This case provides some useful clarification of the extent of the implied duty to exercise a contractual discretion in good faith. The New South Wales Supreme Court emphasised that while a party is required to act honestly and reasonably having regard to its own interests and those of the counterparty, it is not required to exercise its discretion solely in the counterparty’s interests or to subordinate its own interests to those of the counterparty.
Mr Caswell (a professional songwriter) alleged that a musical piece called ‘Christmas in Dixie’ (created in 1982 by American country music and southern rock band Alabama) infringed the copyright of his musical piece ‘On the Inside’ which is the theme song for the Prisoner television series.
Pembroke J in the New South Wales Supreme Court held that:
- a clause in a publishing contract which required Sony/ATV Music Publishing (Australia) Pty Ltd (Sony) to undertake, at its discretion, to institute and prosecute any necessary action against any person suspected of infringing the copyright in the musical works carried an implied duty to exercise that discretion in good faith;
- the notion of good faith involves both a subjective element of honesty and an objective element of reasonableness. Sony was required to act honestly and reasonably having regard to its own interests and those of Mr Caswell but was not required to exercise its discretion solely in Mr Caswell’s interests or to subordinate its own interests to those of Mr Caswell; and
- the fact that copyright in ‘Christmas in Dixie’ was owned by Sony’s US parent company did not, without further evidence, support an inference that Sony preferred its own or its shareholder’s interests to those of Mr Caswell. Sony was entitled to take its own position into account as one of the legitimate factors to be weighed in the balance in considering its legitimate interests.
In addition, Pembroke J rejected the contention that Sony was also subject to some independent good faith obligation that existed outside a contract (although a different result may apply between a fiduciary and a principal).
See the case.