Phillip Collins Limited v. Davis and another

R Howe for the Claimant; P Herbert for the Defendants

JONATHAN PARKER J

The claimant company, Philip Collins Ltd., is and has at all material times been entitled to the services of the well-known popular musician, Mr Phil Collins. The defendants, Mr Rahmlee Davis and Mr Louis Satterfield, are professional musicians who accompanied Mr Collins on a highly successful world tour in 1990. The defendants, with two others, formed the horn section of the group, which consisted of thirteen musicians in all. It was contemplated by the claimant that on completion of the tour an album would be released containing recordings of live performances taking place during the tour, and by their contracts of engagement for the tour each of the musicians (including the defendants) granted the claimant the right to exploit such recordings. The musicians' contracts of engagement also included an entitlement to royalties on such recordings.

In the event, recordings were made of a number of live performances during the tour, and in November 1990 (the tour having ended the previous month) fifteen of such recordings were released as an album under the title "Serious Hits Live". I will refer to this album hereinafter as "the Live Album". The horn section (including the defendants) performed on only five of those fifteen tracks; the remaining musicians performed on all fifteen tracks.

In 1997 a dispute arose between the claimant and the defendants as to the true meaning and effect of the royalty provision in the defendants' contracts of engagement. Throughout the period of more than six years from the release of the album in November 1990 until March 1997 the claimant accounted to the defendants for royalties on the Live Album without applying any discount or deduction to reflect the fact that the defendants had performed on only five out of the fifteen tracks. However, by letters dated 26 March 1997 from its Chief Accountant the claimant informed the defendants that royalties had been mistakenly paid to them in respect of tracks on which they had not performed, and that in consequence they had been overpaid by a total of US$345,151.23 in respect of worldwide sales of the Live Album outside the United Kingdom and a total of £329,370.24 in respect of sales of the Live Album in the United Kingdom. The letter continued:

"We have therefore made a provision to recoup this payment from future royalties earned. We apologise for any confusion that this may have caused.

Please do not hesitate to contact me if you have any queries."

By March 1997 sales of the Live Album were, inevitably, tailing off, and the royalties paid to the defendants in respect of it were reducing accordingly. Whereas the royalties paid to each defendant in respect of the first accounting period (ie. the period from the release of the album in November 1990 until 30 June 1991) amounted to US$219,081 and £29,251, the royalties paid in respect of the six-month period to 30 June 1996 (being the last royalties which the defendants received) amounted to only US$15,386 and £929. Since then, sales of the Live Album have reduced still further, and experience in the music industry teaches that they will continue to do so (subject, possibly, to temporary fluctuations). Had the claimant continued to pay royalties on the same basis as before, the defendants would each have received US$10,922 and £657 for the six months to December 1996, reducing to US$7,127 and £326 for the six months to June 1999. On the claimant's case, the defendants are entitled only to a third of those sums (US$3,641 and £219 each for the earlier period and US$2,376 and £109 each for the later). In the circumstances, it is plain (and it is common ground) that if the claimant's contention as to the true meaning and effect of the contracts of engagement is correct the claimant will only succeed in recouping a very small proportion of the overpayments by way of set off against future royalties; and, by the same token, that the defendants will receive no further royalties from sales of the Live Album. Although the claimant retains the right to re-issue any of the live recordings at some time in the future, either as part of a new compilation album or as singles, it presently has no plans to do so.

For their part, the defendants deny that they have been overpaid. They contend that under their contracts of engagement their royalty entitlement is not subject to any discount or deduction to reflect that fact they did not perform on all the tracks on the Live Album, and that prior to March 1997 the claimant had been accounting for royalties on the correct basis. The defendants also raise defences of estoppel, change of position and limitation, to which I shall refer in due course.

In October 1997 the defendants brought an action against the claimant and others in California claiming a declaration that they are entitled to "the full royalty on a per album basis". They also claimed, against all defendants to the Californian proceedings, damages (including punitive damages) for conversion and conspiracy, alleging that:

"....the Defendants' acts in deliberately conspiring to convert and in converting the royalties belonging to Plaintiffs were and are oppressive, fraudulent and malicious."

On 5 January 1998 the Superior Court of California, County of Los Angeles, stayed the proceedings for six months to permit the defendants (the claimants in the Californian proceedings) to bring an action in England. (I take this information from the copy Ruling of the Californian court which is included in the trial bundle.) The proceedings were stayed because the defendants' contracts of engagement provide expressly that they are to be construed in accordance with English law, and that the English High Court is to have jurisdiction. In the event, for reasons which are not apparent, it was the claimant (and not the defendants) who brought the present action; but what is clear is that the bringing of this action is a direct consequence of the defendants having commenced the Californian proceedings.

The writ was issued on 29 January 1998, accompanied by a Statement of Claim. By its Statement of Claim the claimant pleads that on the true construction of the relevant contracts the royalties payable to the defendants in respect of the Live Album fall to be "pro-rated" according to the number of tracks on the Live Album in which they participated (that is to say, in the event, five out of fifteen). On that basis, the claimant alleges that it has overpaid each of the defendants by US$392,965.98 - it is common ground that, as a matter or arithmetic, that consequence would follow - and that such overpayment was made under a mistake of fact, namely that the defendants had performed on all fifteen tracks. The claimant claims declaratory relief as to the construction of the relevant contracts and repayment of the sums allegedly overpaid (although, as stated in the letters dated 26 March 1997, the claimant intends to effect recovery only by means of set off against future royalty entitlements).

By their Defence and Counterclaim, the defendants plead that on the true construction of the relevant contracts they are entitled to royalties based on the selling price of the Live Album, provided only that it contains one track on which they performed; that is to say, they deny that their royalty entitlement is to be "pro-rated" in the manner contended for by the claimant. On that footing, the defendants deny that they have been overpaid. In para 15 of their Defence and Counterclaim they further deny that, if they have been overpaid, the overpayment was made as the result of the alleged mistake.

Para 15 goes on to plead that the claimant is estopped from denying that the true construction of the relevant contracts is as contended for by the defendants and as adopted by the claimant between 1991 and early 1997, and that the claim in relation to alleged overpayments made prior to 29 January 1992 (being six years before the issue of the writ) is in any event statute-barred. In the event, the only royalties paid to the defendants prior to 29 January 1992 were the royalties in respect of the first period after the release of the Live Album (that is to say, the period to 30 June 1991). It was suggested on behalf of the defendants at one stage in the course of the hearing that the claim for declaratory relief as to the true construction of the relevant contracts is also statute-barred, but that point was not pursued (and rightly so, in my judgment, since it is plainly misconceived).

Para 16 of the Defence and Counterclaim is in the following terms:

"If, which is denied, the alleged overpayment was made as a result of a mistake of fact, then the [defendants] have changed their position in good faith as a result of the overpayment so as to make it inequitable to require the [defendants] to repay to the claimant the alleged repayment or any part of it."

By their Counterclaim the defendants allege that, wrongfully and in breach of contract, the claimant has failed to account to them for the full amount of their royalty entitlement from March 1997 onwards, and they claim declaratory relief in the terms of the construction of the relevant contracts for which they contend, an account of the royalties due on that basis, and payment of the sum found due. It is to be noted that there is no counterclaim for damages for conversion or conspiracy, nor does the Defence and Counterclaim repeat the allegations of oppressive, fraudulent and malicious conduct on the claimant's part which were made by the defendants in the Californian proceedings. It is further to be noted that the Defence and Counterclaim does not contain any allegation of dishonesty or bad faith on the part of the claimant.

The claimant requested further and better particulars of the defence of estoppel pleaded in para 15 of the Defence and Counterclaim. The defendants responded as follows:

"The [defendants'] primary case is as follows:

(1) The estoppel referred to is an estoppel by convention and not by representation.

(2) The parties to this action acted on an agreed assumption, namely the construction pleaded in paragraph 10 of the Defence and Counterclaim and the [claimant] is precluded from denying that construction.

(3) Further or alternatively the [defendants] will say:

(a) the [claimant] unequivocally represented to each of them that the sums paid to each of them between September 1991 and early 1997 ....were properly due and owing to them; and

(b) the representation in paragraph 3(a) above led each of the defendants to believe that he was entitled to treat the moneys paid as his own; and

(c) each of the defendants incurred expenditure as a result of the alleged overpayment and neither defendant is able to recover that expenditure."

The claimant also sought particulars of the allegation of change of position contained in para 16 of the Defence and Counterclaim, requesting each defendant to identify precisely how and when he changed his position as a result of the alleged overpayments. The defendants' response was in the following terms:

The [defendants] have changed their position from the 6th December 1989 [when the contracts were signed] in that they incurred expenditure as a result of the alleged overpayment and neither defendant is able to recover that expenditure. ... The [defendants] will say that the actions of the [claimant] have left each of them in a dire net financial position in the following respects:

"(1) the First Defendant has made financial gifts to his ex-wife, friends, children and mother. His financial position is now so dire that most of his musical equipment is in a pawn shop.

(2) the Second Defendant is US$31,000 in arrears in respect of the rent for his home.

(3) the Second Defendant incurred extraordinary expenditure in relation to the medical treatment of his wife for cancer. The Second Defendant's wife attended hospitals in both California and Mexico."

By its Reply and Defence to Counterclaim, the claimant denies that it is estopped from asserting that the defendants have been overpaid. It further denies that the defendants have changed their position as a result of the overpayments, and/or that it would be inequitable to require the defendants to make repayment. In reply to the defence of limitation, the claimant relies on s 32 of the Limitation Act 1980, pleading that the mistake only came to light in March 1997 and that only then did the limitation period start to run.

The claimant appears by Mr Robert Howe of counsel; the defendants by Mr Peter Herbert of counsel. I understand that the defendants' counsel and solicitors are acting pro bono.

The issues for decision on the pleadings are as follows:

(1) On their true construction, do the relevant contracts provide for the defendants' royalty entitlement in respect of the Live Album to be "prorated" by reference to the number of tracks on the Live Album on which they performed?

(2) If Yes, were the overpayments made in consequence of a mistake of fact, namely that the defendants had performed on all fifteen tracks on the Live Album?

(3) If Yes, is the claimant nevertheless precluded from claiming that the defendants have been overpaid (and if so, to what extent) by (a) estoppel or (b) change of position on the part of the defendants?

(4) If and to the extent that the claimant is not so precluded, to what extent (if at all) is the claim statute-barred under the terms of the Limitation Act 1980?

I will hereafter refer to issue (1) as "the Construction Issue"; to issue (2) as "the Mistake Issue"; to issue (3)(a) as "the Estoppel Issue"; to issue (3)(b) as "the Change of Position Issue"; and to issue (4) as "the Limitation Issue".

I heard oral evidence of fact from Mr Tony Smith (on behalf of the claimant) and from both the defendants. I also heard expert evidence from Mr Ewen Wyllie, a solicitor with practical and professional expertise in relation to the music industry, who was called on behalf of the claimant. Although at the interlocutory stage leave was given to each side to call one music industry expert, in the event no expert has been called on behalf of the defendants. Although a witness statement by such an expert was served by the defendants, the proposed witness (also acting, I am told, pro bono) was unfortunately not available to attend the trial.

Mr Smith has been Mr Phil Collins' manager since about 1973. He acts as manager through his own company, Hit & Run Music Ltd. He manages the claimant, and is the person with overall responsibility for Mr Phil Collins' financial arrangements. In particular, he was responsible for the royalty arrangements in relation to the 1990 tour. His recollection of the events surrounding the signing of the relevant agreements is far from clear, but at this distance in time (more than ten years) that is not in the least surprising. Moreover, he must at the time have been preoccupied with a large number of other matters arising in connection with the forthcoming tour. Despite his lack of detailed recollection, however, I found Mr Smith to be an impressive witness. He gave his evidence with manifest fairness and concern for accuracy, and frankly acknowledged the limits of his recollection. In the circumstances, I have no hesitation in concluding that Mr Smith is a reliable witness.

So far as Mr Davis is concerned, it has to be recorded that, when confronted in cross-examination with documentary evidence which was plainly inconsistent with his case, he frankly accepted that in a number of respects his witness statement (which formed the basis of his oral evidence in chief) significantly overstated his case. I have little doubt that this is partly due to the fact that his recollection of relevant events from 1990 onwards has become to some extent distorted - albeit unwittingly - by his firmly-held conviction that he has been treated most unfairly by the claimant. At the same time, I have no doubt that Mr Davis gave his evidence honestly, and that he was concerned to assist the court to the best of his recollection. In addition, it is to his credit that he was frank in acknowledging the inaccuracies in his witness statement when they were pointed out to him. In the circumstances, however, I am bound to conclude that his recollection of material events is not wholly reliable, and to approach his evidence with that reservation firmly in mind.

As for Mr Satterfield, I am satisfied that he too gave his evidence honestly. In his case, as in the case of Mr Davis, his witness statement contained a number of serious inaccuracies, but, like Mr Davis, he was frank in his acknowledgement of those inaccuracies. Mr Satterfield plainly has less of a mind for administrative detail than Mr Davis, and as a result his oral evidence was at times even more vague and unspecific than that of Mr Davis - particularly his evidence in relation to his financial affairs. No doubt this is attributable to the fact that his focus tends to be on music rather than business. In the circumstances, I must treat Mr Satterfield's recollection of material events with similar caution.

Unfortunately, both Mr Davis and Mr Satterfield failed to make anything approaching proper disclosure of documents at the interlocutory stage, and in consequence (as happens only too often) a large number of further documents were disclosed in the course of the trial and introduced into oral evidence in a piecemeal way. However, in the circumstances I accept that the defendants' failure to comply with their obligations in relation to disclosure was not deliberate, but resulted from a genuine failure on their part to appreciate the extent of those obligations.

Turning to the expert evidence, I am most grateful to Mr Wyllie for the assistance he has provided. In the course of his cross-examination of Mr Wyllie, Mr Herbert questioned Mr Wyllie's impartiality and independence. As to that, I am satisfied that Mr Wyllie is both impartial and independent; that he is fully aware of the duties which an expert witness owes to the court; and that he fully discharged those duties in giving his evidence.

Mr Davis is 52 years old; Mr Satterfield is 63. Both were brought up in Chicago. Mr Satterfield and a Mr Don Myrick were two of the founder members of a group called "Earth Wind and Fire", which was formed in about 1969. Mr Satterfield played the trombone and Mr Myrick (who died in 1993) the saxophone. They were subsequently joined by Mr Davis, who played trumpet and flugelhorn. The fourth horn player with "Earth Wind and Fire" was a Mr Michael Harris, who also played trumpet and flugelhorn. Together, they formed the horn section of "Earth Wind and Fire". By about 1979 "Earth Wind and Fire" had become very successful, and the horn section coined a name for themselves: "Phenix Horns". They formed a company under that name, which was paid a retainer - in the form of a flat fee - for their work with "Earth Wind and Fire". They received no royalties.

In about 1981 the members of Phenix Horns met Mr Phil Collins for the first time. He had heard them play in a concert in Wembley Stadium and had been impressed by their performance. Mr Collins had by that time achieved a considerable measure of success as the lead singer with a group called "Genesis", and was contemplating embarking on a solo career. Later that year, Mr Collins and the members of the Phenix Horns met again in Los Angeles. Mr Collins asked if they would be willing to perform with him on an album. They agreed to do so, and a studio recording was made in Los Angeles. At about this time, Phenix Horns' retainer from "Earth Wind and Fire" was terminated.

Over the next five years Mr Collins released three albums, each of which included tracks on which Phenix Horns performed. Phenix Horns also made a number of live recordings with Mr Collins. Phenix Horns were paid a flat fee for their work with Mr Collins, which was fixed ad hoc. At this stage, Phenix Horns had no royalty entitlement.

It is common ground that Phenix Horns made an important contribution to the success of the albums on which they performed, and, for that matter, to the personal success of Mr Collins.

In the period 1985 to 1989 no albums were released by Mr Collins. In 1989, however, Phenix Horns worked with Mr Collins on his successful album "....But Seriously". Phenix Horns played on four tracks out of the ten on the album. In the light of the success of this album, Mr Collins decided to embark on a world tour the following year, 1990. He invited Phenix Horns to tour with him, as part of his group. Phenix Horns agreed to do so (at this stage Mr Harris dropped out, and was replaced by Mr Kim). It was envisaged by the claimant that recordings would be made of live performances during the tour, with a view to the release of an album following the conclusion of the tour.

Mr Smith decided, in consultation with Mr Collins, that bearing in mind that in their contracts of engagement the musicians (including the defendants) would be giving their consent to the claimant exploiting live recordings of performances in which they had participated, it would be appropriate to offer them a percentage share of the royalties receivable by the claimant, in addition to remunerating them by means of fees calculated at daily rates. Different royalty rates were offered (although the rate for the four members of Phenix Horns was the same: half a percentage point each). The defendants had no real bargaining position in relation to the royalty rates, which were effectively in the gift of the claimant.

The tour lasted from January to October 1990. Live recordings were duly made, and in November 1990 the Live Album was released. Phenix Horns performed on five of the fifteen tracks on the Live Album; the nine other musicians performed on all fifteen tracks.

Following the release of the Live Album, the four members of Phenix Horns were paid royalties calculated by reference to sales of the Live Album, without any "prorating" (ie. without any adjustment to reflect the fact that they had only performed on five out of fifteen tracks). The royalties were paid half-yearly, for the periods ending on 30 June and 31 December in each year. Royalty statements were provided by the claimant in respect of each payment.

This state of affairs continued until March 1997, when the letters to which I referred earlier were sent to the defendants. It is to be inferred that letters in similar terms were also sent to Mr Kim and to the late Mr Myrick's representative. Since then, the defendants have received no further royalty payments from the claimant. As at March 1997, the royalty payments for the six-month period ended 31 December 1996 had not yet been paid. Thus, the last royalty payment received by the defendants in respect of the Live Album was the payment of royalties for the six-month period ended 30 June 1996. As I noted earlier, if the claimant succeeds in this action the defendants can expect to receive no further royalties from the claimant; similarly, the claimant can expect to recover only a small proportion of the alleged overpayments by means of set off against future royalties payable to the defendants, since sales of the Live Album have tailed off to the point where future royalties in respect of it (especially when prorated) will be relatively insignificant.

The decision to seek recovery only by way of set off against future royalties was taken by Mr Smith in consultation with Mr Collins. On the basis that the defendants had been mistakenly overpaid to the extent of two thirds of the royalties paid to them since the release of the Live Album in November 1990, the decision was taken not to seek to compel them to make repayment of royalties already paid - in all probability an unrealistic option in any event, given the defendants' current financial circumstances - but not to pay them any further royalties.

Whatever the merits or otherwise of this decision by the claimant, the manner in which it was communicated to the defendants certainly leaves a great deal to be desired. Given the terms of the letters dated 26 March 1997, quoted earlier, it is not in the least surprising that the defendants' reaction to those letters was one of surprise and shock. In fairness, Mr Smith frankly acknowledged in evidence that the matter could have been handled better by the claimant. Had it been better handled, it is possible that proceedings might have been avoided. But whether that be so or not, the manifest deficiencies in the manner in which the claimant's decision was communicated to the defendants cannot impact on the rights and obligations of the parties in law.

The defendants' first reaction to the news that the claimant would not be paying them any further royalties was to write a letter to Mr Collins personally. The letter, which is dated 23 April 1997 and signed by Mr Satterfield, was a joint composition by both defendants. It is couched in placatory terms, and includes the following passage:

"When Rahmlee [Mr Davis] and I performed, singing and blowing the horns on tour, there was no extra compensation for the singing. Nor were there extra monies for Mr Don Myrick's fabulous solos, on all albums and tours, as you very well know. Not to mention the donation of images on all the videos.

So after 10 years of none gratis, we thought signing a contract for one half per cent in one of many albums, would at least compensate for the career sound, video images. Don's solos, and inspiration added to your production.

Phil, as friends and colleagues, I always thought that if ever there was a problem between us, that we'd be able to work it out. It was very shocking to discover, that after (6) six years of uninterrupted income, that I heavily depended upon to care for my wife, Blondell, and family, would be halted entirely, with no verbal communication from you.

I hope this letter finds you and yours, in the best of health, and are faithfully looking forward to your reply."

No reply was received to that letter, either from Mr Collins himself or from the claimant.

On 14 October 1997 the defendants commenced the proceedings in California to which I have already referred, in which they alleged oppression, fraud and malice against the claimant. These proceedings represented a complete change of tack and of tactics, by the defendants. The olive branch having yielded no results, they decided (presumably on legal advice) to go on the offensive. However, the allegations of oppression, fraud and malice are not repeated in this action. Indeed, as noted earlier, there is no allegation in this action of dishonesty or bad faith on either side.

The general principles to be applied in construing contractual documents such as those in issue in the instant case are as summarised in the following passage from the speech of Lord Hoffmann in Investors' Compensation Scheme Ltd v. West Bromwich Building Society Ltd [1998] 1 All ER 98, [1998] 1 WLR 896, at 912g-913f:

"(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the "matrix of fact", but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of a document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meaning of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax ....

(5) The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had..." (Emphasis supplied.)

I now proceed to apply those principles. I turn first to the circumstances in which the defendants' contracts of engagement came to be signed.

The defendants' contracts of engagement are in identical terms, subject only to necessary changes. They are undated, but the evidence is that they were signed on or about 8 December 1989. The forms of agreement were prepared by the claimant. It is not clear on the evidence who actually drafted them. Mr Smith told me that the wording may well have been based on agreements for the engagement of musicians on an earlier tour, with the addition of the clause relating to royalties: clause 5.01. Mr Smith said that he might possibly have drafted clause 5.01 himself; at all events, he did not recall it being drafted by the claimant's lawyers. The forms of agreement were proffered to the defendants in or about late November or early December 1989, when rehearsals began for the forthcoming tour. At the same time, forms of agreement in the same terms, subject only to necessary changes, were also proffered to the other musicians in the group, including the two other members of Phenix Horns, namely Mr Myrick and Mr Kim.

The defendants, together with Mr Myrick and Mr Kim, met at Mr Myrick's house to discuss the terms offered. They had previously contacted a financial consultant, a Mr West Taylor, who also attended the meeting. Following the meeting, Mr Taylor telephoned Mr Smith, and raised a number of points with him. This was followed by a telephone conversation between Mr Myrick and Mr Smith. As a result of these conversations, a further short document was drawn up containing a number of additions to the forms of agreement. This further document is entitled "Addendum", and bears the date 8 December 1989. The forms of agreement and the Addendum were signed on or about that date, at a meeting between Mr Smith and Messrs. Davis, Satterfield, Myrick and Kim. No one else was present on this occasion.

I turn first to the forms of agreement - for convenience I will take the agreement relating to Mr Davis, and I will refer to it hereafter as "the Agreement". As explained earlier, Mr Satterfield's agreement is in the same terms, subject only to necessary changes.

The parties to the Agreement are Mr Davis (defined as "Artist") (1), the claimant (defined as "Company") (2), and a company called Gentour Inc (3). Gentour Inc was party to the Agreement for the purposes of securing Mr Davis' services for that part of the tour which included North America and Japan. Its participation in the Agreement can be ignored for present purposes.

The Agreement recites that the claimant wished to reserve the right to exploit recordings of Mr Davis recorded during the tour.

Clause 1 of the Agreement provides that the Agreement shall be for a term ending on 30 September 1990 (subject to a right to extend the term). Clause 2 contains the obligations of Mr Davis as a musician and performer on the tour. Clause 3 provides for Mr Davis to be compensated at daily rates set out in the First Schedule to the Agreement. Clause 4 contains warranties by Mr Davis. By clause 4.05 Mr Davis warrants that he is entitled to grant to the claimant all consents necessary to enable the claimant to exploit his recordings (as referred to later in the Agreement) and he grants such consents.

Clause 5 is headed "Recording". Clause 5.01 is in the following terms:

"In the event that recordings made live during a performance during the Term ("live recordings") are released on record for sale to the public which recording [sic] include an identifiable performance by Artist then Company shall procure that Artist receive a royalty at the rate set out in the Second Schedule hereto such royalty to be calculated on the same royalty base as Company's affiliated production company is accounted to by its respective record companies including without limitation the same reductions deductions negations packaging deductions and tax ("the royalty"). The royalty shall be applied against that percentage of the recording costs attributed by the Company at its absolute discretion to the particular recording as the royalty hereunder bears to the total royalty payable to Company's affiliated production company in respect of the recording. The royalty shall be payable to the Artist within 90 days of 30 June and 31 December each year. In the event that a payment of less than $100 is due then this payment shall be carried forward to the next account date."

The Second Schedule to the Agreement provides that the royalty is to be calculated at one half of 1 %.

The only clause of the Addendum which is material for present purposes is clause 7, which contains an addition to the Second Schedule to the Agreement in the following terms:

"The aforementioned royalty is understood to be based on the suggested selling price."

Although clause 5.01 of the Agreement refers to "the Company's affiliated production company", no such company in fact existed at any material time. Royalties in respect of the Live Album are, and have at all material times been, paid by the record companies direct to the claimant. In the circumstances it is accepted by the claimant that the clause is to be read as if the reference to "the Company's affiliated production company" were a reference to the claimant itself.

The claimant is, and has at all material times been, under contract to three record companies in relation to the release of Mr Collins' recordings (including the Live Album), namely Virgin Records Ltd ("Virgin"), Atlantic Recording Corporation ("Atlantic"), and WEA International Inc ("WEA"). In each case, the claimant is entitled to royalties on releases of Mr Collins' recordings, but in each case its royalty entitlement is expressly "prorated" by reference to the number of tracks on the record which contain performances by Mr Collins. By way of example, the prorating provision in the contract between the claimant and WEA is in the following terms:

"As to records not consisting entirely of masters delivered hereunder, the royalty rate otherwise payable to [the claimant] hereunder with respect to sales of any such record shall be prorated by multiplying such royalty rate by a fraction, the numerator of which is the number of masters recorded and delivered hereunder embodied on such record and the denominatory of which is the total number of masters embodied thereon ....."

In addition, each recording contract provides that there should be no "cross-coupling" (that is to say, no inclusion on the record of recordings by artists other than Mr Collins) without the claimant's consent.

Mr Wyllie told me that in his experience it is standard practice in the music industry to include a prorating provision in recording contracts, limiting the royalty entitlement of the artist to those tracks on which he performs. Mr Wyllie regards proration is an essential element of royalty accounting since individual tracks may be used in a number of different ways: eg. as one of a number of tracks on an album containing recordings by one artist only, or on a compilation album containing tracks by more than one artist, or as a single. Mr Wyllie could think of only two situations in which royalties on a particular track might be payable to someone other than the artists who performed on that track. One such situation might arise where a single is released containing, on its A-side, a track by a well-known artist, and on its B-side a track by a less well-known artist. In such a situation, the well-known artist might succeed in negotiating a royalty on the full sale price of the record, with no proration. Similarly, a producer who produces a number of tracks for an artist's album might succeed in negotiating a royalty across the entire album, in addition to a prorated royalty in respect of the specific tracks which he has produced. In Mr Wyllie's experience, however, this occurs very rarely in practice.

I accept Mr Wyllie's evidence on these matters, and I accept and agree with the views which he expressed in relation to them.

Against that background, I return to clause 5.01 of the Agreement.

In the first place, it is to be noted that although the Agreement was entered into at a time when the parties were contemplating the release of the Live Album, the claimant's exploitation rights are not limited to the Live Album. The "term" of the Agreement, defined in clause 1, bears no relation to the release of the Live Album (or indeed of any record) but relates only to the period of engagement of Mr Davis as a musician on the tour. The exploitation rights are granted by clause 4.05 of the Agreement, which enables the claimant to exploit live recordings made by Mr Davis "during the Term" (ie. on the tour). The rights granted by clause 4.05 are not limited to exploitation by means of the release of the Live Album; the claimant has the right to exploit such recordings in whatever manner and at whatever time or times it chooses. It follows that if the defendants are right in the construction which they seek to place on clause 5.01, they are entitled to royalties not only on the entirety of the Live Album but on all tracks by Mr Collins which may be included in any subsequent album, provided only that one of those tracks consists of a live performance recorded during the tour, being a performance in which they participated.

In my judgment, however, such an arrangement would not only run contrary to standard practice in the music industry but would also be wholly lacking in commercial sense or logic. I can see no commercial sense or logic in an arrangement whereby the inclusion on a particular record of a single track on which the defendants perform should entitle the defendants to royalties on all other tracks by Mr Collins on that record. Moreover, if such were the true arrangement between the parties it would be in the claimant's commercial interest to ensure that none of the defendants' tracks were included in any subsequent album of Mr Collins' recordings, since the inclusion of only one such track on such an album would entitle the defendants to royalties on all the remaining tracks by Mr Collins.

In the second place, the second sentence of clause 5.01, relating to the apportionment of recording costs, is in my judgment wholly inconsistent with the defendant's construction and only makes sense in the context of proration. As I read it, it provides that in allocating recording costs for the purpose of calculating the royalty payable to Mr Davis, there has first to be an apportionment of the total recording costs of all the tracks on the album as between the various tracks (the apportionment to be made by the claimant, at its discretion). Then, as the second stage, in relation to "the particular recording" Mr Davis is required to bear such proportion of the recording costs apportioned to that recording as his royalty bears to the total royalty payable to the claimant "in respect of the recording". In the absence of proration there would (so far as I can see) be no need for this provision: it would be entirely otiose, since (on the defendant's construction) there would be no purpose in apportioning the recording costs as between individual tracks, given that on their argument the defendants are entitled to royalties on all the tracks on the Live Album and, for that matter, on all tracks by Mr Collins on any subsequent album provided it includes at least one track of a live performance recorded during the tour, in which Mr Davis participated.

The defendants contend that the words "such royalty to be calculated on the same royalty base as [the claimant] is accounted to by its respective record companies" mean that Mr Davis' royalty is to be one half of one per cent of the overall sum on which the claimant's royalty percentage is calculated (that is to say, the total royalty base for all tracks by Mr Collins on the particular release). In context, and against the background to which I have referred, there can in my judgment be no warrant for such a construction. Reading clause 5.01 as a whole, and in that context, and bearing in mind Mr Wyllie's evidence (to which I referred earlier), I reach the clear conclusion that the clause is directed throughout to royalties for those live recordings (tracks) made on tour which include an identifiable performance by Mr Davis. Hence the need to apportion the recording costs, as provided in the second sentence of the clause (see above).

No doubt the drafting of clause 5.01 leaves something to be desired; but the meaning of the clause is clear, in my judgment. As a matter of drafting, its meaning can be expressed by inserting the words "in respect of such recordings" after the words "receive a royalty" in the first sentence of the clause, so that the sentence reads (so far as material):

"In the event that... live recordings... are released on record for sale to the public which recording[s] include an identifiable performance by Artist then Company shall procure that Artist receive a royalty in respect of such recordings at the rate ... [etc]."

I stress, however, that this is not a case where it is necessary to add words to a clause in order to give it a sensible meaning. The inserted words merely serve to make the meaning of the clause clear to a person reading it with no knowledge of the relevant background. As Lord Hoffmann said, in the passage from his speech in the Investors' Compensation Scheme Case quoted above:

"The meaning of words is a matter of dictionaries and grammars: the meaning of a document is what the parties using those words against the relevant background would reasonably have been understood to mean."

Mr Howe (for the claimant) submits that the words "including without limitation the same reductions deductions negations packaging deductions and tax" are, in context, apt to include proration: a submission which was supported by Mr Wyllie in evidence. In my judgment, however, that is a false point. The words in question form part of the description of the "royalty base", which is a different concept from that of prorating. Moreover, as Mr Wyllie accepted in evidence, as a matter of standard practice in the music industry a recording contract will include both a prorating clause and a clause relating to deductions, negations etc. However, for reasons already given, the meaning of the clause is clear without the need to rely on the words in question.

Mr Herbert (for the defendants) sought to rely on the subsequent conduct of the parties (and in particular the conduct of the claimant in paying royalties without any deduction for proration) as being relevant to the determination of the true meaning of the Agreement. Subsequent conduct may of course be admissible as evidence of the terms of a contract, or on the issue whether a contract has been subsequently varied; but in the instant case there is no doubt as to the terms of the Agreement (in the sense that the terms have been reduced to writing), and it has not been alleged by the defendants that the Agreement has subsequently been varied. In the circumstances, I can see no good reason to depart from the general rule that subsequent conduct ought not to be taken account as an aid to construction (as to which, see Wickman Tools v. Schuler [1974] AC 235, [1973] 2 All ER 39 esp. at 261 per Lord Wilberforce). In any event, if it be the case (as the claimant alleges) that its subsequent conduct in making no deduction for proration was the consequence of a mistaken belief that the defendants had performed on all the tracks on the Live Album - an issue to which I turn below (the Mistake Issue) - I fail to see how that conduct could have any bearing on the true meaning of the Agreement.

Mr Herbert also seeks to rely, as an indication that proration was not intended, on the absence of any provision guaranteeing that a minimum number of what I may term the defendants' tracks would be included in the forthcoming Live Album. In my judgment, however, that submission overlooks the fact that, as noted earlier, the exploitation rights granted by the Agreement are not limited to the release of the Live Album. Further, clause 5.01 itself is framed in conditional terms, i.e. "in the event that" (1) records are released for sale, (2) which include identifiable performances by the defendants. Although at the time the Agreement was entered into the claimant was undoubtedly contemplating that an album would be released containing recordings of live performances given during the tour, the Agreement contains no obligation on the claimant to release such an album. Moreover, given the relative bargaining power of the parties, it is in my judgment unreal to assume that a provision for proration would be coupled with the kind of guarantee suggested by Mr Herbert.

Mr Herbert also relied on the considerable contribution which Phenix Horns undoubtedly made to the success of the tour as the basis for a submission that the Agreement must have been intended to confer on them a greater royalty entitlement than a royalty prorated by reference to the number of tracks on the Live Album in which they participated. Again, it seems to me that that submission flies in the face of commercial reality. Had the claimant considered that a prorated royalty at a rate of one half of a percentage point would not adequately reflect the importance of the contribution made by Phenix Horns, the logical thing for the claimant to have done, rather than remove the requirements for proration, would have been simply to increase the royalty rate.

I accordingly conclude that the claimant's contentions on the Construction Issue are correct.

It follows that the defendants have been overpaid, in that on the true construction of clause 5.01 and in the events which have happened they were only entitled to one third of the sums which they were actually paid by way of royalties prior to March 1997.

I can deal with this issue quite shortly. I accept Mr Smith's evidence that in not prorating the defendants' royalties the claimant's accounting department was proceeding on the mistaken basis that the Phenix Horns, like the other musicians, had performed on all the tracks on the Live Album. The mistake was, I find, made at the initial stage, when the relevant data was first recorded in the accounting system and the payment mechanisms set up. Thereafter, the initial mistake was reflected in each subsequent royalty payment until 1997, when the mistake was discovered by Mr Smith.

Mr Herbert sought to make much of the fact that the employee of the claimant who actually made the initial mistake was not called as a witness. In my judgment, however, there is no requirement on the claimant to call such a person as a witness in order to prove its case on this issue. The evidence of Mr Smith is more than sufficient to do so.

The defendants seek to rely on estoppel by convention and estoppel by representation. These are two quite different concepts, which are not to be conflated. I therefore address them separately.

The defendants rely on the doctrine of estoppel by convention as precluding the claimant from asserting the true construction of the Agreement, and as thereby having not merely retrospective but prospective effect. In other words, it is contended by the defendants that in consequence of the application of the doctrine they are entitled not only to retain the overpayments already made, but also to be paid on the same, non-prorated, basis for the future, in just the same way as if the Agreement had been formally varied so as to exclude proration.

In my judgment the defendants' contention that estoppel by convention (assuming it applies in the instant case) can have prospective effect by, in effect, changing the meaning of the Agreement for the future, is wrong in law. As Lord Donaldson MR said in Hiscox v. Outhwaite [1992] 1 AC 562, [1991] 3 All ER 641 at 575 of the former report, referring to the judgment of Bingham LJ in Norwegian Cruises A/S v. Paul Mundy Ltd [1988] 2 Lloyd's Rep 343 (a passage cited with approval by the Court of Appeal in Republic of India v. India Steamship Co Ltd [1998] AC 878, [1997] 4 All ER 380 at 891F of the former report:

"... once a common assumption is revealed to be erroneous, the estoppel will not apply to future dealings."

On that footing, the only question, so far as estoppel by convention is concerned, is whether the doctrine applies retrospectively so as to bar the claimant from setting off the overpayments previously made against future royalty payments.

Although the doctrine of estoppel by convention is in some respects both difficult and uncertain, it is at least clear from the decision of the House of Lords in Republic of India (above) that the minimum requirements for its application are (1) that the parties to a transaction act on an assumed state of facts or law; (2) that the assumption is either one which both parties share or one which is made by one party and acquiesced in by the other; and (3) that in the case of a shared assumption the assumption must be an "agreed assumption" or "something very close to it" (see ibid. p 913G-H). This last requirement is, as I read it, essential if the exception referred to by Lord Hoffmann in the third paragraph of his summary of the relevant principles of construction of contractual documents quoted earlier (exclusion of evidence of negotiations and of subjective intention) is not to be swept away altogether. I agree with Mr Howe that, as the law stands, the doctrine of estoppel by convention is not available as a vehicle to admit, as it were by the back door, evidence of the parties' alleged subjective intentions or understanding as to the meaning of contractual documents where such evidence would fall within the exception identified by Lord Hoffmann.

In any event, in the instant case there was no agreed assumption, or anything close to one. On the contrary, it is clear from Mr Smith's evidence that if the question had been raised in terms (and there is no evidence that it ever was raised in terms) he would never have agreed to pay royalties on a non-prorated basis. If it be the case that the defendants have throughout assumed that they were entitled to royalties on that basis, that was not an assumption of which Mr Smith was aware, still less one which he shared. Nor, in the circumstances, there can be any question of the claimant having acquiesced in any such assumption. The mere fact of payment on a mistaken basis cannot, in my judgment, amount to acquiescence.

Nor am I satisfied that in signing the Agreement the defendants were acting on the assumption that they would be entitled to royalties on a non-prorated basis. At the time, they were pleased to be part of what promised to be (and what in fact turned out to be) a highly successful commercial venture, and they fully recognised that they were in no position to bargain with Mr Smith as to their royalty entitlement. It was suggested in the course of evidence that had the defendants understood the true extent of their royalty entitlement when the contracts of engagement were signed they would have pulled out of the tour. I regard that suggestion as fanciful. At the time they were confident that the contemplated album of live recordings would include a number of tracks containing performances by the Phenix Horns (as indeed happened), and they were not concerned at that stage with the question or proration. Although both defendants maintained in evidence that at the time the Agreement was signed they assumed that they would be entitled to royalties on a non-prorated basis, I regret that I cannot accept that evidence. As I made clear earlier, I entirely acquit the defendants of any intention to mislead the court or to do other than give their evidence fairly to the best of their recollection, but I am satisfied that this is an example of their recollections having become distorted by subsequent events. At the time, they gave no thought to the question of proration. Had they done so, they could not sensibly have concluded that they were being offered royalties on a non-prorated basis; that is to say, that the claimant was offering them royalties on tracks on which they had not performed.

Mr Herbert sought to make much of evidence given by the defendants of a conversation with Mr Smith at some time during the tour in the course of which (according to the defendants) Mr Smith told the defendants that their first royalty payment from the release of the Live Album would be likely to be in the region of $100,000 each. This is said to support the proposition that Mr Smith was assuming that royalties would be paid on a non-prorated basis, since on a prorated basis the first royalty payment to each defendant amounted to less than $100,000 (albeit not by much). Mr Smith could not specifically remember a conversation taken place during the tour about the amount of royalties which the defendants would be likely to receive from the release of the Live Album, but he accepted that such a conversation might have taken place and that in the course of it he might have mentioned a figure of $100,000.

I accept the defendants' evidence that such a conversation did take place, and that in the course of it Mr Smith mentioned a figure of $100,000. I further accept the defendants' evidence that they understood Mr Smith to be referring to the first royalty payment. On the other hand, I accept Mr Smith's evidence that he was at all material times aware that the Agreement entitled the defendants to royalties on a prorated basis, and I find that the figure of $100,000 was mentioned in that context. Moreover, I am satisfied that in mentioning such a figure Mr Smith did not intend to refer merely to the first royalty payment, despite the fact that the defendants understood him to do so. Mr Smith is an experienced and astute businessman, and it is inherently unlikely that he would have put forward such an optimistic figure for the first royalty payment at a time when the tour was still in progress and no decision could have been taken as to the selection of live recordings to be included in the Live Album. I am satisfied that in mentioning a figure of $100,000 Mr Smith was intending to do no more than give a rough, and conservative, projection of the overall royalties which each of the defendants might reasonably expect to receive from the contemplated Live Album. In any event, in the context of the defence based on estoppel by convention it would be unsafe to attach any major significance to a single informal conversation which took place some ten years ago.

In my judgment, therefore, the defence of estoppel by convention fails.

The defendants' case on this issue is that the mere making of each royalty payment represented that the payment was due; that the defendants relied on such representations to their detriment; and accordingly that the claimant is estopped from seeking repayment. Accordingly, to the extent that the defence is a good one it can only operate retrospectively. The defendants rightly do not seek to use the doctrine of estoppel as the basis for a claim that the future royalties should be paid on a non-prorated basis.

In my judgment, however, the mere tendering of a payment under a contract does not, without more, amount to a representation that the payment is due (see Lipkin Gorman v. Karpnale Ltd [1991] 2 AC 548, [1992] 4 All ER 512 at 579d of the former report per Lord Goff). No reasonable person will assume that mistakes may not be made. The tender may well amount to a representation that the tenderer believes the sum tendered to be due, but that is a representation as to the tenderer's current state of mind and not as to the parties' rights under the contract. Nor is there any evidence in the instant case that the defendants have acted to their detriment in respect of any specific royalty payment. Rather, as explained further in the context of the defence of change of position, the evidence is to the effect that the defendants tended to spend their royalty income as it came in.

In any event, as I read the relevant authorities the law has now developed to the point where a defence of estoppel by representation is no longer apt in restitutionary claims where the most flexible defence of change of position is in principle available (see Lipkin Gorman v. Karpnale (above) at p 580, Goff & Jones' The Law of Restitution 5th edn. pp 828-9, Scottish Equitable v. Derby New Law Online, a decision of Harrison J delivered on 30 September 1999, and Avon County Council v. Howlett [1983] 1 All ER 1073, [1983] 1 WLR 605 CA).

As Mr Howe correctly observed in the course of argument, "change of position" is what this case is really all about.

In Lipkin Gorman (above) the House of Lords recognised change of position as a defence to restitutionary claims. In the course of his speech in that case Lord Goff said this (at p 580c-h):

"I am most anxious that, in recognising this defence to actions of restitution, nothing should be said at this stage to inhibit the development of the defence on a case by case basis, in the usual way. It is, of course, plain that the defence is not open to one who has changed his position in bad faith, as where the defendant has paid away the money with knowledge of the facts entitling the plaintiff to restitution; and it is commonly accepted that the defence should not be open to a wrongdoer. These are matters which can, in due course, be considered in depth in cases where they arise for consideration. They do not arise in the present case. Here there is no doubt that the respondents have acted in good faith throughout, and the action is not founded upon any wrongdoing of the respondents. It is not however appropriate in the present case to attempt to identify all those actions in restitution to which change of position may be a defence. A prominent example will, no doubt, be found in those cases where the plaintiff is seeking repayment of money paid under a mistake of fact; but I can see no reason why the defence should not also be available in principle in a case such as the present, where the plaintiff's money has been paid by a thief to an innocent donee, and the plaintiff then seeks repayment from the donee in an action for money had and received. At present I do not want to state the principle any less broadly than this: that the defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full. I wish to stress however that the mere fact that the defendant has spent the money, in whole or in part, does not of itself render it inequitable that he should be called upon to repay, because the expenditure might in any event have been incurred by him in the ordinary course of things. I fear that the mistaken assumption that mere expenditure of money may be regarded as amounting to a change of position for present purposes has led in the past to opposition by some to recognition of a defence which in fact is likely to be available only on comparatively rare occasions."

Lord Goff went on to emphasise that the defence of change of position will avail a defendant only to the extent that his position has been changed (see ibid. p.580h).

Earlier in his speech in Lipkin Gorman (at p.578D) Lord Goff said this:

"The claim for money had and received is not, as I have previously mentioned, founded upon any wrong committed by the club against the solicitors. But it does not, in my opinion, follow that the court has carte blanche to reject the solicitors' claim simply because it thinks it unfair or unjust in the circumstances to grant recovery. The recovery of money in restitution is not, as a general rule, a matter of discretion for the court. A claim to recover money at common law is made as a matter of right; and even though the underlying principle of recovery is the principle of unjust enrichment, nevertheless, where recovery is denied, it is denied on the basis of legal principle."

Thus, if recovery of the overpayments is to be denied in the instant case, it must be denied not as a matter of discretion but of legal principle. What, then, are the relevant legal principles, in the context of the instant case?

For obvious reasons, it would not be appropriate for me to attempt to set out an exhaustive list of the legal principles applicable to the defence of change of position, but four principles in particular seem to me to be called into play in the instant case.

In the first place, the evidential burden is on the defendant to make good the defence of change of position. However, in applying this principle it seems to me that the court should beware of applying too strict a standard. Depending on the circumstances, it may well be unrealistic to expect a defendant to produce conclusive evidence of change of position, given that when he changed his position he can have had no expectation that he might thereafter have to prove that he did so, and the reason why he did so, in a court of law (see the observations of Slade LJ in Avon County Council v. Howlett (above) at pp 621-2, and Goff & Jones (above) at p 827). In the second place, as Lord Goff stressed in the passage from his speech in Lipkin Gorman quoted above, to amount to a change of position there must be something more than mere expenditure of the money sought to be recovered, "because the expenditure might in any event have been incurred .... in the ordinary course of things". In the third place, there must be a causal link between the change of position and the overpayment. In South Tyneside Metropolitan BC v. Svenska International plc [1995] 1 All ER 545, Clarke J, following Hobhouse J in Kleinwort Benson Ltd v. South Tyneside MBC [1994] 4 All ER 972, held that, as a general principle, the change of position must have occurred after receipt of the overpayment, although in Goff & Jones the correctness of this decision is doubted (see ibid. pp 822-3). But whether or not a change of position may be anticipatory, it must (as I see it) have been made as a consequence of the receipt of, or (it may be) the prospect of receiving, the money sought to be recovered: in other words it must, on the evidence, be referable in some way to the payment of that money. In the fourth place, as Lord Goff also made clear in his speech in Lipkin Gorman, in contrast to the defence of estoppel the defence of change of position is not an "all or nothing" defence: it is available only to the extent that the change of position renders recovery unjust.

With those basic principles in mind, I turn to the facts of the instant case.

At the outset, when considering the facts of the instant case, two matters are to be borne in mind. In the first place, the recovery which is sought relates only to the excess payments of royalty, since one third of the sums actually paid was payable in any event. In consequence, any relevant change of position by the defendants must be referable to the receipt of such excess payments (or, it may be, the prospect of receiving such excess payments). In the second place, the fact that the defendants are currently in financial difficulties is not in itself indicative of a relevant change of position on their part. Although that fact might have been relevant in considering whether to order repayment of the sums overpaid, the claimant is not seeking an order which requires the defendants to make any payment to the claimant: as I explained earlier, it seeks only to set off the overpayments against future royalties.

In their witness statements, which formed the basis of their oral evidence in chief, the defendants addressed the issue of change of position in unequivocal terms. Mr Davis said this in his witness statement:

"Until the royalty payments were stopped, I had adjusted my day to day life according to the regular payments I had received over such a long period, and had become both accustomed to and dependent upon them. I had a few savings. However, with many different projects underway including a clothing business and my solo career, these were soon exhausted. I had relied on the royalties both for my living expenses and to enable me to carry on working. My elderly mother in Chicago and 3 dependants as well as my household in Los Angeles had all been supported with these payments. I could no longer financially assist them - indeed, I have had to borrow money from family and friends. Most of this remains unpaid....... The unannounced withholding of funds has had a domino effect upon my life since most of my projects were predicated on the existence of these royalties."

Mr Satterfield said this in his witness statement:

"I was heavily reliant upon these royalty payments. Over the period until they were stopped, I would estimate that on average they represented 80-90 per cent of my total income. I had, and have, no savings, and the money was used for the day to day living expenses of my family and myself. In particular, the payments were invaluable in assisting my wife with medical treatment ..... I sold my home in Chicago to assist with the care she required. .... The cutting of the royalty payments could not have come at a worse time. In addition, the stopping of the payments dramatically affected my ability to work. There was still a reasonable demand for me. However, the nature of my work involves a great deal of travel, hotels, etc. There were engagements offered to me which I had to decline because I had no money. The effect is a vicious circle...."

Had those factual accounts been true and accurate, they would undoubtedly have provided a strong foundation for a complete defence on grounds of change of position; particularly so in the case of Mr Davis. No doubt the statements were drafted with that very consideration in mind. In the event, however, the passages in the defendants' witness statements dealing with the question of change of position turned out to be seriously exaggerated. I do not entirely blame the defendants for this. It may well be that they did not sufficiently appreciate the need for precision in the framing of their witness statements. But whatever the reason, the fact remains that the defendants' oral evidence, coupled with such documentary evidence as they were able to produce relating to their financial affairs (I referred earlier to the fact that documents were disclosed on a piecemeal basis during the course of the trial), not only failed to approach the degree of particularity reflected in their witness statements, but actually demonstrated that statements of fact made in the passages quoted above were not true.

Thus, Mr Davis expressly accepted in cross-examination that there was no such "domino effect" as is referred to in his witness statement. He also accepted that he was not "dependent on" the royalty income. He frankly admitted that there is not, nor has there ever been, any reason why he cannot earn his living as a musician. It was also clear from his evidence that to the extent that he had not taken other jobs as a musician while the royalties were coming in, that was his choice. He acknowledged that at no stage did he have any savings to speak of, and that his present financial difficulties were due to some bad business decisions on his part. He was unable to point to any particular decision having been taken, or act done, whether by him or on his behalf, as being directly referable to the fact that he was in receipt of royalties calculated on a non-prorated basis. Rather, the true position (as revealed in cross-examination) was that he geared his expenditure to the level of his cash resources from time to time: he was content to enjoy the benefits of the royalty payments as and when they came in, and his outgoings increased accordingly. He was (as I find) fully aware at all material times that royalty income from a particular release tends to reduce over time to nil or a negligible sum. Consequently, he realised that his royalty income from the Live Album would not be maintained at the level of the payments received during the first year or so after its release. On the other hand, that realisation did not lead him to limit his outgoings to any significant extent.

So far as Mr Satterfield is concerned, I intend no criticism whatever of him when I describe him as having a somewhat relaxed and philosophical attitude to life in general, and in particular to financial and administrative matters. Like Mr Davis, Mr Satterfield accepted that there is nothing to prevent him continuing to earn his living as a musician, but, as he put it disarmingly in cross-examination, he earns money when he feels like it. He accepted that the assertion in his witness statement that he cannot work because he cannot afford the up-front hotel and travel costs is an overstatement. Further, it was apparent from his evidence, and I find, that such assets as he and his wife acquired post-1990 (including a number of properties in Chicago which his wife purchased with a view to refurbishment and letting) were not acquired in reliance on a future royalty stream but were purchased ad hoc, as and when they considered that they could afford it. At the conclusion of his cross-examination Mr Satterfield described his current financial position as follows (according to my note):

"I have no money left from my earnings. My lifestyle is hard to explain; you would not believe it. When I got the money in I spent it rather than saved it. A lot of the things I spent it on I am involved in now. I spent it for other people. I have done this throughout my career."

In general, whilst it would plainly not be accurate to describe the defendants as having been careful with their money, I am satisfied that in gauging how much they could spend from time to time they had regard to their current cash resources, the principal source of which (at least in the first two years after the release of the Live Album) was their royalty income.

On the basis of the defendants' oral evidence, coupled with such documentary evidence as they were able to produce, I am unable to find that any particular item of expenditure was directly referable to the overpayments of royalties. Their evidence was simply too vague and unspecific to justify such a finding. On the other hand, in the particular circumstances of the instant case the absence of such a finding is not, in my judgment, fatal to the defence of the change of position. Given that the approach of the defendants to their respective financial affairs was, essentially, to gear their outgoings to their income from time to time (usually, it would seem, spending somewhat more than they received), and bearing in mind that the instant case involves not a single overpayment but a series of overpayments at periodic intervals over some six years, it is in my judgment open to the court to find, and I do find, that the overpayments caused a general change of position by the defendants in that they increased their level of outgoing by reference to the sums so paid. In particular, the fact that in the instant case the overpayments took the form of a series of periodical payments over an extended period seems to me to be significant in the context of a defence of change of position, in that it places the defendants in a stronger position to establish a general change of position such as I have described, consequent upon such overpayments.

Nor, on the evidence, can the defendants' increased level of expenditure be regarded as consisting exclusively of expenditure which (to use Lord Goff's words) "might in any event have been incurred in the ordinary course of things". I am satisfied that had the defendants been paid the correct sums by way of royalties their levels of expenditure would have been lower.

I accordingly conclude that each of the defendants has changed his position in consequence of the overpayments. The question then arises whether the defendants can rely on their change of position as a defence to the entirety of the claim, or only to some (and if so what) part of it.

In my judgment, the defence of change of position which I have found to be established cannot extend to the entirety of the claim, if only because had the correct amount of royalties been paid the defendants' level of outgoings might not have reduced proportionately. The defendants' propensity to overspend their income means that it is impossible to establish an exact correlation between their income and their outgoings.

So how far does the defence of change of position extend? I accept Mr Howe's submission that, on the particular facts of the instant case, the court should adopt a broad approach to this question; if only because, for reasons already given, the defendants' evidence as to their financial affairs does not admit of detailed analysis.

In all the circumstances as I have found them, I conclude that the defence of change of position extends to one half of the overpayments: in other words, that (subject to the Limitation Issue) the claimant's recovery should be limited to $172,575.61 and £14,685.12. In my judgment that represents, on the evidence, a conservative assessment of extent to which the overpayments led to a change of position on the part of the defendants.

It is, however, to be observed that limiting the claim to half the overpayments will almost certainly have no practical effect, since on the evidence it is highly improbable, to put it no higher, that the defendants' future royalty entitlement from sales of the Live Album will amount to anything approaching that sum.

I turn, therefore, to the last issue, relating to limitation.

If the claimants were seeking a single order for repayment of the sums overpaid (as prayed in the Statement of Claim), then subject to the application of s 32 of the Limitation Act 1980 ("the Act"), recovery of payments made more than six years before the commencement of the present action would be statute-barred. by virtue of s 5 of the Act. On that basis, as noted earlier, recovery of the first royalty payments (being the payments in respect of the period from the release of the Live Album in November 1990 to 30 June 1991) would be statute-barred All subsequent payments were made within six years of commencement of the action.

However, as stated in its letters dated 27 March 1997, the claimant is seeking to recover the overpayments only by means of set off against future royalties. The set-off is an equitable set-off, in that the overpayments arise out of the same transaction as the royalties against which they are sought to be offset.

s 35 of the Act provides (by subs.(1)) that for limitation purposes a new claim made in the course of an action shall be deemed to be a separate action and to have been commenced on the same date as the original action (or, if it is made in the course of third party proceedings, on the date when those proceeding were commenced). s 35(2) provides that "new claim" for this purpose means (so far as material) "any claim by way of set-off or counterclaim". In Westdeutsche Landesbank v. Islington BC [1994] 4 All ER 890, [1994] 1 WLR 938 Hobhouse J held that "set-off" in s 35 means legal set-off, and does not include equitable set-off. Hobhouse J cited with approval a dictum of Lord Denning MR in Henriksen's Rederi A/S v. PHZ Rolimpex [1974] QB 233, [1973] 3 All ER 589 (a dictum with which the other two members of the Court of Appeal did not associate themselves) as to the meaning of s 28 of the Limitation Act 1939, the immediate predecessor of s 35 of the Act. Lord Denning MR said this:

The word set-off is not defined in s.28; but I think it is used to denote a legal set-off and not an equitable set-off. That is, a legal set-off as permitted by the statutes of set-off. These apply only "where the claims on both sides are liquidated debts or money demands which can be ascertained with certainty at the time of pleading".... These cross-claims must arise out of separate transactions ... If there is no separate transaction, but only opposing demands arising out of the same transaction, then no question of set-off, properly so-called, arises."

In my judgment, it follows from Hobhouse J's decision in the Westdeutsche Landesbank case (above) that the Act does not apply to the set-off claimed by the claimant in the instant case. Accordingly, the limitation defence fails.

In any event, as in the case of the change of position defence, the limitation defence would have had no practical effect even if it had succeeded in relation to the first royalty payment, given the likely amount of the defendants' future royalties.

In the circumstances it is unnecessary for me to address the applicability of s 32 of the Act, on which the claimant seeks to rely. For completeness, however, I should record that had that issue arisen for decision I would have concluded that the claimant's reliance on that section is misplaced since, as I find, the claimant could with reasonable diligence have discovered its mistake at any time after the erroneous data was entered in the accounting system (which must have occurred shortly after the release of the Live Album in November 1990), and in any event by the time the first royalty payment was made in September 1991.

In the result, I conclude that the claimant is entitled to set off one half of the total sums overpaid against the future royalties of the defendants, such royalties being prorated by reference to the number of tracks on the Live Album on which the defendants performed. As explained earlier, in practice that will almost certainly mean that the claimant will not achieve the recovery to which it is entitled; and, by the same token, that the defendants will not receive any further royalties from sales of the Live Album.

However, for better or worse the case has been fought to a conclusion, and a judicial decision accordingly has to be made.

I will hear counsel in due course as to the form of order, and as to costs. Since Mr Howe is not available today, there will have to be a further short hearing after Easter to deal with these matters.