John and Others v James and Others
| Jurisdiction | England & Wales |
| Judgment Date | 25 March 1986 |
| Date | 25 March 1986 |
| Court | Chancery Division |
Chancery Division.
Mr. Mark Littman Q.C., Mr. P.G. Whiteman Q.C., Mr. Alan Boyle, Miss Marlon Smith and Miss Elizabeth Jones (instructed by Messrs. Frere Cholmeley) for the plaintiffs.
Mr. George Newman Q.C., Mr. S.J.L. Oliver Q.C., Mr. Stephen Silber and Mr. Andrew Sutcliffe (instructed by Messrs. Clintons) for the defendants.
Before: Nicholls L.J.
The following cases were referred to in the judgment:
Bartlett & Ors. v. Barclays Bank Trust Co. Ltd. ELR[1980] 1 Ch. 515
Bernhard v. Gahan TAX(1928) 13 T.C. 723
British Transport Commission v. Gourley ELR[1956] A.C. 185
H. Ford & Co., Ltd. v. I.R. Commrs. TAX(1926) 12 T.C. 997
Isaac Holden & Sons Ltd. v. I.R. Commrs. TAX(1926) 12 T.C. 768
I.R. Commrs. v. Newcastle Breweries TAX(1927) 12 T.C. 927
London & Thames Haven Oil Wharves Ltd. v. Attwool (H.M. Inspector of Taxes) TAX(1966) 43 T.C. 491
O'Sullivan & Anor. v. Management Agency & Music Ltd. & Ors. ELR[1985] Q.B. 428
Parsons v. B.N.M. Laboratories Ltd. ELR[1964] 1 Q.B. 95
President of India v. La Pintada Compania Navigacion S.A.ELR[1985] 1 A.C. 104
Rownson, Drew & Clydesdale Ltd. v. I.R. Commrs. TAX(1931) 16 T.C. 595
James Spencer & Co. v. I.R. Commrs. TAX(1950) 32 T.C. 111
The Naval Colliery Co., Ltd. v. I.R. Commrs. TAX(1928) 12 T.C. 1017
Wallersteiner Ltd. v. Moir (No. 2) ELR[1975] 1 Q.B. 373
Worsley Brewery Co., Ltd. v. I.R. Commrs. TAX(1932) 17 T.C. 349
This was an application for the court to determine certain questions concerning the formulation of accounts to be taken in order to quantify sums payable by the defendants (DJM) to the plaintiffs (J and others) in respect of the amounts wrongly retained by DJM from the sale of records under certain licensing and publishing agreements.
J, a song writer and performer, two companies owned by him and T, his lyricist, entered into various publishing, management and recording agreements with companies in the DJM group. Under the publishing agreements, J and others were entitled to assignment of copyright and payment of royalties on UK and foreign sales. To promote record sales in the UK, Europe, Australasia and the USA, DJM entered into licensing and sub-publishing arrangements whereby the licencees and sub-publishers retained a percentage of receipts. Some of those arrangements were with foreign subsidiaries of DJM with the result that the amounts retained within the DJM group were greater than where the arrangement involved an independent company.
J and others brought an action claiming that they were entitled to recover the sums retained by DJM subsidiaries in so far as they exceeded the usual commercial sub-publishing rates. Nicholls J. (as he then was) on 29 November 1985 held that DJM was in breach of a fiduciary duty and ordered it to pay to the plaintiffs the amounts wrongly retained.
At a later hearing on the form of the order, DJM claimed that in calculating the amounts to be paid to the plaintiff deductions should be made in respect of (1) all sums paid by DJM to any tax authority, or which would have been paid but for the utilisation of tax losses, group relief, or advance corporation tax, and all other losses and reliefs of a like nature available to DJM in the country in whose tax jurisdiction DJM was subject, in respect of each year or period for which tax was paid or payable by DJM and which was no longer claimable; (2) any tax which would not now be payable by any of the plaintiffs on any sums awarded to them but which would have been payable if such sums had been received at the time they fell due. The defendants also sought a direction that in calculating the amount of any compound interest award, interest should be calculated at the agreed rate "less tax which would have been paid by the defendants".
Held, disallowing all the deductions claimed:
1. The plaintiffs had lost the appropriate percentage of the difference between the amounts they would have received had the DJM companies accounted as they should have done, and the amounts they had in fact received. That was what they were entitled to have made good. The fact that the defendants might have paid tax in the UK or elsewhere on some or all of that difference was irrelevant. If the first specified deduction was allowed the plaintiffs would receive less than they would have done had they received the right sums at the proper times, and the plaintiffs should not be penalised because of the defendants' breach of duty. Besides, the defendants had not convinced the court that payment by them of the sums ordered would not give rise to allowable tax deductions in their hands.
2. The defendants' obligation to account for their profits sprang from the terms of the publishing and recording agreements and that obligation required them to bring into account all the sums received by the various sub-publishers. The obligation was to account for the appropriate percentage of those sums, not the defendants' "profits".
3. Notwithstanding the defendants' willingness to do so, the plaintiffs should not be required to enter into a complex and lengthy enquiry to ascertain what sum had been paid as tax when what was in issue was the payment to the plaintiffs belatedly of sums that the defendants ought to have paid years ago.
4. It was not certain that the award to the plaintiffs would not be subject to tax when it was paid. If the tax deductions were allowed, a complex investigation into the tax positions of several parties in the UK and overseas over many years would be required, which was impractical. Further, that investigation would have to be carried out before the final amount of the sums payable could be fixed. Thus, justice required that no deductions in respect of UK or other tax should be made when calculating the amount of the payments to be made by the defendants. (British Transport Commission v. Gourley ELR[1956] A.C. 185 distinguished; Bartlett v. Barclays Bank Trust Co. Ltd.ELR[1980] 1 Ch. 515 at p. 545 followed.)
5. On the facts of this case, it was unsatisfactory and wrong to introduce into the compound interest calculation the far reaching complexities and difficulties involved in deducting the tax paid on that interest. The retained money would have earned, over the years, a compound and not a simple return for the defendants. In awarding compound interest, the court was seeking to ensure that the defendants did not retain profits for which they ought to account. It was not intended to correspond precisely with the amount of a defendant's profits but was a convenient yardstick.
Nicholls L.J.: The judgment delivered in this action on 29 November 1985, necessitated the taking of certain accounts in order to quantify the sums payable by one or more of the defendants to the plaintiffs. I now have before me, in addition to the question of costs, some questions concerning the formulation of those accounts. A large measure of agreement has been reached between the parties and I am grateful for the care taken in the preparation of the draft minutes of order which identify clearly the areas of disagreement. In this judgment I shall use the same abbreviations as in the main judgment.
The first question is whether interest payable on the sums found due on the taking of the accounts should be simple or compound. The basis on which I have decided that the defendants in question are liable to the plaintiffs is that their failure to account for certain sums was a breach of the fiduciary obligations of DJM and TRC under the publishing and recording agreements. Thus, unlike the normal position, this is a case in which the court has jurisdiction to order the payment of compound interest (see Wallersteiner v. Moir (No. 2) ELR[1975] 1 Q.B. 373).
The principle upon which courts of equity act in awarding compound interest is not by way of punishment of the defendants, nor is it to compensate the plaintiffs for loss of profit, but in the words ofBuckley L.J. in the Wallersteiner case (at p. 398) it is "in order to ensure as far as possible that the defendant retains no profit for which he ought to account".
I was referred to the decision in O'Sullivan & Anor. v. Management Agency & Music Ltd. & Ors. ELR[1985] Q.B. 428, where subject to one agreed exception, the Court of Appeal reversed the order of the trial judge that compound interest should be paid to the plaintiff. At p. 461 Dunn L.J., with whom Fox L.J. agreed, distinguished that case from the Wallersteiner case on the basis that in Wallersteiner the court presumed that the money kept by Dr. Wallersteiner was worth to him the equivalent of compound interest at commercial rates with yearly rests at least, whereas in the O'Sullivan case accepting that the money was used by the defendants for their purposes, part of it must have been used for the benefit of Mr. O'Sullivan himself. Waller L.J. said this at p. 473:
Should the interest be compound? When the question of compound interest was raised the judge was referred only to Wallersteiner v. Moir (No. 2) ELR[1975] 1 Q.B. 373. This was a case of very special facts and quite different from the present case. It was also a case decided at a time of low, steady rates of interest. The reason for awarding compound interest was that the interest which had not been paid must be taken to have been used by the defaulting party to make a profit for himself. We have not been referred to any other modern case where compound interest has been involved. In this case there is a joint venture and the effect of the joint venture would mean that in part at any rate the interest was being used to further the joint venture. Furthermore whilst compound interest is payable in equity matters it must be borne in mind that at common law it has been made unlawful and this indicates the nature of the circumstances required to justify it. I am of opinion therefore that this being a joint venture with one reservation I would not award compound interest.
His one reservation concerned secret...
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