POLYGRAM RECORDS SDN BHD v THE SEARCH & ANOR [1994] 3 MLJ 127]
FACTS
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ISSUE
7 October 1984
The plaintiffs, Polygram Records Sdn Bhd, entered into a written agreement ('the first contract') with a rock group, The Search ('the group'). They were signed on by Eric Yeoh ('Eric'). The first contract was for a period of two years, with an option for another two times further periods of one year each, exercisable at the discretion of the plaintiffs, and not the group.
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12 June 1985
A new contract ('the second contract') was entered into between the plaintiffs and the group,
purportedly for the reason that there were some changes in the composition of the group.
Although the second contract contained many provisions which were identical to that contained in the first contract,
there was a major modification, which the group claimed was not brought to their attention.
The modification was that the period of option which the members of the group granted to the plaintiffs was extended
to two additional periods of 24 months each, instead of the two additional periods of 12 months each under the first contract.
It was established during the trial that no copy of the second contract was ever given to the group until 1987,
when the solicitor acting for the group requested a copy of it for the purposes of the present action.
Under both the contracts, however, the option was exercisable only at the discretion of Polygram,
and not by the members of the group. In effect, therefore, under the second agreement,
the group could have been tied to Polygram for a period of six years commencing from the date of
the second agreement, ie 12 June 1985 to 11 June 1991, whereas under the first contract,
they would have been bound only from 1984 to 1988, at the latest.
After the release of the third album with Polygram in February 1987, it was clear that the group was dissatisfied with
their existing arrangements with Polygram and sometime at the end of 1987, the group made the recording of an
album under a new company, Go-Search. Go-Search was a company incorporated by the members of the group themselves.
1988
Polygram commenced proceedings against the group for breach of contract and against the sixth defendant for inducing the group to breach their contract with Polygram. The group counterclaimed, inter alia, for a declaration that both the contracts were voidable on the grounds of undue influence; for the assignment of the relevant copyright in all the songs recorded by the group with the plaintiff; and for a declaration that a clause in the second contract was void in restraint of trade.
Whether at the time when the group began recording for Go-Search, they were still contractually bound to Polygram, either under the terms of the first contract or the second contract?
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LAW AND JUDGEMENT
Section 63 is not limited in its scope to novation as it is understood under English law alone, but also covers situations where the parties have rescinded the earlier contract, by substituting a new one. If there is an 1994 3 MLJ 127 at 151 intention on the part of both the parties to
substitute a new contract, the old need not be performed, even if the new merely alters certain terms of the old. The test basically is this: if a new contract is entered into by the parties, whatever its terms, the old contract is extinguished.
It does not, however, cover a situation where the terms of the old contract are merely altered or varied, without a new contract in substitution of it being entered into. In such a case, the old contract, as altered or varied, remains in force.
The position under the Contracts Act 1950 ('the Act') is similar. Section 63 of the Act provides as follows:
'If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.'
The members of the group, on their part, accepting the reason that there was a need for a new contract, especially because they were told that it was
necessary because of the change in membership of the group, signed the new contract, to replace the first contract.
Furthermore, the substitution of the first contract by the second, is a clear indication of the intention of both
The plaintiffs intended to substitute the first contract with the second contract. As eight months had lapsed after the first
contract was entered into, with no recordings being made by the group, together with the fact that
there were changes made to the group, the plaintiffs felt the need for the first contract to be
replaced by another. Hence, the plaintiffs convinced the group to sign the second contract.
In the light of the above findings, I can find no impropriety on the part of Eric to extract any unfair advantage from the
defendants when the first contract was signed. On the contrary, it appears to have been executed, as any other contract, between two consenting parties.
I, therefore, hold that there was no misrepresentation, and, least of all, undue influence when the defendants entered into the first contract.
The members of the group understood the nature of the contract; the duration of the contract; their obligations to record for Polygram; and,
though they may not have fully understood the mechanics of how the royalty rates were to be computed, they understood that royalties would be paid to them.
Furthermore, Eric had told them that it was a standard form contract used by the company for all artistes employed by the company.
Furthermore, from his evidence, it is clear that he had the interests of the members of
the group, when he explained to them the terms of the contract. But the important factor to
bear in mind is that the members of the group at that stage had made no recordings with
any recording companies before, and were therefore keen to begin a recording career by
entering into a relationship with a reputable recording company for this purpose. There was,
therefore a clear intention on their part to enter into the recording contract with Polygram.
What, however, is clear is that the group, at that particular time, was desirous of entering into a recording contract with Polygram.
They had spoken to Eric and 1994 3 MLJ 127 at 147 Nasir about this, and they had Gary to assist them at that stage.
Though Gary was not their manager nor a lawyer by profession, he was in a position to advise them as to the terms of the contract.
Validity of the first contract (1984)
LAW AND JUDGEMENT
Validity of the second contract (1985)
Based on these facts alone, the defendants contend that as a fiduciary relationship was created between Eric and the defendants, and by the further fact that no independent advice had been relied upon by the defendants, the contract was void for undue influence. The relevant provisions of the law relating to undue influence are embodied in s 16 .
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In cases of presumed undue influence, his Lordship pointed out, there were two ways in which a confidential relationship may be established (at p 423):
Class 2A. Certain relationships (for example solicitor and client, medical advisor and patient) as a matter of law raise the presumption that undue influence has been exercised.
Class 2B. Even if there is no relationship falling within class 2A, if the complainant proves the de facto existence of a relationship under which the complainant generally reposed trust and confidence in the wrongdoer, the existence of such relationship raises the presumption of undue influence. In a class 2B case therefore, in the absence of evidence disproving undue influence, the complainant will succeed in setting aside the impugned transaction merely by proof that the complainant reposed trust and confidence in the wrongdoer without having to prove that the wrongdoer exerted actual undue influence or otherwise abused such trust and confidence in relation to the particular transaction impugned.
Following this classification, quite obviously as there was no special relationship existing between Eric and the group, the defendants in the present case must be relying on presumed undue influence. Again, using the classification stated above, the relationship between the defendants and Eric must, if at all, fall within
Both contracts were recording contracts, whereby the defendants' desire to become recording artistes was being achieved. True, some of the terms appear to be onerous, or may even, perhaps, be labelled as unconscionable. But at the same time, these terms were not new terms, but merely those which were already known to the defendants, by virtue of the first contract. Gary Chew had explained to them the salient features of the terms of the first contract. The defendants had accepted it and had acted upon it under the first contract for eight months. The defendants cannot now, therefore, be heard to say that they were not aware of the terms of the second contract or that it was an unconscionable bargain. Further, it must be borne in mind, that the second contract made no radical changes to the nature of the recording contract itself.
As for the duration of the contract, it is true that the period of the contract was being extended under the second contract. But this change in the duration of the contract by itself cannot render the entire contract to be manifestly disadvantageous to the defendants, though it be said that it appears to be unreasonable. . The plaintiffs have the exclusive right to make the recordings of the musical works of the group; the copyright of the group's sound recordings is assigned to the company; no payments, except royalties are to be paid to the group; an irrevocable option to extend the contract is granted exclusively to the company alone with no corresponding right being conferred on the group; upon the termination of the contract, the group is restrained, for a period of two years, from performing as a singer in any part of the world for purposes of recording; if the group performed anywhere, subsequent to the termination of the contract with the plaintiffs without the plaintiffs' consent, the company had the right to forfeit all royalties which are due and payable to the group. Finally, should the group fall ill and as a consequence become unable to fulfil their obligations under the contract, the company has the right to terminate the contract.
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Visu Sinnadurai J ruled that the first contract was invalid but the second was valid rejecting defendants claims of false misrepresentation and undue influence but accepted that a clause in the second contract was void in respect of restraint of trade. As follow:
• As the first contract was rescinded and substituted by the second contract in June 1985, the first contract entered into between Polygram and the group in 1984 was not binding on both the parties when the group began recording for Go-Search in 1987.
• Alternatively, even if the first contract was valid and binding, the first contract expired on 6 October 1986, with no extension of its duration, as there is no evidence to indicate that the plaintiffs did exercise their option to extend it for further periods of one year each. Therefore, even on this ground, the defendants were not bound by the first contract when they recorded for Go-Search in 1987.
• As for the second contract entered into between the parties on 12 June 1985, I hold that it was a valid and legally binding contract.
• The defendants' challenge to set aside the second contract as being voidable on the grounds of undue influence is unsuccessful. Similarly, this court finds that the second contract, as a whole, is not voidable