or leave it’ situation), Lord Diplock, in that case, stated that although this attitude raises no presumption that it has been used ‘to drive an unconscionable bargain’ with the other party, ‘in the field of restraint of trade it calls for vigilance on the part of the court’ to see that no unconscionable bargain has been struck4.
1 Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269, [1967] 1 All ER 699, HL.
2 Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 at 323, [1967] 1 All ER 699 at 723, HL.
3 A Schroeder Music Publishing Co Ltd v Macaulay [1974] 3 All ER 616 at 623, [1974] 1 WLR 1308 at 1315, HL.
4 A Schroeder Music Publishing Co Ltd v Macaulay [1974] 3 All ER 616 at 624, [1974] 1 WLR 1308 at 1316, HL. The principles outlined in this case were quoted from extensively by the court of first instance in Zang Tumb Tuum Records Ltd v Johnson 10 February 1988 (unreported), and referred to by the Court of Appeal in Zang Tumb Tuum Records Ltd v Johnson [1993] EMLR 61.
[217]
136 Fiduciary duty and undue influence
In O’Sullivan v Management Agency and Music Ltd1, the court found that a fiduciary duty existed between the parties and as a result of that fiduciary relationship ‘the onus was . . . upon those asserting the validity of the agreements to show that they were the consequence of the free exercise of Mr O’Sullivan’s will in the light of full information regarding the transaction’. The court found it significant that Mr O’Sullivan had not received any independent legal advice and found also that the knowledge of the defendant companies and directors that ‘they were dealing with a young and inexperienced man who was content to put himself entirely in their hands and rely entirely on them to give him a fair deal’ created a fiduciary duty. In the circumstances of that case the court found that the agreements executed by Mr O’Sullivan were ‘to be presumed to have been procured by undue influence’, and quoted Lord Chelmsford LC in Tate v Williamson2, who defined the type of relationship in which a presumption of undue influence might arise as being ‘whenever two persons stand in such a relation that, while it continues, confidence is necessarily reposed by one, and the influence which naturally grows out of that confidence is possessed by the other . . .’ The court also considered the validity of assignment of copyright made pursuant to the O’Sullivan agreements and found that ‘the validity of the individual assignments depends on the validity of the agreements themselves, and if the agreements are set aside [there is] no reason why the copyright should not be reassigned . . .’ The statement to the contrary effect by Russell LJ in the Court of Appeal in the Schroeder case was based on a concession by counsel.
In the O’Sullivan case the court also considered the consequences of undue influence and, in particular, the general rule of equity that if a person obtains a profit from that person’s fiduciary position then that person is accountable for that profit. The court quoted Lord Russell in Regal (Hastings) Ltd v Gulliver3: ‘the rule of equity which insists on those who by use of a fiduciary position make a profit being liable to account for that profit in no way depends on fraud or absence of bona fides . . . the liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account’.
1 O’Sullivan v Management Agency and Music Ltd [1985] QB 428, [1985] 3 All ER 351, CA.
2 Tate v Williamson (1866) 2 Ch App 55.
3 Regal (Hastings) v Gulliver (1942) [1967] 2 AC 134n, [1942] 1 All ER 378, HL.
[218]
137 Restraint of trade
In Silvertone Records v Mountfield the court held that there was immense inequality in bargaining power between the defendants and their record company and music publisher1. Although the defendants had at the time of negotiating the contract been advised by a manager and lawyer, the court found that when taken together the terms of the contract prevented the defendants from reaching the public with their work. There was no obligation on the record company to release any record and no restriction at all on the length of the exclusivity term of the agreement. The contract was therefore a restraint of trade and therefore unenforceable.
In 1992 George Michael challenged his recording contract with Sony Music Entertainment (UK) Ltd on the grounds that it was unenforceable as being an unreasonable retraint of trade and that it was anti-competitive and therefore rendered void by virtue Article 81(2) of the EU Treaty2. The recording contract was a renegotiation of an earlier agreement and under the renegotiated contract George Michael received increased advances and royalties.
The court found against George Michael on the gorunds that there was a public interest in upholding agreements reached by way of compromise. The compromise had been genuine, bone fide and freely entered into by George Michael with the benefit of legal advice and the settlement was a compromise of earlier proceedings. The court refused to allow George Michael to reopen issues that had been compromised at the time of the renegotiation. Parker J also found that the terms of the renegotiated contract were reasonable and fair. Under the renegotiated contract George Michael received substantially more money and Parker J stated that ‘the size of consideration may be a positive factor tending to justify the restraint. If the consideration for the restraint is so substantial that by any objective standard it is in the interests of the party receiving the consideration to subject himself to the restraint, then that must . . . be a factor in the direction of justification’.
George Michael’s claim that the agreement was uncompetitive also failed. On the basis of limited evidence put before the court, Parker J found that the agreement did not affect ‘trade between member states’ and did not have as its ‘object or effect the prevention, restriction or distortion of competition in the common market’.
Although the case is likely to be of limited precedential value it is extremely important for advisers to be aware of the effect of accepting recording contracts by way of a settlement arrangement.
Indeed, all the forms relating to this section need careful consideration and adjustment in the light of the foregoing principles. Reference should also be made to the various other authorities in this area3.
[219]
1 Silvertone Records Ltd and Zomba Music Publishers Ltd v Mountfield [1993] EMLR 152.
2 Panayiotou v Sony Music Entertainment (UK) Ltd [1994] Ch 142. For a discussion of European competition law see Paragraphs 10 [15] et seq ante.
3 These include Lloyds Bank Ltd v Bundy [1975] QB 326, [1974] 3 All ER 757, CA (note that the general principle of ‘inequality of bargaining power’ formulated by Lord Denning has been disapproved in National Westminster Bank plc v Morgan [1985] AC 686, [1985] 1 All ER 821, HL); Clifford Davis Management Ltd v WEA Records Ltd [1975] 1 All ER 237, [1975] 1 WLR 61, CA; DPP for Northern Ireland v Lynch [1975] 1 All ER 913, [1975] 2 WLR 641, HL; Shell (UK) Ltd v Lostock Garage Ltd [1977] 1 All ER 481, [1976] 1 WLR 1187, CA; Barton v Armstrong [1976] AC 104, [1975] 2 All ER 465, PC; Multiservice Bookbinding Ltd v Marden [1979] Ch 84, [1978] 2 All ER 489; North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] QB 705, [1978] 3 All ER 1170; Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, [1980] 1 All ER 556, HL; Pao On v Lau Yiu Long [1980] AC 614, [1979] 3 All ER 65, PC; Burmah Oil Co Ltd v Governor and Company of the Bank of England [1980] AC 1090, [1979] 3 All ER 700, HL; B & S Contracts and Design Ltd v Victor Green Publications Ltd [1984] ICR 419, CA; Alec Lobb (Garages) Ltd v Total Oil Great Britain Ltd [1985] 1 All ER 303, [1985] 1 WLR 173, CA; John v James [1986] STC 352; Atlas Express Ltd v Kafco (Importers and Distributors) Ltd [1989] QB 833, [1989] 1 All ER 641.
Referenceshould also be made to the provisions of the Unfair Contract Terms Act 1977 (11 Halsbury’s Statutes (4th Edn) CONTRACT), and to the common law principles as to restraint of trade (see 47 Halsbury’s Laws (4th Edn Reissue) paras 13 et seq).
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