Understanding Commercial Music Contracts: the Place ... - SSRN papers

JOBNAME: No Job Name PAGE: 1 SESS: 1 OUTPUT: Mon Oct 22 10:51:09 2007 /journals/journal/jcl/vol23/04-00316

Understanding Commercial Music Contracts: the Place of Contractual Theory* Steve Greenfield and Guy Osborn† This article is concerned with the application of contract theory to recording agreements within the music industry. It considers whether the economic and social context to the industry and the position of those who seek ‘pop stardom’ deliver contractual arrangements that cannot be adequately explained by either classical or neoclassical contract theory. It further applies relational contract ideas to such contracts to assess whether they provide a more satisfactory explanation for the contractual behaviour.

Introduction Much has been written on the apparent failure of contract law to adequately explain and interpret commercial contracts, particularly with respect to long-term relationships.1 A significant outcome has been the identification of contradictions and discrepancies that cannot be successfully accommodated within a traditional reading of a contract law rooted in the classical model of contract.2 From this critique has emerged an alternative theoretical approach, broadly focused around the idea of relational contracting, that places the context to the relationship ahead of narrow doctrinal rules.3 The entertainment * We would like to thank a number of people who provided feedback and support during the writing of this piece. These include Andy Boon, Roger Brownsword, Stewart Macaulay and John Paterson. All errors are obviously our own. † School of Law, University of Westminster. 1 Of course, ‘explain and interpret’ themselves have a number of possible meanings. Effectively, for the purposes of this article, we are considering the failure of traditional contract law to adequately account for the operation and practices of contracting in the music industry. 2 There is a voluminous literature here. For example, the classic S Macaulay, ‘Non-contractual Relations in Business’ (1963) American Sociological Review 55 and H Beale and T Dugdale, ‘Contracts between Businessmen: Planning and the Use of Contractual Remedies’ (1975) British Journal of Law and Society 45. See also D Campbell and D Harris, ‘Flexibility in Long-term Contractual Relationships: The Role of Cooperation’ (1993) 20 Journal of Law and Society 166 where the problem of the classical law in terms of dealing with long-term contracting is outlined and a testable model of cooperative attitudes and behaviour of parties is developed; S Macaulay, ‘Elegant Models, Empirical Pictures, and the Complexities of Contract’ (1977) 11 Law and Society 507 where Macaulay reviews Kurczewski and Frieske’s work on the practices of Polish industry. Here Macaulay notes that ‘The Studies as a Whole Show that the Empirical Picture of the Contract Process in Capitalist Societies Differs Sharply from the Classical Model’ 507 at 509. Also J Feinman ‘Relational Theory in Context’ (2000) 94 Northwestern University Law Review 737. 3 See for example I Macneil, ‘The Many Futures of Contract’ (1974) 47 Southern California Law Review 589; I Macneil, ‘Relational Contract Theory: Challenges and Queries’ (2000) Northwestern University Law Review 877. An excellent introduction to relational theory, and in particular the works of Ian Macneil, is provided by D Campbell, The Relational Theory of Contract: Selected Works of Ian Macneil, Sweet and Maxwell, London, 2001. The collection includes a bibliography of all of Macneil’s work as well as key excerpts and essays on the importance and impact of the theory. See also P Gudel, ‘Relational Contract Theory and the Concept of Exchange’ (1998) Buffalo Law Review 763.

1

Electronic copy available at: http://ssrn.com/abstract=1068621


2 (2007) 23 Journal of Contract Law

industry, and in particular the music industry, is a fertile ground for analysing some of the problems of accommodating contractual theory within commercial contracts. Whilst some of our previous work has analysed the construction of commercial music contracts and identified key areas of dispute,4 this article considers specifically why traditional contract theory cannot adequately explain the formation of such agreements. It seeks to develop a greater understanding of the process by which such contracts are arrived at, and whether variants on classic contract law ideas offer a more appropriate framework for analysis. The industry has spawned a number of cases that have attracted much media attention, partly due to the personalities involved.5 This article is not primarily concerned with case analysis except insofar as these cases reveal issues around bargaining and the nature of the terms produced. Our approach first necessitates an analysis of the context of the music industry. A crucial aspect of this is the cultural and economic factors that inform both the bargaining process and the eventual contractual terms. The article then considers how we might analyse both the process and contractual outcome using different theoretical approaches. The starting point here is an application of classical contract law, before considering the more contextual methods of a neoclassical approach, and the more ‘radical’ approach underpinning relational contract theory. In addition, we will examine whether Ian Macneil’s relational theory might provide a fruitful vehicle to explain contractual practices in the music industry. Our method follows, in part, Feinman’s invitation to test relational theory through new subfields:6 The development of these subfields provides some evidence of the power of relational contract theory. But what are the implications of these developments for where relational theory might go next? . . . [I]f any progress is to be made, it will be made in the direction of further fragmenting analysis rather than extending Macneil’s project of creating a more general theory of contract. Therefore we can identify and develop additional subfields that can operate as independent relational contexts, as do insurance, landlord–tenant, and products liability law.

A subfield such as ‘contracts for talent’ is likely to prove a profitable area for development as it brings a very particular, indeed sometimes peculiar, set of contractual issues, both substantive and procedural. There are major issues around negotiation and (in)equality of bargaining power, in addition to problems with the enforcement of strict contractual rights. The nuances of such contracts make it a unique and atypical arena to test different contractual theories. Although this article marks an initial attempt to apply a theoretical approach to the contractual practices of the music industry, it forms part of a 4 See, for example, A Boon, S Greenfield and G Osborn, ‘Complete Control? Judicial and Practical Approaches to the Negotiation of Commercial Music Contracts’ (1996) 24 International Journal of the Sociology of Law 89. 5 The cases divide into three areas, management, publishing and recording, though sometimes there is an overlap. On management contracts see, for example, Elton John v Richard Leon James [1991] FSR 397; O’Sullivan v Management Agency and Music Limited [1985] 1 QB 428 and Page One Records Ltd v Britton [1967] 3 All ER 822. Management contracts are not dealt with explicitly in this article which concentrates on recording and publishing agreements. 6 Feinman, above, n 2, at 746.



Understanding Commercial Music Contracts

3

longer term project seeking to develop a broader theoretical understanding of contractual behaviour within the entertainment industry.7

Recording Contracts and the Context of the Music Industry8 The process of getting the record company even close to the negotiating table may be a tortuous one for the artist.9 It is imperative to appreciate that the internal dynamics of the record industry provide an important contextual background to any contractual framework. The recording industry is high risk and effectively predicated upon mass failure; failure for the artist but also for the investors, the record companies. The vast majority of sound recordings that are released are not economically lucrative, often not even recouping the initial outlay;10 ‘[m]any are called but few are chosen’.11 The industry claims that the rate of economic success, measured in terms of money-making artists, may be as low as 10 to 15 per cent.12 Independent verification is difficult to obtain and it is, of course, in the interests of the industry to portray financial rewards as ‘infrequent’ and subject to market uncertainty. A poor rate of 7 See, for example, S Greenfield and G Osborn, ‘Contractual Theory and Recording Contracts’, paper presented at Law and Society Association Annual Meeting, Las Vegas, June 2005. 8 This piece is focusing upon the recording contract and the record industry. The role of music publishers and the music publishing industry should not be underestimated. On the difference between recording and publishing contracts see, for example, A Harrison, Music: The Business, Virgin Books, London, 2005. 9 Before the contract is concluded a number of key events are likely to have taken place. The usual way that record companies hear about new artists is via their Artist and Repertoire (A&R) Department — essentially this is the eyes and ears of the record company; their talent scouts. Prior to this point, the artist will have attempted to gain exposure to increase visibility and chances of success. The artist may already have a music publisher or a manager, both of whom may aid their attempt to secure a recording contract. There is no one specific way in which this occurs, or indeed the order in which such contracts are signed. A traditional model would have involved the first contract an artist signed being a management agreement. The manager would then attempt to secure publishing and or recording contracts for his charges. This model is perhaps best exemplified by acts such as the Beatles and their manager Brian Epstein, or some of the other svengali managers. Whilst this model is still in operation it is not the most prevalent. The process is far less prescriptive today. It may be that the first contract an artist is offered is a recording contract and management and publishing is arranged later. Occasionally artists may self-manage and/or self-publish. See further on this area generally Harrison, above, n 8 and D Passman, All You Need to Know about the Music Business, Penguin Books, London, 2004. 10 This would cover the instance where the amount of money advanced to the artist as part of the recording agreement exceeds the amount of income in terms of recording royalties and other income streams associated with the exploitation of the sound recording. 11 Silvertone Records v Mountfield [1993] Entertainment and Media Law Reports 152 at 156 (hereafter The Stone Roses). 12 ‘Statistically, this is a very risky business. Typically, less than 15% of all sound recordings released by major record companies will even make back their costs. Far fewer return profit . . . There were 38,857 albums released last year; 7000 from the majors and 31,857 from independents. Out of the total releases, only 233 sold over 250,000 units. Only 437 sold over 100,000 units. That’s 1% of the time for the total recording industry that an album even returns any significant sales, much less profit. Fortunately when it hits, it can hit big.’ Hilary Rosen, President and Chief Executive Officer Recording Industry Association of America. Statement to the Subcommittee on Courts and Intellectual Property Committee on the Judiciary US House of Representatives, 25 May 2000.




success can be used to advance the case for a longer period of exploitation of those artists who do provide a profitable return and a longer period of copyright on sound recordings and other copyright protection.13 One explanation for the apparent difficulty in assessing and successfully exploiting the market is its volatility:14 The demand for pop records is to a high degree fickle and unpredictable, and there is virtually no ‘brand loyalty’ in the sense that a customer will prefer one label to another. Fashions tend to change with bewildering rapidity, and a product which is in high demand one month may suffer a catastrophic fall in demand in the next.

The effect of this uncertainty is twofold. For the artist to survive he must immediately produce commercially successful sound recordings or demonstrate the potential for future economic success. The only alternative is to convince the record company that retention on the record company roster is otherwise beneficial.15 For the record company the uncertainty in not knowing whether an act will be financially rewarding has a significant effect on both the negotiating strategies and the contractual terms on offer.16 The company contracts with an artist not knowing whether the relationship will be a short- or long-term one. If artists are unsuccessful they will need to be quickly replaced as the search for the elusive ‘recoupable artist’ goes on apace. In 1994 the Competition Commission found that while roster size fluctuated, artist turnover was considerable, and volatile:17 13 See, for example, the Sonny Bono Copyright Term Extension Act 1998. The music industry is currently struggling to deal with challenges posed by widespread use of P2P software and its response has been to litigate not only against the providers of software, see A & M Records Inc v Napster Inc 239 F3d 1004 (9th Cir 2001) and MGM Studios Inc v Grokster Limited 545 US 913 (2005), but also against individual file sharers. This latter sweeping attack on those sharing copyright material on P2P networks represents a change of direction and a dimension to the litigation not seen in the earlier disputes over technology such as Sony Corp v Universal 464 US 417 (1984), CBS v Amstrad [1988] 2 All ER 484. 14 Panayiotou v Sony Music Entertainment (UK) Ltd [1994] Entertainment and Media Law Reports 229 at 348, hereafter the George Michael case. 15 For example, artists that are not commercially successful may be retained tactically if they are deemed particularly credible or worthy. In-demand artists may be persuaded to sign for a particular company on the strength of their broader roster and attitude towards such artists and having commercially ignored but critically feted artists may add to the record company’s ‘street cred’. In terms of persevering with artists through times of limited commercial success in the belief of later significant success, Island Records’ faith in U2 over almost a decade before the international breakthrough of the album ‘The Joshua Tree’ is a case in point. 16 One alternative to offering contracts to ‘unknown’ artists is the wholesale acquisition of artists and/or smaller labels — here effectively the larger companies are using the smaller ones to operate as their A&R, and then acquiring the artists later in the cycle when much of the initial work will have been done for them. Examples of this include Suede and their label Nude which was acquired by Sony, and also the complicated arrangements surrounding the Sony acquisition of Alan McGee’s Creation Records, then home of Oasis. See here D Cavanagh, The Creation Records Story. My Magpie Eyes Are Hungry for the Prize, Virgin Books, London, 2001. 17 ‘The Supply of Recorded Music: A Report on the Supply in the UK of Pre-recorded Compact Discs, Vinyl Discs and Tapes Containing Music’ (1994) The Competition Commission Cm 2599 p 94.



5

Typically the majors gained and dropped between 30 and 50 per cent of their artists each year. For example Polygram had some 445 artists under contract over the period 1989 to 1992 but fewer than half that number at any one time.

This operational model, demanding a constant supply of artists, places record companies in a superior bargaining position with respect to the artist, conferring upon them much greater leverage.18 Contracts thus tend to be asymmetrical in that they tend to reflect the needs of the record company first and foremost.19 These needs also have to be seen against the context of new technological challenges, specifically with internet distribution, that provide important future income streams if working practices can be rethought. These structural changes may eventually also impact upon the contractual terms themselves.20 We have already seen some attempts by record companies, most notably with the so called ‘penthouse suite’ deal of Robbie Williams, to tap into a number of potentially lucrative income streams such as merchandising and live performances, outside of the core business of sound recording. This sort of deal will only be available to the elite artists, hence the term ‘penthouse suite’. This also illustrates the possibility of some contractual leverage existing, or in some cases evolving over time, for some artists. That said, it is undoubtedly still the case that the record industry is in an immeasurably stronger position than the individual artists, especially those who are unsigned and seeking an initial contract.21 This imbalance in negotiating power has a number of implications, not only for the terms produced (outcome), but also for the conduct of bargaining (process). There is, in any event, far more to the recording contract than the mere paper expression. In social and cultural terms, a recording contract is highly symbolic for the creative artist, denoting both a badge of honour (that the artist is one of the chosen few) and providing a chance of success in a competitive market. In those studies that have examined the gap between the paper deal and the actual relationship, it might be argued that the contract 18 See here S Greenfield and G Osborn, Contract and Control in the Entertainment Industry, Dartmouth Press, Aldershot, 1998. Although see expert evidence of Mr Morris in George Michael at 349, to the effect that there is fierce competition to sign artists, and that in such situations this balance might be redressed to a certain degree as relative leverage is equalised. 19 See D Hesmondhalgh, The Cultural Industries, Sage, London, 2002, p 169. 20 One of the problems for the music industry is that it has often cried ‘wolf’ when faced with technological challenges to its business model. Jack Valenti, President of the Motion Picture Producers Association infamously stated, in his 1982 testimony to the House of Representatives, ‘I say to you that the VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone’. Committee on the Judiciary House of Representatives Sub Committee on Courts, Civil Liberties, and the Administration of Justice. 97th Congress, Monday, 12 April 1982. 21 The imbalance in terms of supply (of artists) and demand (for artists) coupled with the poor commercial success rate leaves the record company free to adopt a competitive bargaining strategy and adopt a ‘take-it-or-leave-it’ attitude to the negotiations. This approach was noted with respect to publishing contracts in A Schroeder Music Publishing Co Ltd v Macaulay [1974] All ER 616 (hereafter Schroeder).



operates largely at a symbolic level.22 The paper contract is symbolic in the sense that it is an indicator of a relationship that operates beyond the boundaries of the formal legal one. The contract itself is unimportant when contrasted to the context of its formation and the subsequent relationship. The reward on signing a recording contract is not just an internal corroboration of the ‘success’ of moving from ‘unsigned’ to ‘signed’, but also offers a signal to others that the group have achieved a new status. For the record company the contract may have less symbolism but this is not to say that the record company doesn’t recognise the importance of the occasion, if only to the artist, and the event may indeed have a ceremonial aspect.23 Once the negotiations are complete, the contract will be concluded — this will usually be executory in nature as it concerns the production of future sound recordings, although it might also include some back catalogue of existing work. Recording contracts are by their very nature potentially long-term contracts. However, as will be illustrated below, the term of the contractual period will be predicated on a number of factors, and at the sole discretion of the record company.24 An important aspect of these contracts is their standard form nature. The notion of standard form contracts has historically created problems for contractual theory. Situations where one party is effectively able to foist their own standard (preferred) terms on the other party offer a direct challenge to the concept of free will in classical contract theory.25 They are a staple feature of business contracting and prevalent in the entertainment industry.26 What is meant by the phrase ‘standard form’ is not so clear. Lord Diplock in Schroeder classified these as being one of two types. First, those agreements that have evolved over a long period of time, or as he put it ‘of very ancient origin’ (such as bills of lading, charter parties, policies of insurance and contracts of sale in the commodity markets) and which have been evolved and been settled over this long period by a series of negotiations undertaken by relevant parties representing the various commercial interests. These ‘ . . . have been widely adopted because experience has shown that they facilitate the conduct of trade . . . If fairness or reasonableness were relevant to their enforceability the fact that they are widely used by parties whose 22 For the phrase ‘the real and the paper deal’ see S Macaulay, ‘The Real and the Paper Deal: Empirical Pictures of Relationships, Complexity and the Urge for Transparent Simple Rules’ (2003) 66 MLR 44. 23 On ceremony, see M Suchman, ‘The Contract as Social Artifact’ (2003) Law and Society Review 91. 24 If distributive or there is no continuing relationship, bargaining tends to be competitive, see Boon et al, above, n 4 at 105. However, this is a crucial issue as at the time the contract comes into existence, neither party knows definitively whether the contract will be long term or not. 25 There is a voluminous literature on the standard form contract ‘question’. See eg Macaulay, above, n 2; G Gluck, ‘Standard Form Contracts: The Contract Theory Reconsidered’ (1979) 28 International and Comparative Law Quarterly 72; F Kessler, ‘Contracts of Adhesion — Some Thoughts About Freedom of Contract’ (1943) 43 Columbia Law Review 629; M Trebilcock, ‘The Doctrine of Inequality of Bargaining Power: Post-Benthamite Economics in the House of Lords’ 1976 Vol 26, 359. 26 See here Greenfield and Osborn, above, n 18. This deals with contracts in the areas of boxing, music, cricket and association football, all of which utilise variants or types of standard form contracts.



7

bargaining power is fairly matched would raise a strong presumption that their terms are fair and reasonable’.27 Here, the practice of using standard form agreements has evolved to facilitate trade and to speed up transactions. The terms have been reached by an ongoing process of refinement and renegotiation to the point where the terms are deemed as acceptable to all and indeed necessary in the interests of efficiency. The second type is more problematic. These contracts lack the established history, and presumption of fairness, identified by Lord Diplock. They tend to appear in ‘newer’ commercial areas, of which the recording industry would of course be an example, and may act to disguise an inequality of bargaining power:28 The same presumption [that the contract terms are fair and reasonable], however, does not apply to the other kind of standard form of contract. This is of comparatively modern origin. It is the result of the concentration of particular kinds of business in relatively few hands. The ticket cases in the 19th century provide what are probably the first examples. The terms of this kind of standard form of contract have not been the subject of negotiation between the parties to it, or approved by any organisation representing the interests of the weaker party. They have been dictated by that party whose bargaining power, either exercised alone or in conjunction with others providing similar goods or services, enables him to say: ‘If you want these goods or services at all, these are the only terms on which they are obtainable. Take it or leave it’.

Three particular points arise from Lord Diplock’s ‘definition’ of this secondary type of standard form contract. First, there are areas of the entertainment industry where it could be argued that the standard form has been shaped by external factors such as organisations representing ‘the entertainer’. The sports industry contains examples of a framework of bargaining that permits external input into the process which may contribute to more equitable agreements. In some ways this shifts such agreements closer towards Lord Diplock’s first category. Second, successful legal intervention also provides a method to challenge and alter existing contractual practice. This is the most manifest affront to the sanctity of contract within the formulation of the classical contractual model, and provides the most overt pressure on recording contract practice and behaviour. Finally, it should be noted on a point of definition that we have previously argued that the term ‘standard form contract’ may be misleading, certainly in terms of its use within the entertainment industry.29 What we can see is a set of common terms that evolve to deal with the same situation (obtaining the artist’s recording services) within different companies. It is suggested that there are several reasons for this convergence. First, the subject of the contract is common. Second, changes to the common terms will evolve through the appearance of a new ‘problem’ which needs addressing; again this will often be universal. Third, those with greater bargaining power are able to extract concessions that then may filter down to other artists. Finally, as noted earlier, negotiations are confined to a small group of experts. 27 Schroeder [1974] All ER 616 at 624. 28 Schroeder [1974] All ER 616 at 624. 29 See, for example, Greenfield and Osborn, above, n 18.



There will also be some room for negotiation over some terms, or even the minutiae of detail, dependent upon relative bargaining power and negotiating strength.30 Therefore, a better terminology for our purposes might be that of the ‘quasi’ standard form contract — this denotes that the basic framework, or even whole terms may be common — but that some individual points may be subject to some negotiation.31 We have identified a number of contextual and economic factors that have a significant effect on the contractual process and the agreement. There are also a number of internal factors, including the often overwhelming desire of the artist to sign, regardless of the terms offered. The very notion of trying to encapsulate, in paper terms, subjective ephemeral notions of ‘pop stardom’ is contractually problematic. A further feature that may often be present is the imbalance between the two parties in terms of negotiating experience. The type of advantage enjoyed by ‘repeat players’ has been subject to academic analysis.32 Our starting point here is to consider the application of classical contract law and to consider the deficiencies that the adoption of such a framework illustrates. Second, a series of contextual approaches is considered, including an evaluation of neoclassical approaches and an initial attempt to map this commercial practice in terms of relational contract theory.

Recording Contracts and Classical Contract Theory Classical contract law theory has its roots in prevailing philosophies of natural law and laissez faire economic theory of the 18th and 19th centuries and is a description of the refinement of contract law that took place during this period.33 The period from the late 18th century to the latter part of the 19th century is seen as the classical age of contract law in England. It was the time 30 Of course, much will depend on the starting position of the company, the original offer, to determine how much room for manoeuvre exists. Humphries J noted with respect to the bargaining over the draft contract offered to the Stone Roses: ‘Mr Furman thought it odd that no query or negotiation took place on a number of important matters and would have been prepared to negotiate to the advantage of the defendants if pressed’. Silvertone Records v Mountfield [1993] Entertainment and Media Law Reports 152 at 159, hereafter The Stone Roses). 31 Examples of these might include financial provisions such as royalty and advances clauses in recording contracts, the question of duration and obligations among others. See Greenfield and Osborn, above, n 18 generally, and pp 181–4 particularly, on the relevance of the standard form model to entertainment contracts. 32 On the imbalance of the parties’ experience in litigation see, for example, M Galanter, ‘Why the Haves Come Out Ahead: Speculations on the Limit of Legal Change’ (1974) 9 Law and Society Review 95. 33 See the comprehensive account of P Atiyah, The Rise and Fall of Freedom of Contract, Clarendon Press, Oxford, 1979 and the briefer P Atiyah, An Introduction to the Law of Contract, 5th ed, Clarendon Press, Oxford, 1995. The fundamentals of classical contract law are outlined by Atiyah, 1979, pp 402–3: ‘First, the parties deal with each other “at arms length” in the legal phrase; this carries the notion that each relies on his own skill and judgement, and that neither owes any fiduciary obligation to the other. Secondly, the parties bargain or negotiate, they haggle over the price and terms of the deal. Offers are made, accepted, rejected or met by counter offers. Prior to acceptance, offers can be revoked, even though relied upon . . . Third, neither party owes any duty to volunteer information to the other . . . The only limitation to this market bargaining is that there must be no fraud or misrepresentation but even these concepts are narrowly construed . . . Fourthly the deal is



9

of key doctrinal developments in the substantive law which reflected the ‘new’ political philosophies and changing economic conditions.34 The overarching laissez faire philosophy manifested itself in a legal approach that the law should not interfere with private agreements. Ideas of objective fairness or justice were overridden by a concentration on the will of the parties. The law entered the contractual arena only at the point of failure to aid one party when the other defaulted on the agreement. This was a contract law with underpinnings of protecting the form of private agreements (sanctity of contract) and supporting free will (freedom of contract) and was informed by notions of voluntariness, exchange, free enterprise and equal bargaining power. This is essentially a contract law to serve a free market economy.35 Thus the principles underlying this classical model can be distilled to a concept of subjective free bargaining without obligation and with the absence of undue pressure or misrepresentation. Parties, through negotiation, allocate risks and obligations and a failure to perform leads to liability for damages. Effectively we see a transposition of the dominant political and economic theory into the law and into the bargaining arena. A distinct theoretical perspective emerges that requires marginal intervention by the courts. Atiyah argues that within this framework the function of the courts is as: ‘ . . . the umpire to be appealed to when a foul is alleged but the Court has no substantive function beyond this’.36 However, he identifies three elements that restricted this ‘hands off’ approach by the courts. First, the fact that some judges still could be seduced by the idea of dispensing objective justice contrary to the theoretical perspective of actor autonomy. Second, older principles from a previous theoretical era might still be applied on occasion. Third, this was a period of increasing statutory intervention.37 The essential key to this change was the shift to promises from reliance and the central function of ‘will’ theory. Applying the broad principles of this classical theory to recording contracts we would find the following. The parties would negotiate on equal terms according to their positioning in the market, despite their obvious inequality

34

35 36 37

finally struck when the parties agree or indicate their agreement. Mistakes and subjective intentions are irrelevant unless they can be said to affect the free and voluntary consent needed to reach agreement. The agreement must be made ‘freely’ and without ‘pressure’ but these concepts are very narrowly interpreted, for they must not conflict with the rule of the market place; and in the market place pressures are themselves a normal part of the scene . . . Fifthly the content of the contract, the terms and the price and the subject matter, are entirely for the parties to settle. It is assumed that the parties know their own minds, and they are the best judges of their own needs and circumstances, that they will calculate the risks and future contingencies that are relevant, and that all these enter into the bargain . . . Finally this bindingness is, in principle, a matter of pecuniary calculation. Each party is bound; he must therefore perform, or pay damages for his failure to perform’. Atiyah, 1979, above, n 33, p 398 describes it thus: ‘The period 1770–1870 saw the emergence of general principles of contract law closely associated with the development of the free market and the ideals of the political economists. The period saw the shift in emphasis from property law to contract; and within the realm of contract it saw the shift from particular relationships, or particular types of contract, to general principles of contract, and the shift from executed to executory contracts’. See L Mulcahy and J Tillotson, Contract Law in Perspective, Cavendish, London, 2004. Atiyah, above, n 33, p 404. Atiyah, above, n 33, pp 404–5.



in terms of knowledge and leverage. This latter ‘inequality’ would not be a relevant consideration to justify any later attempt to nullify the agreement unless the inequality crosses the line into undue influence or duress. An initial offer would be made by the record company, which might be followed by a series of counter-offers and amendments as part of the process of negotiation. Eventually, when both parties are happy with the terms and consensus is reached, the contract is concluded. At any point up to the point where the contract is concluded, either party is free to reject the offer and walk away from the negotiations. However, once the agreement has been reached and the contract has been signed, the parties would be bound to the terms of the contract. In addition, a classical contract reading would hold that all the terms are decided at the point the contract is concluded, including terms designed to respond to future contingencies. As has been identified, there are a number of obvious points where classical theory cannot adequately account for either the negotiating practice or the eventual contractual terms. The general imbalance between the parties as they arrive at the negotiating table is a clear starting point. Within the confines of classical contract theory, inequality is a matter for the market and not for the courts. As Atiyah argues: ‘If there is free competition in the market, mere size or skill should not in any case confer an undue advantage, since the forces of competition will ensure fairness in terms and prices’.38 The music industry with its concentration in few giant corporations, and a similarity of terms on offer militates against this balance across the sector:39 . . . in recent years, the negotiations of recording agreements has tended to become concentrated in the hands of a small group of professionals who have become experts in this field . . . These professionals may act for record companies and for artists, and the expertise and experience which they gain in the process is undoubtedly a factor tending towards similarity between the forms of contract negotiated with different record companies.

A better explanation of the deficiencies of classical contract theory is more complicated and diverse. First, there are relatively few players so common terms can be rapidly homogenised. It is not unknown for lawyers to act for artists and record companies in different transactions, thus building up a bank of knowledge from competing perspectives. Aside from the limited number of personnel involved, there are a number of examples of contractual terms that have persisted even when no longer technically relevant. For example, deductions from royalties because of breakages (a term from the time when sound recordings were made from the more fragile shellac, or shellac compound) is a term that has persisted in contracts long after shellac was no longer used.40 An essential problem with the classical model is the central role that ‘will theory’ plays as contract shifts from part executed to the executory model. The 38 Atiyah, above, n 33, 1979, p 404. 39 George Michael [1994] Entertainment and Media Law Reports 229 at 350. 40 A similarly controversial clause appeared in the Stone Roses case where the geographical area of exploitation was ‘the world and its solar system’. Aside from the question of uniformity these clauses point to a failure in the bargaining process and a dominance in negotiation that is not addressed by the free market.



11

most often expressed maxim of will theory may be found in the phrase ‘consensus ad idem’. However, here we see the lack of any real negotiation as a result of the imbalance in bargaining power, the use of standard form agreements, and the desire of the artist to sign regardless of the terms on offer. All of these factors point to a most superficial notion of consensus. The artist ‘agrees’ to the contract in spite of its one-sidedness; the only meeting of minds is over the signing of the agreement itself regardless of what it actually contains. Furthermore, the economic context requires contracts that allow the record companies the flexibility to retain, but more importantly terminate, the contracts of artists who are commercially unsuccessful. This is achieved through a contract of long duration but which is limited through option periods exercisable at the will of the company. The contractual option periods are linked to the delivery of minimum commitment, and the end result is a potentially very long contract but one which is at the same time riddled with uncertainty, and with little in the way of positive obligation on the company. It is difficult to argue that there can be any real agreement when the future existence of the contract is dependent on so many unknown and unforeseen factors that are out of the artist’s control.

Recording Contracts and Neoclassical Contractual Theory41 Aside from the specific points of criticism above, a classical contract analysis can be subject to more general objections. First and foremost, as Feinman asserted, ‘ . . . the more classical contract law was placed in context, the less sense it made’.42 Further, as Campbell and Harris note, ‘[a] very substantial body of empirical and theoretical literature now exists which purports to show that the explanation of long term contracts by means of the classical law of contract is most problematic’.43 Fundamentally, such an analysis would be an exercise grounded in abstraction and devoid of an appreciation of a contextual framework; one which would not consider issues such as the positions of the parties or the subject matter of the agreement.44 While classical contract theory highlights remedies for breach, in long-term contracting situations recourse to remedies is rarely taken apart from in exceptional circumstances. 41 At this point clarification ought to be made. There may in fact be a problem in determining where the boundaries between differing theoretical approaches lie. This is particularly apparent in instances where it is arguable that relational ideas have been incorporated as part of a neoclassical approach. See, for example, Fienman’s point, above, n 2 at 739 that relational theory has merely been accommodated by neoclassical theory rather than being presented as a challenge. Similarly there is not necessarily a clear distinction between classical and neoclassical approaches to contract law problems. For example, even the doctrine of restraint of trade creates difficulties in terms of whether it can be compartmentalised as truly neoclassical, for example, given its historical origins. 42 Feinman, above, n 2, at 738. 43 Campbell and Harris, above, n 2, at 166. 44 See Macaulay, above, n 22, at 48 recalling Lawrence Friedman’s analysis of US contract law in late nineteenth and early twentieth century.



If resorting to remedies is rare, the form of the contract is less important and marks a blow to any attempt to map such an area with classical contract theory.45 Similarly, where the contract is not viewed by the parties as being the centre of the relationship, classical contract theory struggles to explain the translation of the relationship into paper form, and indeed the purpose of the contract. This is particularly the case where the contract is almost seen as peripheral and the parties are prepared to disregard contractual entitlement or the niceties of the agreement:46 This non-use of contracts turns on a rejection of the classical understanding of contract as a form of economic allocative mechanism. The classical law of contracts centrally turns on the goal of presentiation, the goal of making a present decision about all — including future — aspects of a contractual relationship.

Long-term contractual relationships have to reject the goal of presentiation which is at the heart of classical contract theory. An appreciation of the failings of the classical model to understand the intricacies of recording contracts necessitates a consideration of contextual frameworks. Long-term relationships are undoubtedly more open to a contextual analysis. As Campbell and Harris argue, the long-term contract cannot easily deal with the issue of presentiation, and those wanting to utilise long-term contracts adopt instead an open-ended and undefined approach that ‘ . . . awaits the circumstances to arise which will allow such definition. This is cooperation within the market which is analogous to the cooperation organised within the firm’.47 The legal problems produced by adherence to rigid classical theory have, to some extent, been addressed, through adoption of neoclassical contractual practices. Neoclassical contractual theory and its consequent legal application adopts the existing framework of the classical model, but ameliorates some of the harshness through the utilisation of a more equitable approach; stretching the pre-existing hegemony without fracturing it. It is effectively an admission that a classical approach fails to adequately explain the essence of contractual relations in all situations, and illustrates that equitable intervention may be required. However, neoclassical theory addresses the problems of the classical model without offering a different conception of contract law.48 As Fienman has noted:49 Modern contract law is often usefully referred to as neoclassical contract law. This term aptly situates today’s contract law in its historical context. The essential quality of neoclassical contract is that it is the product of the attempt to accommodate classical contract law and subsequent critiques of it. The word ‘neoclassical’ suggests the partial nature of the accommodation, indicating that neoclassical contract has not so far departed from classical law that a wholly new name is appropriate. 45 ‘If the legal remedy is not pursued when it is available, then the contract itself is not of the first importance . . . ’ Campbell and Harris, above, n 2, at 168. 46 Campbell and Harris, above, n 2 at 169. 47 Campbell and Harris, above, n 2, at 170. 48 See Feinman, above, n 2, at 738. 49 J Feinman, ‘The Significance of Contractual Theory’ (1990) 58 U Cin L Rev 1283 at 1284.



13

A neoclassical view of recording contract formation might on first examination appear to be identical to the classical contract model. The divergence would be in the event of breach; if the artist chooses to do nothing, the contract carries on regardless, however inequitable or restrictive the terms might be. However, it is at the point when the artist attempts to free himself from the bargain that the neoclassical approach may have application. Whilst the classical approach should hold that the contract is immune from challenge beyond very narrow exceptions, there are a number of key doctrines that have developed to alter the harsh effects of contract law based on classical contract theory. We can see, for example, how within the music industry, the doctrine of restraint of trade and, to a lesser extent, undue influence, have been developed and applied to form part of a neoclassical regime that allows contractual escape. The doctrine of restraint of trade is an interesting concept as a contract that acts in restraint of trade seems to attack the very concept of free trade. If through a lawful contract trade can be restricted, this seems an anathema to the political free trade concept on which classical contract theory is built. Courts were originally wary about contracts that sought to restrict trade, particularly those of a general nature. Gradually courts accepted the view that certain contracts that restricted trade (those related to the sale of businesses and post-contractual limitations) could have an overall beneficial effect as a protection for legitimate interests. The extension from its previous limited application, through the decision in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd50 permitted an expansion as restraint of trade was able to move from its initial narrow confines to embrace new areas — it was restraint’s ‘Donoghue moment’.51 The entertainment industry is an area where it has found consistent application as the doctrine has been seen to embrace music publishing agreements, management contracts (both sporting and musical), recording contracts, player contracts and Governing Body sanctions.52 Decisions after Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd seemed to have been flowing in favour of the artists, although the most recent decision, admittedly that of a court of first instance, bucked this trend. Courts have shown themselves willing to look at the substance of the agreements and consider if these are reasonable by reference to the interests of the parties and a broader public policy consideration.53 In terms of 50 [1968] AC 269. 51 This, of course, is an allusion to the effect of the dicta of Lord Atkins in Donoghue v Stevenson [1932] AC 562 and the effect of opening up new areas to potential application of a legal doctrine, in that case the tort of negligence. Our point is that Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 provided a similar role within restraint of trade. 52 See Greenfield and Osborn, above, n 18. 53 With respect to the music contracts a number of key terms have been analysed; including length of the agreement, territory, financial arrangements, assignability, artist and record company obligations, both during and after the contract, and whether independent legal advice was sought. At one point in the evolution of the cases, judicial arguments have been made both explicitly and implicitly that the decisions in these areas indicate acceptance of a more generalised doctrine of inequality of bargaining power. Whilst this would not encompass the very separate doctrine of restraint of trade it could be used alternatively and focus on the process by which the terms were ‘agreed’. However this highly contentious



approaches adopted within the case law, we can identify two interrelated themes. One is to confine an analysis of the case to an exploration of the terms and measure the extent of restraint they produce (the Lord Reid line in Schroeder). This is a narrower approach which could be viewed either as a neoclassical attempt to ameliorate the harshness of rigid classic contractual theory application or even a restatement of classical contract theory using restraint of trade as an established exception to the sanctity of contract that classical contract theory demands.54 The broader approach, which can with greater certainty be evaluated as a neoclassical one, is that exemplified by Lord Diplock in Schroeder as outlined above. We have previously categorised these approaches as being primarily concerned with process (Lord Diplock) or outcome (Lord Reid).55 Whether the focus is primarily on terms or the parameters of bargaining may matter little unless one draws the conclusion that an unequal process may still produce fair terms. Humphries J briefly mused over this point in the Stone Roses case. But in any event, for numerous reasons that we have outlined, the context (both internal and external) to the negotiation is crucial to understanding the contractual relations. This concentration on context to explain bargaining behaviour and contractual outcomes suggest recording contracts as a potentially fertile ground for relational contract theory to be applied, a theory Feinman has described as ‘contextual with a vengeance’.56

The Possibilities of Relational Contractual Theory It is arguable that the potential of relational contract theory has been overlooked in the past, often by accommodating it within traditional thinking rather than utilising it as a challenge to the orthodoxy. For example, relational theory can be seen through a neoclassicist gauze, and applied as a vehicle to provide insights into contractual behaviour but from a resolutely neoclassical perspective — as Feinman puts it: ‘[r]ather than being viewed as a fundamental challenge to neoclassical law, relational contract has been described in terms of scope method and substance that allow it to be comfortably accommodated within the mainstream’.57 However, one useful mechanism, identified by Macneil, is the concept of the discrete/relational continuum.58 Completely discrete contracts are, to Macneil, an impossibility. All contracts are borne out of some sort of social relation and are based around

54

55 56 57 58

argument appeared to have a rather short shelf life, being specifically criticised by the House of Lords. See S Greenfield and G Osborn, ‘Unconscionability and Contract: the Creeping Shoots of Bundy’ (1992) Denning LJ 65. This would depend on the extent to which the development of the doctrine of restraint of trade beyond its narrow support for free trade can be said to sit squarely within the principles of classical contract theory. Alternatively, its very existence could be attributed to the advancement of a neoclassical approach. See Boon, Greenfield and Osborn, above, n 4 for example. Feinman, above, n 2 at 742. Feinman, above, n 2 at 739. There is some debate amongst contract scholars as to the importance of this notion with respect to other elements of relational contract theory. See for example Campbell, above, n 3.



15

relational patterns.59 However, there are contracts that he labels ‘as if discrete’. In contradistinction, relational contracts are incremental and unable to be fully articulated at the beginning of the contractual relationship. In terms of neoclassical theory, the incorporation into legal practice of the expanded doctrine of restraint of trade and undue influence can solve some of the problems that poorly bargained recording contracts evince. This does not, however, explain the fundamental problems that such agreements frequently produce. Individual contracts that come before the courts are treated as mere aberrations of normal, acceptable practice. Neither classical nor neoclassical contract theory offer any explanation as to how such flawed contracts come into existence nor can they offer any guidance on how they might be avoided in future, aside from a very simple unilateral change to some of the terms to adjust the balance of reasonableness, and perhaps allow an attempt at ‘judge proofing’ future agreements. An example of an alteration to contractual practices can be seen in some music publishing contracts post Schroeder. One of the clauses disliked by the House of Lords was the lack of any obligation to exploit the work, coupled with unrestricted ownership of copyright. The industry response to the pro-artist decision in Schroeder was to attempt to bring their contracts within the parameters suggested by Schroeder and to attempt to make the contract ‘judge-proof’. It is now common to see an obligation to exploit placed on the music publisher, and more unusual to see a transfer of copyright for the full term. Indeed one of the constraints of classical contract theory is that it renders it impossible to consider why and how these contracts came into being and why they are problematic — by restricting any analysis of context to within the pre-existing theoretical and legal boundaries we are unable to properly understand and explain contractual behaviour. The question is whether any alternative approach offers an opportunity of providing insight into this behaviour. A starting point for an explanation of alternative approaches is to consider whether relational contract theory can offer any concrete assistance.60 Our first intervention is to determine the nature of relational agreements and whether recording contracts fit into this category. Stewart Macaulay described these agreements thus:61 Relational contracts, typically, are not specific and precise allocations of risk. They involve complex transactions, and often it is hard to determine when they begin and are to end. They are agreements to cooperate to achieve mutually desired goals. 59 Gudel, above, n 3, adopts an example from Oliver Williamson to give an indication of about the nearest one could get to a completely discrete contract — where a purchase is made of a bottle of local spirits from a shopkeeper in a remote part of a foreign country which the purchaser intends to never visit again nor to recommend it to his friends. If the seller did not speak the buyer’s language, and bartered a personal possession rather than used local currency, so much the better! 60 See, for example, the collection of Macneil’s work edited by D Campbell, above, n 3 and the 2000 special edition of Northwestern University Law Review 94 (3) that published contributions to the Symposium at that University in 1999, that celebrated Macneil’s work. Both of these include references to the massive body of work that Macneil has produced over his distinguished academic career. 61 Macaulay, above, n 22 at 65. There is, of course, an argument here that the parties are negotiating with different objectives and that in fact the goals are not, at least totally, mutually desired within the record industry.



The field of recording contracts is a useful vehicle to test the boundaries and applicability of this theory, as recording contracts seem to exhibit many of the features of relationality that Macneil identifies. They appear to be complex transactions, although at the heart of each agreement is a rather simple objective; the supply of exclusive recording services in return for payment. However, considerations such as future technological developments create ‘new’ situations that the contract will try to pre-empt. This leads to a degree of complexity reflected in both the length and breadth of recording contracts whose exact parameters are unclear at the point the contract comes into existence; they are non-specific and imprecise and may (eventually) be based around an idea of a longer term relationship.62 As Macneil might put it, the contract is an incremental entity that may evolve and become more complex as the relationship develops. Macaulay cites two lovely analogies, that he attributes to Macneil to explain the difference in ethos:63 . . . classic contract law assumes a light switch. A light is either on or off; the parties have agreed to a contract or they haven’t. Often however, in a long term continuing relationship, the situation resembles a rheostat. As more and more power is sent to the bulb, we get more and more light. It is hard to say when the light has been turned on. On and off are not useful terms. Similarly, in a relational contract often it is hard to say when the contract is formed. Moreover, it is not likely to be formed once and for all. Rather than a scene frozen in a still photograph, a relational contract is more like an ongoing motion picture.

The question is whether a recording contract exhibits characteristics of either type of relationship, or, interestingly, even both. At one point the agreement looks to be more akin to the light switch analogy above but arguably, even initially, it may be more like the rheostat. The record company will have gleaned its information about the artists from A&R and other talent scouts before offering the contract, and even for the initial term of the contract we can see the rheostat in operation. The record company may invest time and money in the relationship even at this embryonic stage. At the point when the initial term is over and the company comes to consider exercise of the option periods, the bulb will shine more brightly if the parties cooperate and the option is exercised. Alternatively, the light may be extinguished. 62 The nature and character of recording contracts was explored in the George Michael case: ‘Recording agreements were unknown in 1894. Indeed, it is only in the last 20 years or so that recording agreements have evolved into their present complex and voluminous form. In his witness statement, Mr Lee traces the development of recording agreements as follows: “Until the early sixties contracts appear to have been simple documents, although I have to admit that my knowledge of these contracts is limited and there is little published material analysing them. Advances were non-existent or token, royalties were often expressed as 1d or 2d per record (reduced overseas) and there was no obligation to record or release records. The whole contract would often be expressed on one page compared with the contracts now prepared which often exceed 40 pages . . . With the increase in sales of pop records in the 1950s and 1960s greater attention was paid to the form of contracts. Record companies wanted to ensure that they acquired all possible rights in recordings and realised the benefit to them of long term relationships with artists. Contracts became more precise, explicit and voluminous during the 1970s”’. George Michael [1994] Entertainment and Media Law Reports 229 at 355–6. 63 S Macaulay, ‘Relational Contracts Floating on a Sea of Custom? Thoughts about the Ideas of Ian Macneil and Lisa Bernstein’ (2000) 94 Northwestern University Law Review 775 at 778.



17

A record contract may appear, at least from its form that expresses longevity, to be broadly relational. The record company hopes that it will be a continuing relationship as this will be an indicator of commercial success. At the outset it should be seen as a relationship and not simply as a contractual transaction. The initial signing of the contract injects capital to finance the recording and distribution of the sound recording itself, and over that period the relationship between the parties should be a close and cooperative one. However the contract will contain a series of options exercisable solely at the behest of the company that permits termination. Effectively, we have an example of a relational contract with a get-out clause for the party with the superior bargaining power: ‘[s]ometimes the party with greater power wants a relationship based on trust and cooperation but also wants to reserve the power to hold the other to the letter of a written document which is to its advantage’.64 It makes commercial sense to adopt a flexible and cooperative approach during the currency of the contract whilst the artist is profitable by, for example, demonstrating a willingness to conduct renegotiations. Once the stronger party sees no benefit from adopting such an approach, usually because the relationship is nearing its commercial end, the contract’s terms will be utilised through the next option period not being taken up.65 In purely relational terms we might expect recording industry negotiations to adopt the following pattern. The record company makes an offer of a contract to the artist it wishes to add to its roster. The artist consults his or her lawyer or other advisor, who advises that the terms offered are unreasonable as a potential restriction on his or her ability to ply his or her trade. The lawyer advises either to reject the contract outright, or proposes some amendments to the proposal. The recording company will want to ensure that their contracts are enforceable in the light of neoclassical attacks on the notion of sanctity of contract, and what industry norms permit. To do this it ensures that specialist independent legal advice is obtained. In addition, the record company attempts to ensure that a bargain has been reached, with real evidence of negotiation and that the terms finally agreed upon fall within the broad parameters of acceptability, as delineated by the legal cases that have framed the area, to ensure the agreement is fully ‘judge-proof’. However, the context and culture of the industry prevents this happening. At the point of signing, unless the artist is in high demand, the company has no need to act cooperatively. It can offer a take-it-or-leave-it deal and only requires certain safeguards within the bargaining process to be confident that the contract is ‘secure’ from legal challenge. It is the knowledge of likely commercial failure that provides the rationale for this approach. The relationship is, in all probability, going to be a short one so there is nothing to preserve. Furthermore, the artist will be unlikely to reject outright whatever deal is on offer, so the company can happily offer a restrictive ‘take-it-or-leave-it’ contract knowing that, subject to minimal negotiation and 64 Macaulay, above, n 22 at 66. 65 Further to this, as Macaulay puts it: ‘that business people may honor relational norms and sanctions while a relationship is underway, but when it breaks up, they may want “end game norms” to apply’, above, n 22 at 53.



change, the artists will gratefully accept it. A different approach here might be to use the model that Palay provides, which arguably offers a possible way out of the problem for recording contracts. Palay argues that parties anticipating strong relational ties do not worry about the terms of the agreement.66 Now record companies might anticipate relational ties, therefore it is in their interests to take a relational approach at the outset. Indeed, as Palay adds, careful bargaining of a contract may actually signal distrust, when the situation actually calls for a ‘marriage’. Again this may be true within the record industry. Some recent moves within the record industry as a whole can be seen as broadly relational, this includes a shift towards greater transparency within some contracts. For example, the recent approach of some record companies has been to simplify contracts and to try and make them more transparent, especially in terms of complex royalty provisions, so that there are no time bombs ticking in the contract that later explode when it comes to review.67 Historically, this has been one of the crucial triggers to legal action and money is often the issue that provokes fracture, when the contract fails to do what it appeared to say it is going to do. Similarly, the approaches adopted by the independent sector of the recording industry give weight to a view that traditional approaches towards contracting are not suitable in the cultural sector:68 At various independent record companies associated with punk in the late 1970s and 1980s, new ways of dealing with artists were developed which challenged the standard arrangements in the music industry. Deals with musicians were often on a 50–50 basis, rather than the single figure percentage royalty rates usual at the time. Long-term contracts were rejected in favour of deals based on personal trust. The aim of such deals was to be as ‘musician-centred’ as possible. Contracts were avoided on the grounds that the standard contracts were loaded in favour of companies and that if the personal trust between musicians and companies broke down, there was no point in pursuing the relationships anyway.

Practices such as those noted by Hesmondhalgh above, and those adopted by companies such as BMG and V2 in the past, illustrate that a heavy reliance on the contract as the vehicle for the relationship is not always a useful one. Crucially here in terms of relational contract theory, cooperation is usually seen as fundamental. With recording contracts we have this strange paradox that while cooperation is the key to maintaining a long-term relationship, the differing bargaining power and positions of the parties, allied to their differing expectations, means it is unlikely that the stronger party knows whether they do in fact want a long-term relationship at the point the agreement comes into force. This is a key distinction from other work on long-term bargaining and the explicit role of cooperation within this framework. 66 See T Palay, ‘A Contract Does not a Contract Make’ [1985] Wisconsin Law Review 561. 67 See here S Greenfield and G Osborn, ‘Spirits in the Material World. Musicians, Lawyers and the Scope and Legal Enforceability of Music Contracts’ in The Yearbook of Copyright and Media Law, E Barendt, A Firth, S Bate, T Gibbons, J Palca and (eds), Sweet and Maxwell, London, 1999, pp 149 at 171–4. 68 Hesmondhalgh, above, n 19, p 170.



19

Conclusion With respect to recording contracts, there are a number of key factors that illustrate the difficulties in identifying the place and relevance of contractual theory. The question as to the length, potential or otherwise, of the relationship is a particularly important one. As the vast majority of groups are commercially unsuccessful, the relationship is likely to be brief with contracts structured to give the company flexibility to terminate. The counterpoint of this is that if the band is deemed commercially viable, the company will want to keep the group at any cost, and at this point the formalities of contract lessen in importance. The company will want to adopt a cooperative approach for a number of reasons. For example, not only does the company need to keep the band under contractual control but also in a productive artistic state. The artist needs to be kept ‘happy’ but possibly not too secure financially in order that performance is achieved. Furthermore, if the artist is wrangling over the terms of the contract he or she is less likely to deliver material of suitable quality. Whilst the company will usually give little away during the initial negotiations, at the point of success a bargaining ‘about-turn’ may take place. The paper contract, and its terms, at this point becomes unimportant, and with it classical contract theory is rendered redundant. The original contract will tend to be very one-sided due to the endemic contextual features in operation at the outset of the negotiation that we have identified. This carries with it a potential danger for the party relying on the contract, that a court may find the contract unenforceable, allowing an artist to freely negotiate a new deal in the marketplace from a position of considerable strength, although this too carries with it certain risks.69 Furthermore it is by no means certain, given the standardisation of terms, that a new contract will be substantially better than a renegotiated agreement with the original company. However an artist renegotiating is not in the same position as an artist who is unfettered by existing contractual ties. As Parker J observed:70 In a renegotiation an artist cannot expect to be treated in exactly the same way as he would be if he were negotiating on the open market free from any contractual ties. There is bound to be a degree of discount to reflect the fact that the artist is already bound by an existing recording agreement. What form that discount will take, and how great it will be, will depend on the circumstances of the particular renegotiation.

However, the original company cannot afford to run the risk of the artist leaving, or refusing to perform, just as financial returns are starting to emerge. Thus relying on the paper contract, at the expense of a consensual relationship, may be extremely unproductive.71 In addition, the original parsimony in terms of rewards allows for the inevitable renegotiation; this is part of the industry’s culture. This trashes classic contractual theory that sees presentiation as fundamental. The company agrees to give the artist greater rewards to maintain the relationship. Of course it is not entirely philanthropic, as at the 69 The Stone Roses case demonstrates the pitfalls of lengthy litigation in a fast-moving industry. 70 George Michael [1994] Entertainment and Media Law Reports 229 at 351. 71 Indeed the company hardly wants to draw the attention of the artists to the original position.



same time the company can lengthen the contract through additional option periods or insist on other terms in its favour. After all, what else can the artist ‘give’ but more? This illustrates what is a strange phenomenon; that these contracts possess an inbuilt mechanism that makes the contract potentially more restrictive (in terms of length if not reward), the more successful the artist becomes. Renegotiation whilst improving financial terms for the artist is an integral part of the process of maintaining the duration of the term. Finally, the very content of the contracts and the prevailing legal attitude ‘forces’ cooperation. The inability to obtain an order for specific performance of a contract for personal services renders the agreement largely unenforceable.72 The contract can only be performed voluntarily as no direct legal sanction can be applied. Of course, in contracts that do not contain a fiduciary element a court may well uphold a negative restraint to prevent provision of those exclusive services elsewhere, and there is always the possibility of damages for breach of the contract. However, given that income is generated through sales, without any product the company will not realise its investment and also runs the risk that by the time any differences have been resolved, the fickle nature of the market has destroyed its position and any potential profit. All of these features combine to alter the bargaining landscape that originally existed at the time of signing. A new world of cooperative existence appears with the artist no longer one of the ‘few’, but indeed elevated to one of the ‘successful few’. In fact, the paper contract now has little but symbolic importance, it only needs taking down from the shelf periodically, dusting down, and having the terms cooperatively renegotiated.73 The only time it will have major significance from this point on is in the event of a significant malfunction and a desire to terminate the agreement, and where resort may be made by the record company to end game theory, that is to say to rely upon the formal contractual document when the relationship breaks down.74 We have therefore a strange phenomenon; a curious, amorphous contract that is at the outset either close to discrete or avowedly relational — no-one in fact knows. Certainly if it is to continue it is one which becomes explicitly and implicitly relational. It is a contract that cannot adequately function at the level of solely a ‘paper deal’. It can only work (because of both the subject 72 See Greenfield and Osborn, above, n 19, ch 6. 73 Parker J in George Michael observed the following with respect to renegotiation: ‘3.1 Renegotiation of a recording contract after an artist has had a successful album is commonplace. The record company is not contractually obliged to enter into any renegotiation, but in doing so it is not acting out of altruism. It has a continuing interest in maintaining a good relationship with the artist and in keeping the artist motivated. In addition, the record company may be looking for something in return, eg options on further albums . . . 3.2 Although in the negotiation of a recording agreement the artist will generally be advised that he should assume that he will be “stuck” with the terms of his recording agreement, nevertheless the practice of renegotiation is well known, and an experienced adviser (such as Mr Tony Russell) will know that if his client has a successful album a renegotiation will almost certainly be on the cards’. George Michael [1994] Entertainment and Media Law Reports 229 at 351. What is interesting to note here is both the culture of renegotiation despite the lack of contractual authority, and that increased revenue may bring with it a longer contractual term as we note above. 74 See R Scott, ‘A Relational Theory of Default Rules for Commercial Contracts’ (1990) 19 Journal of Legal Studies 597.



21

matter and the lack of contractual enforcement) if the relationship is intact. It also brings out into the open the problems of classical contract law. The lack of contextual analysis of the initial ‘meeting of minds’ leads to an assumption that the contract is lawful and enforceable as much as damages are a useful remedy. The lack of, or breakdown of, the relationship leads to concentration on vitiating factors that permit judicial rectification of a manifestly ‘unfair’ situation. It is clear that once there is something to develop, as in a relationship for the exploitation of commercial talent, relational theory can offer a meaningful explanation. Interestingly, there is room for reversion; destruction of the relationship by reliance on the paper terms. Relational theory goes further than offering an explanation but also provides an alternative negotiating strategy even at the outset: one that relies on trust rather than a contractual hold over the artist. As Macaulay notes:75 . . . the album notes to Ella Fitzgerald sings the Duke Ellington Song Book say: ‘Ella and [Norman] Granz have become close friends; on the basis of a handshake and no contract, he has been her personal manager for the last couple of years and has gradually steered her into the country’s deluxe night clubs . . . ’. I cannot imagine that when they shook hands Ella and Norman would even think about the transaction breaking down, and, as a result, they would not spend any time thinking about whether they wanted to have legal rights. Suppose that we could force Ella at the point of the handshake to consider whether she wanted to be able to sue Norman if something had happened. She might well say that she did not need a contract because she trusted Norman and a contract implied distrust. Often there are ways of achieving the relational bond and getting a document signed too.

Here we have an approach light years away from any version of events demanded by classical contract law or any version of it. The requirement of certainty and lack of form could be used to avoid an agreement that had worked quite happily. Relational theory would allow us to understand not just why such an agreement came into force but, more importantly, the nature and coverage of it. However, until the fear of contractual failure is reduced, the imbalance between supply and demand, and the mismatch between dreams of stardom and economic reality, encourage record companies to postpone a relational attitude to their contractual negotiations. In fact, perhaps rather than considering the place of contractual theory, the question that really ought to be asked is whether the contract itself has a place at all if a meaningful relationship is to be engendered.

75 S Macaulay, ‘Freedom From Contract: Solutions in Search of a Problem?’ [2004] Wisconsin L Rev 777 at 801.