Distribution agreements

The problems surrounding 3MV’s insolvency have brought to a head the sometimes thorny issue of ownership of stock. These problems should prompt every independent label to look at their own distribution agreement.

A number of independent record companies distributed by 3MV may rue the day they did not pay more attention to the clause in their distribution agreement which governs when ownership of stock – records – passes from them to the distributor. Ownership of stock is one of the provisions in standard distribution agreements which need to be reviewed very carefully.

The Sale of Goods Act 1979 allows contracting parties to agree the time at which ownership of goods will pass. In the absence of an express provision, ownership of goods passes when they are delivered. A number of 3MV’s distribution contracts expressly provide for ownership of records to pass on their delivery to 3MV and, in some circumstances, on manufacture. From that date those records are assets of 3MV.

This is not in a record company’s interest – ownership of these records should be retained by the record company until payment for them is received.

If ownership of records is retained until payment is received, the record company has a right to recover those records in the event of non-payment or reimbursement of their full value, whether the distributor is solvent or insolvent.

If ownership passes and the distributor then becomes insolvent, payment for the sale of records is governed by insolvency law. On insolvency, particularly if (as is likely) the independent record company is an unsecured creditor of the distributor, that company will receive little or nothing, depending on the extent of the distributor’s insolvency. Further, if the record company removes its records from the distributor’s warehouse, unless there are specific provisions allowing the record company to do this, the record company may open itself up to a variety of claims, including theft.

Many independent record companies will say that even if their distribution agreement provides for ownership of records to pass to the distributor on delivery (or manufacture), their agreement does allow them to collect unsold records on expiry or termination of their agreement (usually provided any outstanding money due to the distributor has been paid). Indeed, 3MV has directed a number of labels to collect unsold records from Pinnacle’s warehouse.

That’s all well and good but, legally, who owns those unsold records? Unless the distribution agreement expressly states that ownership of unsold records reverts to the record company on collection, the record company may find itself holding the collected records (or the proceeds of their sale) on trust for the distributor. To overcome this, the record company must establish that the collection of records provision in the distribution agreement is meaningless unless a term is implied that ownership of collected records reverts to the record company.

A liquidator, administrator or receiver may not accept this argument without court approval, particularly if the amount of unsold records is significant and comprises records by successful artist(s). In such circumstances, the record company may be forced to bring an action for interference with its property against the liquidator, administrator or receiver.

If a liquidator, administrator or receiver refuses to accept that ownership of unsold records reverts to the record company on collection without court approval, this will lead to delay, possibly the non-return of records and the incurring of legal fees at a time when a record company can little afford it. There are numerous instances of record companies who have folded as a result of their distributor going bust.

Bulletins are for general guidance only. Legal advice should be sought before taking action in relation to specific matters. Where reference is made to Court decisions facts referred to are those reported as found by the Court. Please note that past bulletins included in the Archive have not been updated by any subsequent changes in statute or case law.