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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Union Music Ltd & Anor v Watson [2002] EWCA Civ 680 (29 April 2002) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2002/680.html Cite as: [2002] EWCA Civ 680

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IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
MANCHESTER DISTRICT REGISTRY
(HIS HONOUR JUDGE HOWARTH, Sitting as a Deputy High Court Judge)

		Royal Courts of Justice Strand London WC2 Monday, 29Th April 2002

Monday, 29th April 2002

1. LORD JUSTICE ROBERT WALKER: This is an interlocutory appeal in the course of hotly contested litigation between parties in the entertainment industry. In fact the issue on the appeal is doubly interlocutory since it is an appeal from a ruling that Mr Russell Watson (the first defendant in the action) should make an election before proceeding with his application to have the second claimant, a company called Arias Limited ("Arias"), struck out as a party in the proceedings. That ruling was made by His Honour Judge Howarth on 3rd December 2001 when he was sitting at Manchester as an additional judge of the Chancery Division.
2. I have to say that I have grave doubts whether this appeal, and the events leading up to it, reflect the spirit of the new Civil Procedure Rules or are likely to assist the overriding objective. They have already resulted in the loss of the trial date and they may prove to be a little more than interlocutory skirmishing for its own sake. However, the court gave permission to appeal and this court cannot say "a plague on both your houses", however much it might be inclined to do so.
3. The background to the matter can best be explained by identifying and introducing the parties. I start with the first defendant, Mr Russell Watson, who is the appellant in this court. According to a paragraph of the particulars of claim, which is admitted:

"In May 1998 Mr Watson was a little known talent (singing largely on a casual basis in working men's clubs) impecunious, and living in a council house in Salford."

4. He is now a well-known performer of popular opera. His album "Russell Watson - the Voice" was No.1 in the United Kingdom classical charts. The action is about which promoters and managers are entitled to share in his success.
5. The first claimant, Union Music Limited ("Union"), is a company incorporated (according to the witness statement of Mr Christopher Sorrel, a partner in Wacks Caller, Union's solicitors) as a joint venture between Mr Keith Chadwick (who claims to have "discovered" Mr Watson) and Mr Ian Boasman (who was to assist with finance). Mr Chadwick is no longer a director or shareholder of Union, his place having been taken by a company called Lonecroft Plc. Wacks Caller was joined as a respondent to Mr Watson's strike out application.
6. The second claimant, Arias, is at the centre of the controversy with which this appeal is concerned. It was incorporated on 17th July 1998 for the stated purpose of promoting, managing and exploiting Mr Watson's talents. It has 100 issued shares, 51 held by Union and 49 held by Mr Watson. Initially its directors were Union, Mr Watson and his wife Mrs Helen Watson. Unhappily Mr and Mrs Watson have separated and Mrs Watson resigned as a director on 7th September 2001, after the commencement of the action (which was on 22nd December 2000).
7. The other matter at the centre of the controversy is a shareholders' agreement entered into on 5th August 1998 between Union, Mr Watson and Arias. The terms of the written agreement, and some oral variations said to have been made to it at a board meeting of Arias on 31st March 1999, are pleaded in the particulars of claim. I need not go into them at this stage.
8. The second defendant is a company called Blacknight Limited ("Blacknight"). It is part of the Cliff Richard organisation. According to the particulars of claim there was on 21st June 1999 a written although unsigned agreement between Union, Arias and Blacknight. Union and Arias agreed to make available to Blacknight Mr Watson's exclusive audio and audio-visual recording services, and assigned copyright and other rights to Blacknight in all such recordings, on terms under which Arias was to receive 80 per cent of the net income from exploitation of the recordings and 90 per cent of all other income generated by Mr Watson. The defence does not admit that this agreement was entered into.
9. The particulars of claim allege that in November 1999 Mr Watson entered into his own agreement with Blacknight, Blacknight having in the meantime (on 5th August 1999) entered into an agreement with Decca Record Company Limited. They also allege that Mr Watson is in breach of his fiduciary or contractual obligations to Arias, and that Blacknight is in breach of its agreement to pay sums due to Arias, and is liable for inducing Mr Watson to act in breach of his fiduciary and contractual obligations. There is also a restitutionary claim for expenses and remuneration.
10. In his defence and counterclaim Mr Watson has contended that the shareholders' agreement dated 5th August 1998 is unenforceable as an unreasonable restraint of trade for reasons set out in paragraph 17 of the defence and counterclaim. Alternatively it is pleaded that it should be set aside as procured by undue influence, or as an unconscionable bargain. The restitutionary claim is denied, among other things, on the basis of an unspecified change of position. The defence also contends (and this is of central importance) that:

"The claimants' solicitors have no authority to act on behalf of [Arias] (even on the claimants' own case) and [Mr Watson] reserves the right to claim the wasted costs incurred as a result of the misconceived claim purportedly brought by [Arias]."

11. The reference to the claimants' own case appears to be a reference to paragraph 9 of the particulars of claim, which is in the following terms:

"The Board of Directors of Arias is presently controlled by Mr Watson and his wife. Nevertheless, the majority shareholder is Union. It is the wish of Union, as the majority shareholder in Arias, that Arias commence, and continue, these pleadings as against Mr Watson. Accordingly, by its participation in these proceedings Union authorises, and ratifies, the commencement and continuation of these proceedings by Arias against Mr Watson. Granted the terms of Article 40 of Table A Mr Watson has the ability to make any general meeting of Arias inquorate. So far as may be necessary, Union as the majority shareholder in Arias would seek directions from the Court under Section 371 of the Companies Act 1985 for the holding of a quorate meeting of Arias so that the commencement, and continuation, of these proceedings could be authorised by Arias in general meeting."

12. Section 371 of the Companies Act 1985 does confer that power on the court, and the court has a wide discretion to make such order as it thinks just. That discretion is not however unlimited: see Harman v BML Group Limited [1994] 1 WLR 893. The claimants' advisors have from the outset of the matter referred to the possibility of making an application under section 371 and two applications have been made but neither has yet been heard. The live application is, we were told, to be heard in June, and there is also a requisition for an extraordinary general meeting under section 368 of Companies Act 1985. On the hearing of Mr Watson's application to have Arias struck out Mr Edward Bartley-Jones QC (appearing then, as today, for Union and Wacks Caller, with Mr David Casement - not, it is to be noted, appearing for Arias itself), wished to argue that a section 371 application would in fact be unnecessary, in the light of clear evidence as to the position taken by Union as 51 per cent shareholder in Arias. That point of company law seems to be controversial, see for instance Breckland Group Holdings Ltd v London and Suffolk Properties Ltd [1989] BCLC 100. But the argument on the preliminary point about election filled the time available before the judge on 3rd December 2001, and the judge and counsel agreed that further argument would have to wait for another day, after the hearing of this appeal. It seems to me that if at all possible all the outstanding issues should now come before Judge Howarth with a view to getting the action ready for trial at last.
13. The point on election (which the judge described as "a very simple point, a simple sounding point at least") was, in his words at the outset of his judgment, whether Mr Watson:

"... should be put to his election as to whether or no he relies upon the terms of a shareholders' agreement, or whether or no he is asserting that the shareholders' agreement is now void, it having been voidable and having been avoided by him."

14. Later, the judge paraphrased Mr Bartley-Jones' argument as being that:

"... if Mr Watson is relying on that agreement it is said then he cannot have his cake and eat it, or if one wants to be a little less user-friendly in terms of ordinary speech, he cannot approbate and reprobate."

15. The judge, relying especially on the decision of Sir Nicolas Browne-Wilkinson V-C in Express Newspapers Plc v News (UK) Ltd [1990] 1 WLR 1320 held that that principle should be applied. His decision was expressed in paragraph 1 of the perfected order in these terms:

"The First Defendant is required to elect before commencing the strike out application whether he accepts or denies the substantive validity of the Shareholders' Agreement."

16. Before going into the judge's reasons I should, I think, say rather more about the terms of the shareholders' agreement and how its validity is challenged.
17. As is often the case with shareholders' agreements, it contains a variety of provisions aimed at different purposes. Some of the clauses contained material which simply duplicated provisions to be found in Arias' memorandum and articles. Then there were what might be called typical joint venture clauses. Clause 6 (which was much relied on before the judge) prescribed a large number of actions or activities, in 18 subclauses, which were to require the prior written consent of both shareholders. Clause 7 restricted every type of disposal of shares, and clause 10 contained a general undertaking to exercise voting rights in accordance with, and to achieve the purposes of, the agreement.
18. There were three clauses of a quite different nature, embodying the essential bargain between Mr Watson as the performer and Arias and Union as providers of promotion and management services. These were clause 5, which contained an assignment by Mr Watson of worldwide copyright, including all subsidiary rights, in his performances, and an agreement by Mr Watson to provide his services; clause 11, which contained restrictive provisions binding Mr Watson (this clause must be read with clause 22, providing for severability of invalid provisions); and clause 16, providing for non-disclosure of information.
19. It will be in mind that Mr Watson seeks to challenge the agreement on two main grounds of a different character: unreasonable restraint on trade on the one hand, and undue influence or unconscionable bargain on the other hand. Success on restraint of trade would lead to all or some of the provisions being held unenforceable. Success on undue influence or unconscionable bargain would lead to an order setting aside the agreement on equitable terms, which might well include the sort of restitutionary relief which is separately claimed at the end of the particulars of claim. Whatever the outcome of the action, Arias and shareholdings in Arias would not simply disappear: their future would have to be settled either by agreement between the parties or further proceedings in court.
20. The judge gave an extempore judgment and it is not, with all respect to him, easy to follow all his reasoning. But it is clear from page 5 of the transcript, and it is even clearer from the skeleton argument used below by Mr Vernon Flynn (who appeared below for Mr Watson and in this court has been led by Mr Clive Freedman QC) that Mr Watson's case, on his strike-out application, was based first and foremost on the provisions of clause 6 of the shareholders' agreement, which I have already referred to. He relied in particular on clause 6.1.1 (appointment of any agent), clause 6.1.4 (borrowing money in excess of £1,000 - it was said that litigation by Arias would necessitate heavy borrowing), clause 6.1.8 (entering into any commitment over £1,000) and clause 6.1.16 (acts likely to lead to winding-up). Below, Mr Flynn wished to rely on these provisions to argue that it was impossible for Arias effectively to ratify the action commenced in its name without proper authority. He also argued that the deadlock could not be solved by an application under section 371, citing for that purpose Harman v BML Group.
21. We have heard no argument at all on the point in this court, but I am not convinced that Harman v BML Group Ltd would necessarily cover this situation. In that case Dillon LJ emphasised that he was dealing with entrenched class rights, not with what he called "ordinary Table A quorum provisions" (see at p 896). However he did also say (in the context of parallel proceedings under section 459 of the Companies Act 1985) that it was "not for the court to make a new shareholders' agreement between the parties and impose it on them."
22. So the outcome of the pending application under section 371 may not be a foregone conclusion. For my part I express no view at all as to the likely outcome. The fact is that a section 371 application has been in the air since the particulars of claim were first put in on 22nd December 2000 (about 16 months ago) but none has yet been heard, nor has there been any other effective action to ratify the proceedings on behalf of Arias.
23. In these circumstances, I cannot help feeling that Mr Flynn's line of argument before the judge may to some extent have amounted to trying to clear the second or third hurdle in his path before he got over the first. Had he relied simply on the absence of board authority, without trying to establish pre-emptively the impossibility of any future ratification, he might not have had to rely on clause 6 of the shareholders' agreement at all. But he did wish to rely on clause 6. He put it in the forefront of his argument. As Mr Bartley-Jones has said in his skeleton argument in this court:

"It is vital to note... that Mr Watson's strike-out application depends entirely, on the enforcement of the agreement as against Union and Arias."

24. It was on that basis, as I read the judgment, that the judge concluded at page 10 of the transcript that:

"If [Mr Watson] seeks to rely on the provisions of the shareholders' agreement, it does seem to me that by seeking to use that not just as a ground of defence but as a sword for striking out the name of Arias as one of the claimants, he is asserting, inevitably, that the shareholders's agreement is still valid and binding. It seems to me he does have to elect between doing so."

25. In this court the skeleton arguments on both sides have referred to much more authority than was cited before the judge. I am inclined to think that the most relevant proposition, and possibly the only one needed, is Lord Wilberforce's well-known observation in Johnson v Agnew [1980] AC 367 at 398:

"Election, though the subject of much learning and refinement, is in the end a doctrine based on simple considerations of common sense and equity."

26. The authorities, especially the decisions of the House of Lords in United Australia Ltd v Barclays Bank [1941] AC 1 and Johnson v Agnew and that of the Privy Council in Personal Representatives of Tang Man Sit v Capacious Investments Ltd [1996] AC 514, show that there is a clear distinction in principle between election between substantive rights and election between remedies, although inevitably there are cases in which the two become confused. Sometimes the need for an election is another way of describing a situation in which a litigant, if he takes a particular course, will be at risk (sometimes amounting to a near certainty) of having affirmed or acquiesced in a transaction and so lost his right to challenge it. There is, I think, a strong element of that in this case. Sometimes there is an element of abuse of process and sometimes the need for an election is little more than a matter of case-management (as for instance with a submission of no case to answer). There is, I think, something of that also in this case.
27. Mr Freedman has argued in this court that his client is entitled to run alternative cases which are not mutually exclusive, and that his client has not yet obtained either a judgment or any benefit from his conduct; nor has he misled the other side about his position. All that may be so; but Mr Watson is poised on the brink of a pre-emptive strike-out application which may have a decisive effect on the whole action, and the springboard on which he is poised is clause 6 of the shareholders' agreement. If he proceeds with his application in such heavy reliance on clause 6 it is hard to see, whatever the outcome of the application, how he could resist an amendment to the reply and defence to counterclaim pleading affirmation and acquiescence. The judge's order has had the effect of enabling and requiring him to make an informed choice, rather than proceeding with his application regardless, and possibly having occasion to regret it.
28. In deference to Mr Freedman's skilful submissions I must comment briefly on some of the other authorities which were cited. The decision of the Vice-Chancellor in Express Newspapers Plc v News (UK) Ltd was a decision on the unusual, and fairly extreme, facts of the case, but it embodies a general principle. Indeed the principle is so general and so hard to argue with as a general proposition that it needs careful handling. That point was very clearly made by Lord Atkin and Lord Wright, among others, in Lissenden v Bosch [1940] AC 412 at pages 429 and 435 respectively. At page 435 Lord Wright quoted Lord Esher MR in Yarmouth v France (1887) 19 QBD 647 at 653:

"I detest the attempt to fetter the law by maxims. They are almost invariably misleading; they are for the most part so large and general in their language that they always include something which really is not intended to be included in them."

29. Lord Wright then himself continued:

"Indeed these general formulae are found in experience often to distract the Court's mind from the actual exigencies of the case, and to induce the Court to quote them as offering a ready made solution. But it is not safe to act upon them unless and to the extent that they have received definition and limitation from judicial determination."

30. Banque des Marchands de Moscou v Kindersley [1951] Ch 112 contains (at pp 119 to 120) a valuable statement by Sir Raymond Evershed MR, with various illustrations, which I need not set out in full, as to the need to confine the doctrine of not blowing hot and cold within its proper limits. On the facts before this court in that case, which concerned a Russian bank which had long since been dissolved under Russian law but was said to have both assets and liabilities in England, there was no unfairness in allowing alleged debtors in this country to claim that the bank no longer existed, but also to claim that if it did exist they were creditors and not debtors. The Master of the Rolls was careful (at p 119) to limit his observations about the need for the putative elector to have taken a benefit to a case such as that was before him. Certainly in many cases the receipt of a benefit will be the factor which makes it obviously unfair for the person required to elect to act in an inconsistent way. But the Master of the Rolls was careful to limit the proposition to a case of the sort then before him.
31. First National Bank Plc v Walker [2001] 1 FLR 505 was the culmination of a three-cornered dispute between a wife, her divorced husband and a bank which had made an advance, for the ex-husband's business purposes, on the security of the matrimonial home. The Court of Appeal held that (in circumstances which I need not specify in detail) it was no longer open to the wife to allege undue influence as a ground for resisting possession. Sir Andrew Morritt V-C (with whom Chadwick and Rix LJJ agreed) stated (at paragraph 37) that pleadings are inherently liable to be amended but that the wife's settlement with her ex-husband was an irrevocable step. The Vice-Chancellor said at paragraph 54:

"I do not think that the label to be attached, whether estoppel, approbation and reprobation, abuse of the process, affirmation or release is of any importance, though on the facts of this case I am inclined to think that all of them apply."

32. Mr Freedman also referred to Phillips v Brewin Dolphin Bell Laurie Ltd [1999] 1 WLR 2052, in which in an insolvency context, and on complicated facts, a question arose whether two commercial agreements could be regarded as one transaction for one purpose, but as two transactions for another purpose. I do not think the case affords us much assistance, especially as the House of Lords have since (while upholding the Court of Appeal) taken a different approach (see [2001] 1 WLR 143).
33. These cases illustrate the versatility of the general principle (which does not depend, as the Vice-Chancellor made clear in the First National case, on any precise or technical classification). The principle depends on common sense and fairness; fairness to both sides, I would add, since the judge's order, even if unwelcome to Mr Watson, stops him from proceeding blindly into what might prove to be a trap. The application of the principle also depends to a high degree on the facts of the particular case.
34. Mr Freedman referred to some authorities which recognise that an apparent election might be revocable, for instance a decision to seek specific performance of a contract. But at this stage of this particular litigation the time had come to limit the parties' freedom to indulge in interlocutory skirmishing. For these reasons I think that the judge was right in his general approach.
35. Had the matter been argued differently, he might have thought it right to restrict his order by relating it specifically to reliance in the strike-out application on clause 6 of the shareholders' agreement. I have in mind that clause 6 might possibly survive under the severance clause, even though other parts of the shareholders' agreement were struck down as an unreasonable restraint of trade. However, the argument has not proceeded on those lines and indeed we have not found it necessary to call on Mr Bartley-Jones. It would therefore obviously be inappropriate for this court to tinker with the judge's order. In the matrix of the matter as it was argued before him, his order was a fair resolution of the essential issue. I would dismiss this appeal.
36. In doing so I would revert to what I said at the beginning of this judgment about the spirit of the Civil Procedure Rules and the overriding objective. In Harman v BML Group Plc, referred to earlier, Dillon LJ said at page 898:

"It seems to me obvious that this company is in a situation, with large numbers of legal proceedings started, in which the shareholders are likely to find that their, on the company's, moneys have all been dissipated on the legal costs, and the goose that they hoped to lay the golden eggs has been well and truly slaughtered. There are few companies that can afford the feast of litigation which these parties seem to be looking forward to."

37. I trust that the parties and their legal advisers will take those words to heart.
38. LORD JUSTICE CARNWATH: I agree that the appeal should be dismissed for the reasons given by my Lord.
(Appeal dismissed; cost to be subject to detailed assessment; interim payment of £15,000 in 21 days).