Zang Tumb Tuum Records Ltd & Anor v Johnson

The validity of a contractual restraint is assessed objectively at the date of the agreement. All contractual provisions must be considered, and restrictions must be reasonably necessary to protect legitimate interests and commensurate with the benefits secured to the restrained party. A lengthy, one-sided recording agreement, giving the company extensive control while imposing exclusive obligations on artists, may be unreasonable even where the industry involves substantial commercial risk. An ancillary publishing agreement may also fail where it imposes additional restrictions without adequate justification. Any defence based on waiver, laches or estoppel is equitable and depends on all the circumstances, including delay, intervening conduct and the balance of justice. The approach in [1974] 1 WLR 1308 was applied.

The recording and publishing companies appealed from orders made by Whitford J after trial of their action and the defendant’s counterclaim. The plaintiffs sought declarations that agreements made with members of the pop group Frankie Goes to Hollywood were valid and enforceable, including an obligation on the defendant, after leaving the group, to enter a further recording agreement.

The defendant contended that both agreements were unreasonable restraints of trade. The judge held the recording agreement unenforceable, treated the relevant leaving-member clause as void for uncertainty, and held the publishing agreement unenforceable. He also directed an inquiry concerning excessive recording costs for a later album.

The appeal concerned construction, restraint of trade, waiver or related equitable defences, and the proper scope of the damages inquiry.

Dillon LJ gave the leading judgment. Mann LJ and Sir John Megaw agreed with his reasons and order.

1. Recording agreement. The court applied the objective fairness and reasonableness approach in Schroeder Music Publishing Co. Ltd. v. Macaulay. The recording agreement bound the artists exclusively for potentially eight or nine years, while the recording company could decline to exercise further options, refrain from releasing records, and retain extensive control over recording decisions. The artists’ obligations were therefore substantially one-sided. The industry’s financial risks and the possibility that successful artists would compensate for unsuccessful projects did not justify the duration and structure of the restraint. The recording agreement was void as an unreasonable restraint of trade.
2. Leaving-member clause and publishing agreement. It was unnecessary finally to determine whether clause 14.2 was void for uncertainty. If the recording agreement as a whole was unenforceable, the clause could not require the defendant to enter a fresh agreement which was itself unenforceable. The publishing agreement assigned worldwide copyright and prevented composition for others for five years. Its best-endeavours and limited reassignment provisions did not justify this additional restriction in the circumstances. It too was unenforceable.
3. Waiver, laches and estoppel. Any defence to reliance on unreasonable restraint must be equitable and assessed in the light of all the circumstances. There is no automatic rule that the objection must be insisted upon at the earliest opportunity. The length of delay, the acts done during the interval, any resulting change of position, and the balance of justice are material. The defendant’s correspondence consistently reserved his position, and the plaintiffs had not shown an unequivocal abandonment or sufficient prejudice. The defence therefore failed.
4. Recording costs and inquiry. Despite unenforceability, the recording company remained accountable for royalties and receipts arising from records actually made and distributed, including any excessive costs wrongly deducted. The judge had not finally found either a breach or the amount of reasonable costs for the second album. He was entitled to direct an inquiry because excessive expenditure appeared probable but could not be quantified at trial. The order was varied to refer to damages, and breach, “if any”.
5. A separate argument based on a fresh agreement or estoppel arising from the parties’ conduct had not been pleaded or raised below and was not open on appeal.

Subject to the variation of the damages inquiry, the appeal was dismissed with costs.

• Court of Appeal (Civil Division) dismissed the appeal with costs, subject to varying the wording of the inquiry into damages.
• High Court of Justice, Chancery Division (Whitford J, 10 February 1988) held the recording agreement and publishing agreement unenforceable as unreasonable restraints of trade, treated clause 14.2 as void for uncertainty, and directed an inquiry concerning recording costs for the second album.