Contracts can imply more than what’s stated

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One matter that came to me years ago was the situation of a songwriter who had assigned all of his copyrights to a music publishing company, only to discover that, in the eight years of the relationship, the publisher had done nothing but passively issue licenses on request, a job for which a license administrator takes 5 to 10 percent of the revenue, but for which this publisher had taken its 50-percent share.
Of course, for a 50-percent publisher’s share, a publisher is obliged to actively exploit the writer’s catalog, which includes actively seeking new versions (known as “covers”) for previously recorded compositions, distributing the compositions in print in the form of sheet music, and licensing the commercial exploitation of the compositions in foreign territories.
In eight years, the publisher had done none of those things. In response to a demand for return of the copyrights to the catalog, the publisher was quick to respond that the contract did not expressly set forth any specific obligations on the publisher’s part, and therefore it was not in breach of any express contractual obligation.
Coincidentally, I had just received a telephone call from Richard Gordon, my dear friend and former contracts professor at Georgetown Law Center, and I related the songwriter’s conundrum.
Gordon pinpointed a 1917 New York case that provided the answer: Otis F. Wood v. Lucy, Lady Duff Gordon.
Lady Duff Gordon, whose personal favor and certificate of approval on ladies’ garments provided them with enormous sales potential, granted Wood, a person with an established licensing business, an exclusive agency for one year to license the use of her name for ladies’
apparel, with the revenue to be shared on a 50-50 basis.
Thereafter, there was a falling out between the two, and Lady Duff Gordon declared the contract terminated on the ground that the agreement between them lacked the elements of a contract – specifically, that the contract did not expressly oblige Wood to do anything.
Judge Benjamin N. Cardozo rejected her position, finding that contracts are generally “instinct with an obligation” that each party will do what was customarily expected of it to make the enterprise achieve the contemplated goal.
In this contract, the judge wrote, “It is true that [Wood] does not promise in so many words that he will use reasonable efforts to place the defendant’s endorsements and market her designs. We think, however, that such a promise is fairly to be implied. The law has outgrown its primitive stage of formalism when the precise word was the sovereign talisman, and every slip was fatal. It takes a broader view today. A promise may be lacking, and yet the whole writing may be ‘instinct with an obligation,’ imperfectly expressed. If that is so, there is a contract.”
Armed with Lucy Lady Duff Gordon, we were able to solve the songwriter’s problem and recapture his catalog; the publisher gave up the copyrights rather than go to court.
The principle of Lucy Lady Duff Gordon also guided the court’s decision in B. Lewis Productions Inc. v. Angelou, a 2005 case in which poet Maya Angelou tried to terminate a contract for a joint venture in which Lewis would provide the capital and seek to broaden Angelou’s audience by exploiting her poetry on greeting cards, stationery and calendars.
The plaintiff did, in fact, contribute capital and succeeded in interesting Hallmark Cards in the concept, resulting in the latter sending a license for Angelou’s future works that would have provided substantial income to the enterprise.
Thereafter, Angelou observed Butch Lewis’ conduct at a party that made her furious and notified his lawyer that the contract was terminated on the grounds that the agreement was ineffective because it was vague, indefinite and lacked essential terms.
The court, relying on the principles of Lucy Lady Duff Gordon, ruled against Angelou. The court also relied on the 1917 case to hold that deficiencies or gaps in express contractual obligations in a contract could be filled by what has been more recently characterized as the implied obligation of good faith and fair dealing to which all parties to a contract are subject.
“Every contract carries an implied obligation of good faith and fair dealing that requires each party, consistent with the contract terms, to act in good faith in enabling the other to receive the contemplated contractual benefits for which it bargained,” the court wrote.
“The covenant is breached when a party acts in an irrational or arbitrary fashion, the effect of which is to deprive the other contracting party of the benefits of the bargain. Where a contract contemplates the exercise of discretion, the covenant includes an implied promise not to act arbitrarily or irrationally, and even an explicitly discretionary contract right may not be exercised in bad faith so as to purposely frustrate the other’s right to the contract’s benefits.”
An implied covenant, the court warned, “may not be construed so broadly as to rewrite the contract or create rights that were not included within the contract terms.” However, it is “not merely duplicative of express contract rights, but provides a well-established foundation to require the parties to a contract to act reasonably when dealing with each other … and to prevent unreasonable actions that defeat a contracting party’s reasonable expectations.”
Thus, the inactive music publisher could have been found guilty of violating the implied covenant.

Peter A. Herbert is a partner at Hinckley, Allen & Snyder LLP, specializing in intellectual property and entertainment litigation matters.

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