New South Wales Supreme Court CITATION : CN Presents Pty Ltd v De Vito [2009] NSWSC 388 This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 30 and 31 March, 1, 2 and 3 April 2009 JUDGMENT DATE : 13 May 2009 JURISDICTION : Equity Division Commercial List JUDGMENT OF : Rein J at 1 DECISION : See [102]. CATCHWORDS : CONTRACTS – general contractual principles – whether there was a concluded contract (a management agreement), subject to formal documentation categorisation – whether repudiated by defendant – consideration as to damages if repudiation had been established – whether agreement to establish a business was performed – cross claim for alleged breaches of the management agreement LEGISLATION CITED : Entertainment Industry Act 1989 CATEGORY : Principal judgment Baulkham Hills Private Hospital v GR Securities Pty Ltd (1986) 40 NSWLR 622 BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 CASES CITED : DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 Masters v Cameron (1954) 91 CLR 353 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 Tasman Capital Pty Ltd v Sinclair [2008] NSWCA 248 CN Presents Pty Ltd (First plaintiff) PARTIES : Robert Malcolm Gardner (Second plaintiff) Constantine Michael Nellis (Third plaintiff) Cosima De Vito (Defendant) FILE NUMBER(S) : SC 50005/07 COUNSEL : Mr J Cohen (First, second and third plaintiffs) Mr M Secivanovic (Defendant) SOLICITORS : Worthington Williams Lawyers (First, second and third plaintiffs) Inner West Legal (Defendant) 1 IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST Rein J Date of Hearing: 30 and 31 March, 1,2 and 3 April 2009 Date of Judgment: 13 May 2009 50005/07 CN PRESENTS PTY LTD & 2 ORS v COSIMA DE VITO JUDGMENT 1 REIN J: The first defendant, Ms Cosima De Vito ("De Vito"), is a singer/performer who appeared in the first "Australian Idol" television talent quest program, reaching effectively third place and being given the opportunity to appear in the final. 2 The first plaintiff, CN Presents Pty Ltd ("CNP") is a company, the sole shareholder and director of which is Mr Constantine Nellis ("Nellis"), who is now the third plaintiff. CNP and Mr Robert Gardner ("Gardner"), the second plaintiff, claim that they entered into a management agreement with De Vito in February 2004 (which I shall refer to as "the management agreement"), that De Vito breached that agreement and that, in effect, her breaches were accepted by them as a repudiation of the management agreement which came to an end in December 2004. 3 Mr J Cohen, of counsel, appears for CNP, Gardner and Nellis and Mr M Secivanovic, solicitor, appears for De Vito. 4 De Vito accepts that she appointed Nellis and Gardner as her managers, agrees that the management agreement came to an end, but disputes that she breached it. She does not dispute that in February 2004 Nellis was actually contracting on behalf of CNP and Gardner. 5 There is no dispute that De Vito agreed to pay CNP and Gardner a fee of 20%, but there is a dispute as to what the 20% was agreed to be applied to and as to the period for which the management agreement was to run. 6 There is a second strand to the case brought by CNP. CNP claims that De Vito agreed to pay it $50,000 plus GST for its work through Nellis in setting up CDV Records, of which only $25,000 has been paid, and $1000 per week as a wage or wage equivalent for Nellis' work as general manager of CDV Records, which weekly wage has been paid. I shall refer to this as "the business agreement". CNP claims to recover the amount of $30,000 not paid. It also claims entitlement to reimbursement for expenses. 7 De Vito has cross-claimed against the plaintiffs, alleging breaches of the management agreement in the period February 2004 to December 2004, alleging that the plaintiffs breached their fiduciary obligations to her and did not meet the appropriate standard of care. She claims the following amounts: (1) $77,188.80 on account of production of an excessive number of copies of De Vito's album titled 'Cosima'; (2) $10,373.16 on account of the excessive production of De Vito's single titled 'When the war is over" (" the first single "); (3) $28,208.35 on account of the excessive production of De Vito's single titled "Now that you can't have me" (" the second single "); (4) $3,762.00 on account of employing unnecessary staff; (5) $10,000.00 on account of leasing premises at Suite 2, Level 3, 85 William Street, East Sydney; (6) $46,152.36 on account of the uneventful and failed poster and sticker campaign; and (7) $60,766.75 on account of contracting an excessive number of public relations consultants. She also claimed entitlement to recover the $25,000 paid to CNP/Nellis for the setting up of the record label – CDV Records. I have had Nellis' statements dated 18 April 2008 and 27 March 2009 marked respectively as "E" and "F" and Gardner's statements dated 26 April 2009 and 17 April 2008 marked respectively as "G" and "H" subsequent to the hearing. The Management Agreement 8 In early January 2004, according to Gardner (who lived and worked in the United States), after having met De Vito, he rang Ms Deborah Wagnon ("Wagnon"), whom he understood to be De Vito's United States attorney, and said he was "officially managing Cosima" and that he wanted the management commission to be "20% of all Cosima's source of income and a term of five years". He says that Wagnon said "what about a term of three years?" to which he replied that "it will take at least five years to break a singer, even in the pop music market". He says that Wagnon replied "that's OK, that's fine": see Gardner's statement dated 17 April 2008 ("Exhibit H") at para 17. It was not disputed that Wagnon was De Vito's attorney, but in any event, Gardner deposed to a further conversation with De Vito which is referred to below at [10]. 9 As at the date of Gardner's conversation with Wagnon it does not appear from his own evidence that he had De Vito's agreement to anything but he had proposed to her that he co-manage her with a Mr Kim Thomas ("Thomas") who was based in Australia. 10 According to Gardner he had a further conversation with De Vito late in mid-January to the following effect: "[Gardner]: As you know, I have spoken to Kim and he is quite interested in co-managing you with me. Kim and I will manage your world wide career by getting you international record labels. But we think it would be a good idea if you had a manager for your day to day affairs. I have contacted a friend of mine, Con, in respect of offering him this position. I will give him your contact details so he can contact you directly and set up a meeting. [De Vito]: OK. I can't wait to meet them both. [Gardner]: I have also spoken to Deborah and we have agreed that as your managers we will receive 20% commission of all source income and the term of the management agreement will be for 5 years. [De Vito]: That's fine. That's standard." See Exhibit H at para 19. 11 Gardner says that following that conversation he commenced work on behalf of De Vito: see Exhibit H at para 20. 12 At this point CNP/Nellis was not a party to any agreement. 13 According to Gardner, on 21 February, De Vito said to him "I don't want Kim to be part of my management team" and following correspondence with Thomas, Thomas accepted that he would not be involved even though Gardner wanted him to be: see Exhibit H at para 23. 14 Gardner says that in September 2004 he spoke to Nellis about the need for a formal management agreement. He says Nellis agreed that it was needed and that Nellis said he would speak to De Vito about it: see Exhibit H at para 25. 15 Gardner sent a draft agreement to Wagnon on 13 September ("the Gardner draft"). The names he put on that draft contract were "Ted Gardner and Constantine Nellis d/b/a Gardner Nellis Management". The d/b/a stands for "doing business as" and seems to be equivalent to our "trading as". 16 On 7 October Gardner received an email from Sarah Thomson ("Thomson") which annexed another draft management agreement ("the second Thomson draft"): see Exhibit A2 at p 226. Thomson was an employed solicitor of Dayton Legal, a Sydney law firm. 17 Gardner says that on 7 October Nellis told him that he had had Thomson prepare the draft management agreement on behalf of himself and De Vito: see Exhibit H at para 28. It showed the parties as Ameroo Management (a business name of Gardner), CNP and De Vito. Gardner says he queried the 30% reference in the draft agreement and that Nellis said he would talk to Thomson. Gardner asked Nellis to provide Thomson with a copy of the Gardner draft. 18 On 5 November 2004, Gardner emailed Nellis and Thomson, asking what was happening with the agreement: see Exhibit H at para 32. 19 On 16 November 2004, Gardner received a further draft of the management agreement from Thomson ("the third Thomson draft"): see Exhibit RMG 1 to Exhibit H at pp 50-65. He noted that it reduced the term from five to three years but accepted that. 20 Gardner met with Wagnon on 27 or 28 November and following that, expressed a view to Nellis that De Vito might not be serious in wanting to sign the contract: see Exhibit RMG 1 to Exhibit H at p 66. 21 On 14 December Wagnon emailed to Nellis (care of Thomson), Gardner and De Vito her response, on behalf of De Vito, to the further Thomson draft ("the Wagnon draft"). Gardner could not recall receiving the email. Nellis said he did not receive it and was never aware of it: see T117.3 – 117.48. 22 On 24 December 2004 Nellis, on behalf of CNP and Gardner, by letter of that date, resigned as manager. Nellis also resigned as manager of CDV Records: see Exhibit A2 at pp 427-430. 23 I have referred to the evidence of Gardner. Nellis says that he met De Vito on 7 February 2004 (having been told about her by Gardner) and that he had a conversation with De Vito in which, inter alia, the following was said: "[Nellis]: I would be primarily responsible for your ongoing day-to-day management. I will make sure that you are organised, as far as your career is concerned, on a day-to-day basis. All we need to do is agree to run it by way of a standard management contract. We will charge you as a group 20% of your earnings, which is the industry standard. The contract will be for five years with a retention period of three years. I recommend that Ted forward to Deborah (referring to Cosima's US attorney), one of his standard management contracts which reflects the terms I've just explained." See Nellis' statement dated 18 April 2008 (" Exhibit E ") at para 26. 24 He says that De Vito indicated uncertainty about Thomas. 25 He says that following that discussion he took a number of steps in his new role as her manager: see Exhibit E at para 33(a) – (l). 26 Nellis says he had another conversation with De Vito on 16 February as follows: "[Nellis]: I've already done a lot of work for you. If you don't want me to be your manager that's fine, but tell me now and there's no hard feelings. If you want me to continue being your manager, I just want to make sure you understand the terms upon which I am prepared to co-manage you. I repeat, those terms are what we discussed last time, being that we will have a five-year contract, we will charge you 20% of your earnings and there will be a three-year retention period after post termination of the contract. Otherwise it will be a standard management contract. [De Vito]: Thanks for the work you have already done. You seem pretty genuine and I know I can work with you. I want you and Ted to work as my co-managers and I am prepared to agree to those terms as I have told you before. I just don't know about this Kim Thomas. [Nellis]: Ted thinks that Kim will be a good part of the management team. It doesn't much matter because the fee will always be 20% of your gross earnings, irrespective of whether Ted, Kim or me do the work, and we will divide that money up how we decide. That won't affect you." See Exhibit E at para 34. 27 Nellis says that on 20 February De Vito told him she did not want Thomas as her manager and she would speak to Gardner about that. Nellis said that the commission would still be 20% of gross earnings: see Exhibit E at para 36. 28 He says that in mid-June 2004 whilst in the United States he "produced a document which was a summary of the terms and conditions of the management agreement that Ted and I had to manage Cosima. That document was given to Cosima but I did not retain a copy thereof and, as far as I am aware, Ted has lost that document." See Exhibit E at para 37. 29 Nellis says that on the same day the document was prepared he said to De Vito: "Cosima, we need to execute the management contract formally. Ted and myself have drafted a one page summary as discussed when I first met you, outlining the parameters of the deal." See Exhibit E at para 38. De Vito denies that she had this conversation or received a document: see De Vito's affidavit dated 23 June 2008 (" De Vito's affidavit ") at paras 105 – 106. 30 He says that he subsequently instructed Thomson "in respect of the preparation of a management agreement for Ted and myself to manage Cosima, which reflected the terms and conditions upon which Ted and myself had been managing Cosima." See Exhibit E at para 40. 31 Nellis says on 25 August he rang Thomson "to provide further instructions in relation to the preparation of the management agreement": see Exhibit E at para 41. On 26 August Thomson sent Nellis a draft management agreement ("the first Thomson draft"). 32 Nellis says he sent a copy of Gardner's draft to Thomson in late September "to assist her in the further preparation and finalisation of the management agreement and to ensure that the management agreement she prepared was substantially similar if not identical to Ted's management agreement.": see Exhibit E at para 44. 33 On 7 October Nellis received the second Thomson draft: see Exhibit CMN1 of Exhibit E at pp 42-60. 34 On 16 November Thomson sent to Gardner and Nellis the third Thomson draft: see Exhibit CMN1 of Exhibit E at pp 65-80. It provided for a term of three years. 35 Nellis said he rang De Vito and had the following conversation with her: "[De Vito]: I have received an e-mail from Deborah. She has recommended that I make the contract for three years instead of five. Do you have a problem with this? [Nellis]: That's fine by me. Let's just finish it as we both have Ted and Deborah on our backs about this. [De Vito]: I'll let Sarah know." See Exhibit E at para 51. 36 On 12 December Nellis received from De Vito an email which contained an email from Wagnon dated 10 December: see Exhibit CMN1 of Exhibit E at pp 82-83. 37 I have referred at [21] to the email annexing the Wagnon draft sent by Wagnon on 14 December which appears to be copied to Gardner, Nellis and De Vito. Nellis denies that he received it. He denies that he gave any instructions to Thomson in respect of it. De Vito had a copy of the Wagnon draft. A copy was produced from documents provided to Mr Secivanovic by a receiver appointed to Dayton Legal: see Exhibit 1 at pp 131-134. The Wagnon draft from that source has handwriting in the margin that I infer is the handwriting of Thomson and placed there as she obtained instructions from Nellis. The handwriting appears to be the same handwriting on a document which was completed by Thomson and the notations appear to be the notations of a lawyer obtaining instructions from her client. The client could not have been De Vito because Wagnon was the author of the draft and she was De Vito's attorney. 38 De Vito admits that she appointed Gardner and Nellis as her managers and agreed to pay 20% commission. She said in cross-examination that her agreement to commission was limited to "gigs" brought in by them. In her affidavit she said: "It was accepted by myself and relayed to Con that he would go out into the marketplace and attempt to get me some work. Any work Con was successful in obtaining for me would result in him being paid 20% commission." See De Vito's affidavit at para 37. 39 The outline of submissions for De Vito dated 30 March 2009 refers at para 10(b) to an agreement that the plaintiffs "would be entitled to receive 20% of the gross revenue received by the defendant during the term of the agreement". The Business Agreement 40 Nellis said when he first met De Vito he asked her about her withdrawal from the final episode of Australian Idol, that she explained the reason and that he accepted it. De Vito said that on medical advice she withdrew from the final episode of Australian Idol because she was suffering from nodules on the vocal chords. The plaintiffs expressly eschewed any challenge to De Vito's evidence about this but the question of the nodules problem remained of significance. Nellis says that in trying to obtain a recording deal for De Vito he found the nodules incident to be an obstacle. He says that even in his first conversation he mentioned to De Vito that one possibility was to establish an independent record label. De Vito denied that Nellis had raised the idea of her having her own record label at the first meeting, but does not dispute that by March 2004 Nellis had told her that the independent record label was worth pursuing in the absence of any offers from record companies. Nellis says he did obtain an expression of interest from Roadshow Records, but he said he did not think this was beneficial to De Vito: see T67 – 68. 41 It appears that Nellis set about seeking money from possible investors to invest in the production of a 'Cosima' album and came up with the idea of obtaining investors through a prospectus but then he proposed that he, with the assistance of his father, and De Vito, with the assistance of her parents, would put the money into the establishment of a record label. No money was provided by Nellis or his father. Nellis says that the reason no money was provided was because De Vito's parents were willing to provide all the money needed. 42 In June 2004 De Vito, through her accountants, registered a business name: CDV Records. The business was intended to be a vehicle to make recordings in the compact disk format (as singles or albums) and it was agreed that Nellis would manage the CDV Records business on behalf of De Vito. It was accepted that, although Nellis would be the general manager, payments would be made to CNP and that I could treat the agreement as one made with CNP. The first single became No. 1 in the Aria charts on its first appearance in the chart. An album 'Cosima' was produced and reached the No. 2 position on the charts for albums. The second single was then produced and sold. 43 It was agreed that the funding for the business was provided by De Vito's parents – an amount of $1.1 million: see T178.20. Nellis says that he spent $20,000 – $30,000 of his own money in setting up the business and he has claimed to recover that amount from De Vito. There is no dispute that De Vito agreed to pay Nellis or CNP $1000 per week for CNP/Nellis to manage CDV Records for De Vito or that he or CNP was in fact paid that amount. There is no dispute that in September 2004 De Vito's mother transferred $25,000 to Nellis in part-payment of the $50,000 plus GST. There is a dispute as to the basis upon which that amount was paid, because De Vito alleged that Nellis told her he would need $55,000 that would be expenses to establish the business (or 'record label'), but as the case progressed I was told the only dispute was that Nellis had not done anything to earn the $55,000. Nellis claims the balance of the $55,000 and "about $20,000" for reimbursement of expenses. The payment in September 2004 by De Vito's mother is not consistent with the argument that Nellis had not, in fact, "set up" CDV Records. At one point, De Vito said she paid the $25,000 under pressure from Nellis, because he said he would stop working for her: see T186.40 – 186.44, but nothing was said in submissions about this and I do not think, if the amount was owing, it is of any significance why the amount was paid. Credibility 44 There were a number of aspects of Nellis' evidence that led me to have doubts about his reliability. 45 When Thomson prepared the first draft of the management agreement she included a clause by which CNP warranted that it held a licence under the Entertainment Industry Act 1989. In her email to Nellis (Exhibit A2 at p 294) she drew Nellis' attention to an assumption that Nellis was licensed as a manager under that Act. In fact, Nellis was not licensed. De Vito did not rely on the absence of a licence to challenge the validity of the management agreement but the absence of a licence remained of relevance in two respects. First, neither Nellis or Gardner appreciated that a licence was or might be required in Australia, and secondly, the absence of a licence led Nellis to assert that everything he did was the subject of discussions with Gardner and that they spoke on the phone almost every day. I found the assertion by Nellis that he discussed all of his activities on behalf of De Vito with Gardner improbable and his evidence unconvincing: see T34 – 36, and there was only limited reference to discussions with Gardner, particularly after April 2004, in his statements (Exhibits E and F). Gardner said that Nellis had the day-to-day management of De Vito: see T129.40, although he said he did speak often with Nellis in the order of twice a week, but more often dealt with Nellis through emails: see T139.36 – 140.8. Very few emails from Nellis to Gardner have been tendered in evidence. The material in evidence generally does not support much activity or input by Gardner on behalf of De Vito after January 2004. Nellis tried to assert that Gardner's American licence might be sufficient: see T34.44, and he said he did not know if Gardner had an Australian license: see T35.29. 46 The second matter is that Nellis asserted that Thomson of Dayton Legal was acting for De Vito on the management agreement as well as for himself and Gardner. I think the evidence establishes that this was not true. It would appear that the purpose of the evidence was to make it appear that De Vito had agreed to all the terms contained in the Thomson drafts when she had not. Thomson's emails of 26 August 2004 (Exhibit A2 at p 294), 7 October 2004 (Exhibit A2 at p 226) and 8 October 2004 (Exhibit A2 at p 245) make it clear that she was acting for CNP/Nellis and Gardner, but not De Vito. The balance of documents show that Wagnon was acting for De Vito on the draft management agreement. De Vito accepted that Dayton Legal was acting for her on other legal matters such as licensing agreements and for her when the dispute with Nellis and Gardner arose in December 2004. 47 The third matter relates to Roadshow Records. Nellis, in his oral evidence, said that he had told De Vito about this, but in Exhibit E at para 59, whilst he mentioned having approached Roadshow Records, he said no recording contract was offered: see Exhibit E at para 60, and he said nothing about have told De Vito. 48 Nellis had managed no artists before De Vito. His failure to immediately prepare or have prepared a management agreement is consistent with someone who was quite inexperienced in the industry, as was his vagueness about licensing requirements. He had previously been made a bankrupt which may explain the failure to proceed with the application that Thomson prepared: see Exhibit 1 at p 140. His evidence that he had prepared a draft of the management terms in June 2004 and not kept a copy of the document and that Gardner had lost the only copy was unconvincing. The correspondence he sent to De Vito after he left had a distinctly bizarre quality to it and underscored a lack of professionalism: see Exhibit 1 at pp 93-130. 49 On the other hand, I have taken into account that in relation to his evidence of his conversations relating to the making of the two contracts, his evidence has not really been effectively contradicted. 50 I turn now to consider the credibility of De Vito. 51 De Vito, in her affidavit, did not deny that Nellis said the period of the agreement would be for five years nor that he had sought 20%, but she said "[a]ny work Con was successful in obtaining for me would result in him being paid 20% commission.": see De Vito's affidavit at para 37. 52 Gardner's evidence of what he said was not challenged on this point. He said that the agreement was that De Vito would pay him "20% commission of all source income": see Exhibit H at para 19. 53 I note that De Vito's Commercial List Response accepted an oral agreement only and did not contain any acceptance that a more formal document was to be signed. Her affidavit made no such reference either. Indeed the Commercial List Response asserted that she had refused to sign the proposed formal agreement, which is not consistent with the evidence. In cross-examination at T169.25 and T202.41, she said that she understood that her lawyers and Nellis' lawyers would prepare a formal agreement, and I have referred to the evidence relating to Wagnon's steps in responding to the draft management agreement. It appeared that De Vito may not have appreciated that a contract could be oral: see T169 – 170. 54 Mr Cohen directed an attack on De Vito's credit based on the fact that she had annexed to her affidavit a copy of the loan agreement with her parents which was dated 30 March 2004: see Exhibit CDV-1 of De Vito's affidavit at p 37. It was clear that the prospectus or investment proposal was prepared in June 2004 so that the loan could not have been made on the basis of that document, but nothing seemed to turn on the point. It is not clear why the document was dated 30 March 2004 but it was not put to De Vito that she had dated it or done so for any reason. In her affidavit she had not said when she had entered into the loan agreement: see De Vito's affidavit at pp 56 – 57. I did not think that the cross-examination on this point damaged her credibility and indeed, although there were some inconsistencies (for example, her denial that she had agreed to anything other than the 20%: see T170.25, although she said in her affidavit that she could not recall what was said) which lead me to approach her evidence with a degree of caution, I thought she was seeking to provide honest answers in the witness box. I found Nellis' assertion that De Vito had refused to attend a meeting with Sony Records because 'Paulini' – another Australian Idol contestant – had been signed up, as unlikely and I accept De Vito's evidence that she would have wanted that opportunity. One further problem with Nellis' evidence in this respect is that it is inconsistent with his assertion that De Vito was not of interest to major record labels. 55 Since De Vito did not contradict Gardner's evidence at all and indicated her inability to recall the details of what she had discussed with Nellis, and given the absence of any challenge to Gardner's veracity as a witness, I accept the evidence of Gardner and Nellis as to their respective conversations with De Vito. It was the plaintiffs' contention that the agreement with Nellis on 7 February was made on behalf of CNP and Gardner and that, in effect, that agreement superseded the previous agreement between Gardner and De Vito. Mr Secivanovic accepted that this was the position. 56 I find that the management agreement was oral and had the following terms: (1) CNP and Gardner would act as De Vito's managers for a five year period (later reduced by oral agreement to three years); (2) De Vito would pay to CNP and Gardner a total of 20% of her earnings during the management period; and (3) There was to be a three year retention period which I take to mean that any money earned by De Vito as an artist in the three years following the end of the management period from activities during the three year period of management would be subject to the 20% commission. 57 I note that no argument was advanced by De Vito that the agreement was uncertain because Nellis said "otherwise it will be a standard management contract" or because of the use of the phrase "retention period". 58 There is no doubt that by August or September 2004 the parties thought they should have a formal agreement prepared, but I do not think it can be inferred that all three parties as at February 2004 had agreed that a formal agreement should be prepared as a precondition to formation of a contract. 59 Mr Secivanovic argued that the agreement was one that fell into the fourth category identified by McLelland J in Baulkham Hills Private Hospital v GR Securities Pty Ltd (1986) 40 NSWLR 622 – an addition to the three categories in Masters v Cameron (1954) 91 CLR 353 and see Tasman Capital Pty Ltd v Sinclair [2008] NSWCA 248 at [25] – [29], where the possible fourth category is discussed. That the contract fell into the fourth category does not assist De Vito because no formal agreement was ever entered into prior to its termination and there was a binding agreement from February 2004 whether the parties contemplated a formal documentation or not. I proceed on the basis that De Vito agreed to appoint CNP and Gardner her managers for five years in February 2004 (but reduced to three years later) and to pay CNP and Gardner a total of 20% of her gross income as an artist. 60 There are difficulties with what was meant by "gross income" but I shall return to that. Repudiation 61 The plaintiffs asserted in written submissions handed up at the commencement of the hearing that it was an express term of the agreement that Nellis would manage De Vito "for the purposes of maximising her career potential as a singer": see para 5 of the plaintiffs' outline of submissions dated 30 March 2009. There was no express term to this effect. The plaintiffs contended in the written submissions that it could be said that there was an implied term that De Vito would substantially accept the managers' reasonable advice. No attempt was made in submissions to deal with the criteria necessary for a term to be implied, namely that the term must: (1) be reasonable and equitable; (2) be necessary to give business efficacy; (3) be so obvious it "goes without saying"; (4) be capable of clear expression; and (5) not contradict an express term. See Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 606 approving of the test in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 283. 62 The plaintiffs conceded that the asserted implied term does not require the defendant to accept all advice. The qualification in the asserted implied term of 'substantially' raises the difficulty of what is meant by 'substantial'. There is also a question of whether the artist is required to accept advice in the sense of listening and fairly considering advice or in the sense of actually following advice. I do not think that it goes without saying that De Vito agreed to substantially follow reasonable advice. Even if such a term were implied I think that its application would have to be considered in the context of an important mutually agreed alteration to their commercial arrangement which came about by the agreement of all three parties, namely that Nellis would also be general manager, and hence act in a subservient role, in respect of all matters concerned with CDV Records. In determining what was reasonable advice, it would be necessary to have regard to the dual role in which CNP/Nellis was acting for De Vito. 63 In terminating the management agreement Nellis wrote on behalf of CNP and Gardner to De Vito by letter of 23 December 2004 and he stated: "after all that has happened in the past eight weeks that the contract has become unworkable and you have not followed the advice that we have given you regarding your career and matters associated with it." See Exhibit A2 at p 427. 64 There may be cases in which the conduct of an artist is so detrimental to the relationship that her (or his) conduct amounts to a repudiation of the management agreement. It could be difficult to determine whether the conduct amounted to repudiation or rather a breakdown in the relationship that enables the conclusion to be drawn that the agreement had been mutually abandoned: see DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423. 65 Mutual abandonment was asserted by neither party although the description "unworkable" was used in the plaintiffs' letter of 23 December 2004 and by Mr Cohen in his submissions: see T308.50. I shall discuss the individual matters asserted to cumulatively amount to repudiation, but there are a number of aspects of the matter that need to be taken into account: (1) The parties had agreed by about August 2004 that a formal agreement should be entered into. (2) To that end drafts were circulated and even as late as 14 December 2004 De Vito's lawyer was responding with comments on a draft prepared by Thomson. The Thomson drafts, I find, were prepared on behalf of CNP and Gardner. (3) De Vito certainly was not looking to end the relationship. (4) De Vito had accepted Nellis' advice that she establish a record label and had appointed Nellis as the general manager of the label. She had borrowed the funds from her parents and in the role as owner of the label and employer of Nellis she was entitled to do what she thought suited her and her commercial interest. If there was a tension created for CNP and Gardner as artistic managers and CNP/Nellis as general manager of CDV Records, it was one very much of their own creation. Indeed, one might view what transpired as a substitution of the 'label' idea for the idea of 'artist', reflected in the fact that Nellis was to receive $55,000 and was to be paid $1000 a week. (5) Mr Cohen conceded that there was a problem in relation to the dual role of CNP/Nellis as artistic manager and general manger of CDV Records, particularly since there is no dispute that all (or almost all) of the money for production of records had come from De Vito's parents. 66 The assertion is that advice had been given by Nellis and not followed. The incidents which Mr Cohen identified in submissions as those relied upon by the plaintiffs were these: (1) the failure of De Vito to follow Nellis' advice that she present a medical certificate and call a press conference: "the nodules issue"; (2) the inclusion on the 'Cosima' album of a track called "Taste the Tears" which a Ms Mary Hamblion, an executive assistant at EMI, and a Ms Julie Horton of Real Songs thought was too upbeat in tempo: "the boppy track issue". Ms Horton was the assistant to Diane Warren, the writer of all but one of the songs on the 'Cosima' album; (3) "how money should be spent": see T303.46; (4) "what sort of promoters to use": T303.46; (5) "how may concerts she would do": see T304.22, and how many songs she would sing at any one time: see Exhibit E at paras 134-140; and (6) De Vito, on Nellis' evidence: see Exhibit E at paras 86-87, asked Nellis to lie on her behalf to her parents about her bedroom arrangements on tour in June 2004. (1) Nodules 67 So far as this was concerned, I thought De Vito's response was entirely reasonable. As at 6 December 2004, Australian Idol was behind her and she saw no need to deal with rumours which she felt had been dealt with by the reality of the improvement in her voice: see T171 – 173. 68 In my view, De Vito was perfectly entitled to take the position she did and a failure to take advice in this respect, on its own or with other unrelated matters, could not support a repudiation. (2) The boppy track 69 De Vito was, it appears to me, fully entitled to determine, as record label owner, what songs she would include on the CD and at what tempo. Nellis said that he does not accept that this was her right: see T87.21 – 87.40, but at T88.6 he said it was never his duty to make decisions for De Vito. 70 I found De Vito's evidence on this entirely credible – she was willing to accept that Ms Hamblion and Ms Horton had a different view about the track in question but she could not understand why Ms Hamblion would want her name removed from the credits on the CD. Further, the album achieved No.2 status. Normally a No. 2 position in the charts for an album would, I expect, be regarded as a success, but the fact that a very large number of CDs had to be destroyed raises a doubt as to whether that description is apt. However it has not been suggested by Nellis (or Gardner) that it was not a success and Mr Cohen put to De Vito in cross-examination that the album had done very well: see T168.13. (3) How money should be spent 71 Mr Cohen argued at T304.10 that because De Vito had said it was her money and she had a right to do what she liked, it could be inferred that she would not accept advice: see T213.25 and T224.30. I do not think it can be inferred from her comments which were made in the context of the tempo at which a song was to be performed and whether her sister could accompany her that she would not accept advice from Nellis, but it does bring to the fore the problem of Nellis' dual role to which I have earlier referred. 72 As owner of the record label, De Vito was, in my view, entitled to require her sister and her boyfriend to accompany her on trips overseas. The incurring of extra expenses by De Vito as owner of the record label would not support a claim of repudiation of the management agreement. (4) Promoters 73 There was evidence of disagreement concerning the number of promoters, but again this seemed to be very much concerned with the promotion of the album, which was a matter within De Vito's province as owner of the record label business. (5) Number of Concerts and Songs 74 At paras 85 and 134 – 140 of Exhibit E, Nellis details his problems with De Vito. According to him, De Vito indicated enthusiasm for going "on the road" in June 2004. He says he spoke to her about touring and she told him she wanted backing tapes and that her voice would not hold out for more than four songs: see Exhibit E at para 136. He gave evidence at para 138 of Exhibit E which indicates that De Vito did have a problem with her voice. De Vito denies that she said what is attributed to but she does not deny that her voice was "tired on stage": see De Vito's affidavit at para 139. If Nellis' version is correct it would seem to point to De Vito having a problem, namely that she was not constitutionally suited to be a touring artist. If that were true, then Nellis' advice that she press on with a tour and sing a lot of songs irrespective of its impact on her vocal chords would be unreasonable. It might well mean that the relationship of manager and artist were unworkable and could not continue, but I would not characterise a refusal to sing on tour as a repudiation of the management agreement especially not in the context of Nellis encouraging De Vito to set up a record label and employing him to run it. I note that De Vito's version is that her voice was tired at the concert in November because she had just come off an aeroplane from an overseas trip. Nellis denies having the conversation De Vito says she had with him: see Nellis' statement dated 27 March 2009 ("Exhibit F") at para 46. Nellis' version of his conversation in relation to the establishment of the label, see Exhibit E at para 68, does not refer expressly to public performances: see also Exhibit E at para 71. 75 Mr Greg Clarke ("Clarke") was called by the plaintiffs. He was engaged by Nellis to work as 'live sound engineer' and production manager for De Vito. He gave evidence that on 5 November 2004 he met with De Vito, Nellis and De Vito's sister ("Sarina") with a view to discussing band rehearsals, choice of musicians and the possibility of engaging the services of a Mr Wayne Miller – a keyboard player. According to him, De Vito indicated that she did not want to talk about those matters just now. A week later he met with De Vito, Nellis, Sarina and a Christina Hatzis who was Nellis' secretary. Clarke says that De Vito said: "I don't see the need for a live band. I'm not a musician. I've never worked with musicians before. Why can't we keep using the backing tracks? What's wrong with that?" See Clarke's affidavit sworn 27 March 2009 (" Clarke's affidavit ") at para 13. 76 Clarke says he asked Nellis "[d]o you think she's even capable of doing a full 2 hour show?": see Clarke's affidavit at para 15. 77 No answer to his question of Nellis is recorded in Clarke's affidavit. Clarke also said that De Vito told him that "she had never sung more than six songs at any one time": see Clarke's affidavit at para 16. 78 Clarke's evidence, which was served late, was not challenged in cross-examination. The first conversation is consistent with someone who does not see the need for live shows and possibly does not like the idea of live shows. The later comment about not having ever sung more than six songs at once is quite neutral both as to context and content. De Vito denies that she was not willing to go on tour and she says that since 2004 she has done so – evidence which was also not challenged. 79 The same issue arises, namely, whether there was a reluctance on De Vito's part to undertake touring and to sing more than four or six songs at once, and if there was, there was no evidence of any exploration of the difficulty by Nellis with her. In my view, Nellis' role of artistic manager required a clear exposition to his client of the consequences of not touring and a clarification of the cause of her reluctance both to establish that there was a refusal to follow advice and that the refusal was not justified by, for example, concern about her voice and general health. (6) Bedroom arrangements 80 De Vito disputed that she had ever had any reason to ask Nellis to lie for her and I am not persuaded that she did. In any event, this incident occurred in June 2004 and is not an example of De Vito refusing to accept advice. (7) Music Video 81 Although it was not mentioned in submissions by Mr Cohen as one of the grounds for repudiation, there was evidence from Nellis that a Mr Gritelli, who had produced a video clip for De Vito's first album, had complained about not being paid. De Vito's mother did pay the account following the complaint and Mr Gritelli made another video for De Vito so it does not appear any long-term damage was done to the relationship. 82 I am not inclined to accept the evidence of Nellis in preference of De Vito where it is in dispute for reasons I have given previously and because I thought it somewhat unlikely that he would have such an extensive recall of matters after such a lengthy period without a single contemporaneous note or letter to support his contentions about her conduct, and the fact that it was only in December 2004 that he wrote to assert that she had not followed his advice (and even then did not set out what advice it was claimed she had not followed.) 83 It follows in my view that there was no repudiation of the management agreement by De Vito. The resignation of Nellis and Gardner was therefore itself a repudiation of the agreement which De Vito was entitled to accept. What De Vito did is consistent with her accepting that the management agreement had come to an end and she makes no claim for damages based on the breach of the management agreement by CNP and Gardner in wrongly terminating. Damages The management agreement damages 84 The plaintiff's claim was a claim for damages based on the repudiation of the management agreement. No claim was pleaded on the basis that the plaintiffs were entitled to be paid pursuant to the agreement itself. That would involve a need to determine whether the gross earnings in question had to be received by De Vito within the period that the management agreement was on foot or within the three year retention period after it had terminated for whatever reason. In view of my conclusion that the plaintiffs have failed to establish that De Vito repudiated the management agreement, it follows that the plaintiffs are not entitled to damages for breach of the management agreement. 85 I will, however, deal with the issue of damages against the possibility that I have erred in finding repudiation not to have been established. The agreement would have run for three years from February 2004. The plaintiffs claim lost income in the form of 20% of the gross earnings of De Vito for the period February 2004 to December 2008. I make the following observations: (1) The plaintiffs' position was that they were entitled to 20% of all sales of 'Cosima', the first and second singles and royalties received by De Vito from four record labels who created compilations containing the first single. De Vito argued that the only royalties on which they were entitled to a commission were those received before December 2004when the plaintiffs terminated the management agreement. De Vito paid 20% commission on her earnings as a performer and there was no claim for any unpaid commission on those earnings. (2) The plaintiffs did not agree that production costs should be deducted from the payment made to De Vito by MGM even though MGM, which produced the album and singles, did, in fact, deduct those costs. (3) There was an issue about an export incentive scheme payment of $62,000. The plaintiffs claimed entitlement to 20% of that, which De Vito resisted. (4) Mr Cohen argued that whether the agreement was terminated by De Vito's repudiation or because it was terminable at will did not matter because the plaintiffs would be entitled to 20% for their exertions even if De Vito received payment after December 2004. That is a case that was not pleaded. (5) Mr Cohen at T283.33 said "we also claim an amount on speculative losses. I won't put [a] figure to that." He did not address the topic further, and nor will I. 86 It was agreed that the total royalties earnt by De Vito (excluding royalties from MGM) within the full period of the management agreement, had it run, were as follows: Universal 77,44.00 Warner 8,815.81 Sony BMG 59,406.54 Rajon 2,322.40 TOTAL 78,288.75 87 It was also agreed that MGM had paid to De Vito a total amount of $128,000 within that period. The total dollar figure for MGM sales was $327,134 but MGM deducted $231,416 for production costs, leaving the net $128,000 figure. When added to the figures in [86] above, this brings the CD earnings to $206,288.75. 88 There were a number of arguments on damages which were: (1) Whether the relevant MGM figure was the $327,134 or the $128,000. In my view, if gross earnings of De Vito were to be based on monies paid by MGM to her, the monies received would be the figure after the cost of production necessary to produce the album and singles. (2) Whether the plaintiffs were entitled to 20% of an export incentive scheme allowance of $62,000 which De Vito received. In my view, the plaintiffs are not entitled 20% of this amount directly, but would be entitled indirectly – the $62,000 should be treated as an offset against the $231,416 MGM production costs. (3) In addition to the question of the cost of production, Mr Secivanovic argued that unless De Vito received the monies from the record sales and other record companies by 23 December 2004 – the date of termination by the plaintiffs of the management agreement – no commission could be claimed. If the plaintiffs had established repudiation they would not need to establish payment prior to 23 December 2004. 89 One difficulty was with the phrase 'gross earnings'. There was no attempt by the plaintiffs to establish De Vito's 'earnings' based on her tax returns which apparently were available to them through discovery: see T276.21. In my view, her gross taxable earnings would be a very good starting point to determine her gross earnings in any relevant period. There was no attempt to establish what amount De Vito was entitled to as an artist rather than as owner of the record label. The focus of the parties, however, was on the sales of CDs and royalties. There are figures available as to what it cost her to achieve the CD sales and compilation royalties (which only arise from the CDs produced by De Vito trading as CDV Records). There appeared to be no dispute about the figures for each head of claim. 90 I should add that De Vito's evidence that she, in fact, made no profit is not necessarily inconsistent because she had an obligation to repay the money lent by her parents and had other expenses but the evidence was too imprecise to enable those costs to be quantified. 91 I would therefore calculate her gross earnings as: Royalties received from record companies 206,288.75 ADD: Export incentive scheme payment 62,000.00 Total royalties received 268,288.75 LESS: Cost of setting up CDV Records 50,000.00 Lease of premises at Suite 2, Level 3, 85 William Street, East Sydney 10,000.00 Amount paid to publicists 64,000.00 Amount paid to advertising company 49,000.00 Amount payable to CNP for expenses incurred (see below) 7,000.00 Amount paid in wages to CNP/Nellis of $1000 per week for 25 weeks 25,000.00 Wages paid to assistants 25,000.00 Total costs 230,000.00 Gross earnings 38,288.75 20% commission on gross earnings 7,657.75 The business agreement damages 92 In my view, CNP has demonstrated that De Vito agreed to pay $50,000 plus GST for the setting up of CDV Records. It does seem that his work was minimal but it was his idea, he researched the export incentives deduction and he prepared a budget or proposal, and no argument based on the consideration being past consideration was advanced. CNP is entitled to recover the $30,000 claimed. 93 CNP, however, has not established any basis for separately claiming expenses, additional to the $55,000, connected with the establishment of the record label. Nellis said in June 2004 that the recording label "is all set up" and that the $55,000 would be for past services: see Exhibit E at para 76. CNP has not established any agreement with respect of a claimed "away from home" allowance for Nellis. De Vito agreed that an amount of $7000 was payable for expenses paid by Nellis as manager: see T285.41. The Cross-Claim 94 The breaches alleged were alleged to be breaches of the management agreement, when they all seem to relate to CNP/Nellis' work as general manager of CDV Records. No point, however, was taken by Mr Cohen in relation to this. There was no development in submissions of the reference to fiduciary duties in the pleadings. Too Many Copies 95 It was put to Nellis that the only reason he had so many copies of the CDs made was so that it could be claimed that the album had achieved 'gold'. Nellis denies this. 'Platinum' was mentioned as the standard at one point and I take Nellis to have denied this as well. It does seem that a very large number of the albums remain unsold which points to over-ordering. There were no purchase orders obtained by Nellis although he claims that the people he was liaising with were able to gauge demand. Nellis said that numbers were developed in consultation with others in the industry. Whilst I think there is certainly room to doubt his competence as a manager in ordering as many copies as he did, I am not persuaded that the fact that sales did not materialise is sufficient to make out a case in negligence and there was no expert opinion to support De Vito's claim. Mr Secivanovic's argument that Nellis' admission that he had been negligent in relation to some other, unconnected matter supported the conclusion of negligence in this context is, in effect, a propensity argument and is completely misconceived. Unnecessary Staff 96 It appears somewhat surprising that Nellis should arrange for De Vito to employ staff who had been working for him under the banner of CDV Records. It appears on the balance of probabilities that Nellis transferred staff that could be expected to assist him in his role as manager to the account of De Vito. The evidence of Gardner supports De Vito's contention that much of what was asserted to be done by CNP/Nellis on behalf of CDV Records was really work that would be included in CNP's role as manager. It follows that these items ought not have been put as an expense of CDV Records. I think the fact that Nellis arranged for his staff to be added to the CDV Records payroll was itself indicative of the relative significance of his role as general manager of CDV Records in contrast to his artistic managerial role. Lease 97 A similar situation pertains to the lease. It appears that Nellis encouraged De Vito to take a lease which enabled him to operate from an office, and in so doing, he or CNP were working as both artistic manager and as general manager of CDV Records and accordingly it is not appropriate to allocate the rent to CDV Records entirely unless all of the work he was doing was work for CDV Records rather than as artistic manager. However, I have taken into account the costs incurred by the lease and the staff in arriving at the gross earnings so I do not think any further deduction is warranted even if a basis for apportionment could be discerned. Posters and Stickers 98 So far as the poster and sticker campaign, it is not established that it was a failed campaign or that it was an expenditure that should not have been incurred. Public Relations Consultants 99 A significant amount of money was spent on public relations consultants but it has not been established that any particular work was duplicated or that it was unnecessary to achieve the sales made. 100 De Vito claims that many steps were taken (such as ordering production runs and engaging consultants) without her knowledge or permission. It is not clear that Nellis was required to obtain her permission for these steps since he was managing CDV Records and was also her artistic manager and there is no evidence from her of any complaint to him when she learnt of these appointments. 101 De Vito claims to recover the $25,000 paid to Nellis. She asserts that Nellis did not set up CDV Records, did not act in good faith towards her and did not exercise due diligence and care in setting up CDV Records. Whilst it is true that De Vito's accountants registered the name CDV Records, there is evidence that Nellis did help the process of developing the idea and obtaining relevant tax information, and De Vito paid him $25,000 in September 2004, by which time the album and singles had been produced. De Vito has failed to make out her claim. Conclusion 102 It follows that in my view, CNP is entitled to recover $30,000 from De Vito plus an amount $7000 for expenses that he incurred as manager that were agreed, plus interest. The claims by CNP (or Nellis) and Gardner under the management agreement are not made out and the claims of De Vito against CNP (or Nellis) are not made out. 103 I will hear the parties on costs before making formal orders disposing of the proceedings. 25/05/2009 - Formatting of judgmentCorrection to calculation of damages - Paragraph(s) [1] - [103][91] DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.