Court Opinion

ID: 9706413
Source: CourtListenerOpinion
Date Created: 2023-08-26 01:43:00.099785+00
Date Added: 2024-06-11T15:41:24.332645
License: Public Domain

Read, J.
(dissenting). These form contracts obligate respondent Famous Music Corporation, a major music publisher, to pay appellants, a well-known songwriter and the heirs of other well-known songwriters (collectively Songwriters), specified amounts for identified formats in which their work is published in the United States and Canada (e.g., regular piano copies) with identified exclusions (e.g., certain television and film synchronization rights), plus 50% of “all net sums actually received by [Famous] . . . from any other source or right now known or which may hereafter come into existence . . . less all expenses and charges . . . and less all deductions for taxes.” Thus, Famous agreed to pay the Songwriters listed royalties plus a catchall royalty consisting of half of any net profit actually realized by Famous from exploitation of Songwriters’ musical compositions in ways or places neither specifically delineated in nor excluded by the contract. This contractual scheme is absolutely clear and unambiguous.
To exploit Songwriters’ compositions abroad, Famous entered into subpublishing contracts with foreign music publishers. The *461foreign subpublishers administer Famous’s catalog of songs and collect the royalties; deduct a fee (usually a percentage of the royalties collected) and the taxes imposed by the foreign country; and account to Famous for the balance. Famous pays half of this balance to Songwriters under the catchall royalty provision. Thus, Famous and Songwriters effectively each pay half of the foreign taxes. In certain instances, however, Famous takes a foreign tax credit on its United States income taxes for the full amount of foreign taxes paid on both its own and Songwriters’ behalf.1 Songwriters seek their one-half share of any deductions for foreign taxes actually reimbursed to Famous in this way. This case, then, turns on the meaning of the phrase “less all deductions for taxes.”
As we stated in Greenfield v Philles Records (98 NY2d 562, 571 [2002]), “[i]f the contract is more reasonably read to convey one meaning, the party benefitted by that reading should be able to rely on it; the party seeking exception or deviation from the meaning reasonably conveyed by the words of the contract should bear the burden of negotiating for language that would express the limitation or deviation” (quoting Boosey & Hawkes Music Publs., Ltd. v Walt Disney Co., 145 F3d 481, 487 [2d Cir 1998]). The word “deduction” means “something that is or may be subtracted” (Merriam-Webster’s Collegiate Dictionary 301 [10th ed]). “[L]ess all deductions for taxes” is therefore more naturally read to encompass subtractions for taxes for which Famous is—and remains—out of pocket. If these subtractions are subsequently reimbursed, they are not, in fact, subtractions at all. By disregarding reimbursed tax payments, Famous is calculating the catchall royalty in contravention of a clear and unambiguous contractual scheme, which calls for the parties to split net profits evenly. That the parties in 1945 (the date of the Evans contract) did not identify precise elements (i.e., foreign tax credits) that might bear on how to calculate “all deductions for taxes” in future decades does not render their intent ambiguous.
Finding the contract ambiguous, though, the majority gleans intent from the parties’ course of dealing. Principally, the majority considers it critical that Songwriters did not demand “a showing of any credits” until 1997, and then, only by letter from the Songwriters Guild of America (majority op at 459). For the majority, it is not enough that Famous was being “evasive.”
*462The availability of foreign tax credits under the Internal Revenue Code long predates these contracts; however, Famous does not contend that it was taking advantage of foreign tax credits in Japan or elsewhere when these contracts were signed. The record does not establish when Famous first began employing these credits to reimburse itself for foreign taxes effectively paid by Songwriters. The record does, however, show that Songwriters were unaware that Famous was doing this until shortly before the litigation began. Moreover, Famous was not just “evasive”; Famous repeatedly and emphatically denied using foreign tax credits in response to point-blank inquiries made by the Guild on Songwriters’ behalf.2 As we stated in Continental Cas. Co. v Rapid-American Corp. (80 NY2d 640, 651 [1993]), “[i]f ambiguity exists, ‘[t]o show a practical construction . . . there must have been conduct by the one party expressly or inferentially claiming as of right under the doubtful provision [i.e., Famous], coupled with knowledge thereof and acquiescence therein, express or implied, by the other [i.e., Songwriters]’ ” (citations omitted and emphasis added).
Further, “[i]n New York, all contracts imply a covenant of good faith and fair dealing in the course of performance” (see 511 W. 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144, 153 [2002]). The covenant of good faith and fair dealing
“embraces a pledge that ‘neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.’ While the duties of good faith and fair dealing do not imply obligations ‘inconsistent with other terms of the contractual relationship’ they do encompass ‘any promises which a reasonable person in the position of the promisee would be justified in understanding were included’ ” (id. [citations omitted]).
This is particularly true in relationships where the parties “do not deal as equals either in terms of access to information or business acumen and thus, . . . often lack equal bargaining power” (id. at 154).
*463Although Songwriters were well-established artists, they were not dealing as equals in terms of access to information with regard to Famous’s use of these allegedly extremely complicated foreign tax credits. Famous was therefore under a heightened obligation to honor any promises that Songwriters were justified in relying upon—including the implied promise that “all deductions for taxes” would, in fact, encompass actual, unreimbursed outlays for taxes. The majority, in effect, converts a good faith requirement to account for deductions into a negotiable contract “benefit” that is forfeited if not spelled out in prescient detail and diligently policed.
The majority also contends that the contracts should be construed in accordance with music industry custom and practice by which music publishers apparently now may pay artists a share of foreign tax credits, but only pursuant to an explicit clause.3 Of course, custom and usage cannot be used to contradict, alter or vary the terms of an unambiguous contract. Furthermore, Famous cannot establish, as it must, that “the party sought to be bound [Songwriters] [were] aware of the custom, or that the custom’s existence was ‘so notorious’ that [they] should have been aware of it” (British Intl. Ins. Co. Ltd. v Seguros La Republica, S.A., 342 F3d 78, 84 [2d Cir 2003]). Again, there is no suggestion that what might constitute music industry custom and practice today was the same when these contracts were signed as long as 60 years ago. Further, I agree with Supreme Court that “the fact that defendants have been successful in breaching a material term of their royalty contracts for years hardly justifies a continuation of such behavior based on custom and usage.”
Accordingly, I would reverse the order of the Appellate Division.
Chief Judge Kaye and Judges Ciparick, Rosenblatt and Graffeo concur with Judge G.B. Smith; Judge Read dissents and votes to reverse in a separate opinion; Judge R.S. Smith taking no part.
Order affirmed, with costs.

. This occurs when the subpublisher pays the foreign taxes in Famous’s name directly, as is most notably the case in Japan.

. In answer to letters from the Guild, Famous represented that it did not employ foreign tax credits, and was, in fact, legally unable to do so. Only after an audit by the Guild did Famous finally acknowledge its use of foreign tax credits with regard to taxes paid in Japan. Famous’s royalty statements to Songwriters did not indicate that Famous was utilizing foreign tax credits and, indeed, did not even show that Songwriters were paying foreign taxes.

. That the music publishing companies are concededly capable of allocating reimbursed foreign tax payments belies Famous’s argument that these calculations are too difficult to make.