The Orion Publishing Group Ltd v Novel Entertainment Limited [2012] EWHC 1951 (Ch)

A brief note of this case based on a Lawtel report appeared in an earlier bulletin. The judgment has now been published, so this is a more detailed note and includes some of the document types that were included/excluded within the expression.

Orion (a publishing company) assigned worldwide television, film, radio and audio-visual rights in a children's fictional character (Horrid Henry) to Novel. Under the agreement, Orion had the right to appoint an accountant to examine Novel's books of account in order to verify the accuracy of accounts within the previous 12 months, which included verification of royalty payments. There was a dispute as to the precise scope of the clause and Orion sought a declaration as to certain matters, including the scope of the term "relevant books of account" and whether it was entitled to make copies of documents.

The High Court held as follows:

  • Even though, by the time of the hearing, Orion had obtained all the documents which it was seeking (under the reservation on the part of Novel), O was justified in seeking the declaration as there was clearly an ongoing dispute in which costs would be incurred if the dispute was to come back before the court.
  • The court acknowledged that the modern phrase is "accounting records" which was accepted to be a wider term. The reasonable man test was applied, and each case had to be looked at on its own facts.
  • "In respect of the previous 12 month period" was straightforward and limited examination to materials related in some way to the previous 12 months.
  • The purpose of the examination was to establish the accuracy of the relevant statements detailing the amount of royalties payable. Thus, Orion had to be able to inspect material not solely related to the fictional character; but where material included information on other Novel projects, Novel could redact any confidential information. The qualifying word "relevant" prevented Orion from examining materials related to other projects.
  • "Relevant books of account" included such backup or vouching materials as would enable an accountant examining them to establish their accuracy. They were not limited (as Novel acknowledged) to documents that were properly so-called accounting papers or documents containing only figures, but they were limited to the documents that recorded the receipts and expenses relevant to sums due to Orion and to the documents that backed up, vouched for or verified the accuracy of the figures included in them. Ancillary materials were not included.
  • Copies of documents could be taken. Not to permit this would impose an uncommercial construction. It was clear from the clause that an accountant could make copies of material it was entitled to have access to, subject to an obligation of confidence. Orion would be in breach of the confidentiality clause in the agreement if it were to use the copied material for ulterior purposes.

Some of the declarations made as to specific types of documents were:

  • Contracts and correspondence having contractual effect between Novel and any commissioning broadcaster. Open to examination, even though they did not contain figures. In the judge's view, they vouched the figures and contained material needed to vouch for the accuracy of the figures.
  • Correspondence not having contractual effect between Novel and commissioning broadcasters. Not included.
  • Documents evidencing details of any audit carried out by Novel in respect of programmes and the findings made on any such audit. The findings would be obvious in the ledgers. The materials of the audit itself were "way beyond the term "books of account"". The fact that they may be the best way of checking that the actual income recorded was accurate was beside the point. The declaration was that the document should contain "the final results of any audit carried out by Novel in respect of the exploitation of the programmes".
  • Royalty statements received from Novel from any parties which had exploited the programmes. Included.
  • Any reporting management system used by Novel for income and rights exploitation. There was at the time of the case no such system. Whether it should be included would depend entirely on its nature when commissioned.
  • All Novel's sale invoices and credit notes relating to the exploitation of the programmes. Included. Orion had asked for the declaration to include sales invoices which did not relate to exploitation of the programmes, but this was refused.
  • Novel's sales ledger. Again limited to those relating to the exploitation of the programmes.
  • Any documents evidencing the raw data on which the sales ledger may have been based. The wording was too elusive, so no declaration was made.
  • Any ledgers or documents evidencing any fees, commissions or expenses payable to or recoupable by Novel's licensees etc. Included, but limited to "primary financial documents".
  • Documents evidencing all banking and remittances and cash book entries relating to income received by Novel. Included, but limited to those derived from the programmes.
  • Documents evidencing amounts due and not received. Declined as Novel was only obliged to pay royalties based on amounts received.
  • Novel's contract with directors, producers or suppliers that related to relevant expenditure. Included.
  • Novel's purchase/expense ledger. Included.
  • Detailed supporting workings and breakdown of any sum which Novel had treated as having been incurred and proposed at some stage to pay itself in respect of the production of the programmes. Declined. Novel had been seeking to charge production fees in excess of £500,000 and Orion wanted to investigate the justification for the charge. The judge held that it was entitled only to material that vouched for the accuracy of the fact that the sum had been charged, not extraneous materials concerning how the sum had been calculated in discussions or negotiations. Any challenge to the figure would have to be made elsewhere under the agreement.

Comment

Whilst the scope of each audit clause will depend on the precise drafting, a relatively broad construction of "books of account" was given in this case, in that documents such as contracts were included. For further detail, it is best to look at the judgment itself – there were many further categories of document considered.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.