Columbia Tristar Home Video (International) Inc. v Polygram Film International B.V.

An obligation to maintain complete books and records for audit purposes may extend beyond documents physically held by the contracting party. In an accounting context, it includes contemporary invoices, receipts and other documents evidencing individual cost items. The obligation may be performed by maintaining records through producers or distributors, provided the counterparty receives access to them for the contractual audit. The scope is determined by the wording, immediate context and purpose of the obligation, together with the relevant commercial background.

Polygram Film International B.V., as licensor, claimed unpaid advances from Columbia Tristar Home Video (International) Inc. under an output agreement for film video rights. The agreement required Polygram to maintain complete books and records concerning actual negative cost and theatrical prints and advertising expenditure, and gave Columbia audit rights.

The High Court held that Polygram only had to maintain records in its possession and entered judgment for the unpaid advances, dismissing Columbia’s counterclaim. Columbia appealed on the construction of the record-keeping and audit provisions. The central issue was whether the obligation extended to underlying expenditure documents held by producers or distributors and, if so, whether access to those documents could satisfy the obligation.

1. Appeal allowed on Issue (2). The obligation in clause 17(d) to maintain complete books and records concerning actual negative cost and P&A expenditure was not confined to documents physically held by Polygram.
2. In the context of accounting for production and promotional costs, complete books and records included contemporary documents such as invoices, receipts and other documents evidencing expenditure on individual items of direct negative cost and individual items making up actual P&A spend. The purpose of the provision was to enable Columbia to determine the accuracy of statements furnished to it and to protect its auditing rights.
3. The obligation could be construed as requiring Polygram to maintain the records itself or through others, or to cause them to be maintained. Polygram did not necessarily have to possess the documents personally. Where relevant records were held by producers or distributors, its obligation could be satisfied by affording Columbia access to them at the place where they were located, for the contractual period and purpose of examination.
4. The commercial background did not justify restricting the obligation to documents held by Polygram. The parties’ knowledge that producers and distributors generated the underlying records did not displace the express requirement for complete records. Nor did customary production audits make Columbia bound by their findings.
5. The Court of Appeal did not decide whether Polygram had breached the obligation, whether any breach had been remedied by arrangements for access, or whether Columbia had suffered substantial damage. Those matters, including whether there was an arguable defence sufficient to avoid summary judgment or justify conditional leave to defend, were remitted for further consideration by Walker J. Lords Justices Otton and Stuart-Smith agreed with Potter LJ.

• Court of Appeal (Civil Division) allowed the appeal concerning the construction of clause 17(d) and directed that the remaining matters be considered further by Walker J.
• High Court of Justice, Queen’s Bench Division, Commercial Court held that Polygram only had to maintain records in its possession, entered judgment for the unpaid advances and dismissed Columbia’s counterclaim.