Entertainment One Films Australia Pty Ltd v Hopscotch Pictures Pty Ltd

Background

1. The proceedings arise out of an agreement dated 12 May 2011 (the Royalty Deed) by which the second defendant, Mr Troy Lum, and Mr Frank Cox, who at that time each owned 25 percent of the shares in the first defendant, Hopscotch Features Pty Ltd (Features), agreed to assign to the first plaintiff, then known as Pictex Pty Ltd (eOne AU), income they derived from Features.
2. The Royalty Deed was part of a larger transaction by which eOne AU and companies associated with it purchased a number of businesses controlled by Mr Lum and Mr Lum became the Managing Director of eOne AU, a position he held for approximately eight years. Since the Royalty Deed was entered into, Mr Lum has acquired all of the shares in Features.
3. Paragraph 1.1 of the Royalty Deed provides: Assignment 1.1 Lum and Cox assign to eOne all dividends, royalties, income, sale proceedings and other monies: 1.1.1 payable in respect of the Features Shares; and 1.1.2 otherwise due to them in any capacity in relation to the Features Business, and the right to be paid such amounts, for the Term and otherwise on the terms set out in this deed.
4. "Features Business" is defined to mean "the film production business conducted by Hopscotch Features". "Features Shares" is defined to mean "a fully paid ordinary share in the capital of Hopscotch Features".
5. Clause 2.1 of the Royalty Deed provides: Good Faith and Warranties 2.1 Lum and Cox must observe at all times a duty of good faith to eOne and must not enter into or structure transactions for the purpose of, or for purposes which include the purpose of, or which are known to have effect of: 2.1.1 materially reducing the amount payable to eOne under this Deed; or 2.1.2 otherwise materially increasing the amount retained by Hopscotch Features in relation to the proceeds received from the Features Business to the detriment of eOne.
6. Clause 5 of the Royalty Deed relevantly provides: Audit 5.1 At any time during the Term and for a period of two years afterwards, eOne may carry out an inspection and audit to determine whether Lum and Cox have properly complied with their obligations under this Deed. 5.2 Lum and Cox must, if given at least five Business Days' prior written notice of eOne's desire to carry out an inspection and audit under clause 5.1, provide eOne and its personnel with reasonable access during normal business hours to all relevant books, books of account, computer and electronic records and other documents in relation to the Features Business and Hopscotch Features necessary to enable eOne to carry out the inspection and audit. Lum and Cox must procure that Hopscotch Features co-operates fully with eOne and its personnel and promptly provide to eOne and its personnel an explanation of any matter reasonably required by them in connection with the inspection and audit. …
7. eOne AU made a request to conduct an audit under cl 5.1 of the Royalty Deed on 25 September 2019. On 17 October 2019, it appointed Mr Alex Bell of Grant Thornton to conduct that audit. Mr Bell attended the premises of Features on 17 October 2019. It is unclear what information he obtained at that time. Soon afterwards, eOne AU terminated Mr Bell's appointment and appointed Mr Michael Potter of Axiom Forensics in his place. On 16 December 2019, Mr Potter attended Features' offices. Subsequently, he was provided with some documents and was told that others he had requested were not available. Nothing further happened until 15 November 2021, when Mr Atkin, the solicitor for the plaintiffs, sent a letter to KCL Law, who at that time were acting for the defendants, alleging that there were significant anomalies in the information that had so far been provided and requesting additional documents.
8. Although there were further exchanges of correspondence between the parties' solicitors, little seems to have happened until 26 August 2022, when the plaintiffs commenced these proceedings. In essence, the plaintiffs made two complaints. First, they alleged that on or about 16 December 2019, they had appointed an auditor who had requested books and records from Mr Lum and Features, that the auditor had received some material, but not all the material that was requested, with the result that the auditor could not determine whether Mr Lum had complied with his obligations under the Royalty Deed.
9. Second, they allege that various amounts were payable under the Royalty Deed that had not been paid. The details of the pleading are not important for present purposes. However, it is relevant to observe that although they gave a (limited) number of specific examples, the particulars to each relevant allegation included or consisted of a paragraph to the following effect: eOne AU is not able to give full details of the fees and other monies … due to the failure of Mr Lum and Hopscotch Features to provide books and records. Full particulars will be provided following disclosure.
10. On 25 November 2022, the defendants filed a Commercial List Response and List Cross-Claim Statement.
11. On 17 February 2023, the plaintiffs served their Commercial List Reply and Commercial List Response to the Cross-Claim and notified the defendants of their intention to "seek leave to make amendments to their Commercial List Statement" (CLS) and stated that a draft would be provided "in due course".
12. There were delays in providing the draft. It was finally provided on 28 March 2023.
13. Relevantly, the draft sought in para 120 "an interlocutory order for specific performance of clause 1.3 of the Royalty Deed" or "an order that the defendants provide discovery" of a broad range of documents, including "[f]inancial accounts including profit and loss statements, balance sheets, cashflow statements and detailed ledgers for the first defendant for the period 21 May 2011 to the present" and "bank statements of the first defendant for the period 21 May 2011 to the present".
14. On 30 March 2023, Simpsons, the solicitors for the defendants, sent Maddocks, the solicitors for the plaintiffs, a detailed letter objecting to a number of the proposed amendments. The letter also stated that in view of the "wide-ranging discovery" sought by the plaintiffs "it may be necessary to apply to the Court to strike out parts of [the defendants'] CLS". Their principal complaint was that the CLS identified various failures to pay or to collect amounts said to be owing to the plaintiffs without identifying what those amounts were.
15. On 26 April 2023, the plaintiffs filed a notice of motion seeking discovery of documents from the defendants.
16. On 2 May 2023, the defendants filed a notice of motion seeking to strike out parts of the CLS.
17. On 5 May 2023, the Court gave directions for the filing of evidence and submissions in relation to the two motions.
18. Following that directions hearing, the plaintiffs indicated that they proposed to seek leave to file an Amended CLS and an order was made that the plaintiffs pay the defendants' costs of the strikeout motion. There were delays in preparing the amended document, but eventually one (which was not marked up) was circulated on 20 June 2023. A marked up version was served the following day. It proposed major changes to the CLS. However, a feature of the list statement continued to be a statement that generally the plaintiffs were unable to provide particulars of their allegations until after disclosure, a circumstance now said to arise "by reason of Mr Lum's breach of the Audit Obligations [that is, the obligations contained in cl 5 of the Royalty Deed]".
19. On 29 June 2023, the Court made orders requiring the defendants to indicate by 7 July 2023 whether they objected to the proposed Amended CLS. Their objections were notified on 7 July 2023.
20. On 28 July 2023, in accordance with directions made by the Court on 14 July 2023, the plaintiffs filed a notice of motion seeking leave to file the proposed Amended CLS. They then served a further draft on 31 July 2023.
21. The hearing of the notices of motion was set down for 22 September 2023. On the morning of that hearing, the plaintiffs served a fourth Amended CLS. Much of the debate about the list statement at the hearing focussed on an allegation that Mr Lum had breached the duty of good faith contained in cl 2.1 of the Royalty Deed. It was alleged that that duty, among other things, imposed an obligation on Mr Lum to cause the affairs of Features to be carried out so as to: (a) maximise its revenue and minimise its expenses; (b) ensure all amounts owing to the company were collected; (c) maximise its profit; (d) minimise the amount of capital retained by the company; (e) maximise the funds available for distribution as dividends to shareholders; (f) maximise the dividends declared; and (g) otherwise maximise the amounts payable to eOne AU under the Royalty Deed.
22. It was alleged that Mr Lum had breached that duty in various ways including by failing to cause Features to collect amounts owing to it or by causing Features to make payments that reduced its profits. But again, with a very limited number of exceptions, no specific amounts or payments were identified. It was eOne AU's position that it was not able to give particulars because of Mr Lim's breaches of the audit obligations contained in cl 5 of the Royalty Deed.
23. During the hearing, I raised the question whether it would be better to deal with the question whether the defendants had breached the audit obligations as a separate question in advance of the other issues in the case. Also during argument, Mr Withers SC, who appeared for the plaintiffs, suggested that he would at least need to administer an interrogatory to identify the films that were produced by Features in order to give further particulars. The motion was adjourned part‑heard for a week to allow the parties to consider whether a separate question should be ordered and the draft interrogatory foreshadowed by Mr Withers.
24. There was further correspondence between the parties in relation to the separate question. The defendants also raised the question whether the plaintiffs should be required to provide security for the defendants' costs. As a result, the hearing of the motions did not resume on 29 September 2023.
25. On 2 November 2023, the plaintiffs filed and served an application for a separate question and the defendants served their application for security for costs. The defendants' solicitors had previously written to the plaintiffs' solicitors on 5 October 2023 opposing the separate question because one issue raised by their List Response was an estoppel defence which was said to arise from representations made in 2014 and 2018 that Mr Lum could keep his shares in Features and that upon termination of his employment he would be released from any obligation to pay to eOne AU monies he had received by reason of his shareholding or position with Features. In reliance on those representations, it is alleged that Mr Lum agreed to extend his employment, carried out work to build the Features business, invested money in Features and caused Features to incur obligations and make payments to eOne AU. It was the defendants' case that those issues were bound up with the question whether Mr Lum had complied with his obligations in relation to an audit and that the same witnesses would need to give evidence in relation to both issues, which made a separate question impractical.
26. The application for security for costs was resolved on the basis that the plaintiffs agreed to provide security and the motion be dismissed with no order as to costs. The balance of the issues between the parties came before the Court on 13 November 2023.
27. The outcome of the hearing on 13 November 2023 was that the plaintiffs were given leave to serve a Further Amended List Statement addressing issues that had been raised during the hearing. I indicated that I would not order a separate question and I ordered that the plaintiffs pay the defendants' costs of and incidental to the hearings on 22 September 2023 and 13 November 2023.
28. In accordance with directions I made on 13 November 2023, the plaintiffs served the ACLS. The defendants opposed the filing of that document. There were then further delays with the result that the application was not heard until 28 March 2024. At the hearing, the plaintiffs indicated that they abandoned their application for discovery in advance of evidence. However, it is apparent that they propose to seek extensive discovery after evidence is served.

Paragraphs 57 to 62 of the ACLS

1. The defendants objected to paras 57 to 62 of the ACLS. Those paragraphs are in the following terms: 57. Since 12 May 2011, Hopscotch Features has been paid monies in respect of films it has produced. Particulars Paragraph 34(a) of the Defendants' Commercial List Response dated 25 November 2022. eOne AU is not otherwise able to give full details of the fees earned by and paid to Hopscotch for film production by reason of Mr. Lum's breach of the Audit Obligations. The precise quantum of fees earned by and paid to Hopscotch for film production will be particularised following discovery. 58. Those funds, net of expenses directly related to the films: (a) are and were payable to Mr Lum as a shareholder in Hopscotch Features or in any capacity; and (b) are and were payable by Mr Lum to eOne AU pursuant to cl 1.1 of the Royalty Deed. 59. Mr Lum has not paid those monies to eOne AU or caused Hopscotch Features to pay those monies to eOne AU. 60. As a consequence of the matters pleaded at paragraphs 51 to 59, funds that should have been paid by Hopscotch Features to Mr Lum and by Mr Lum to eOne AU pursuant to cl 1.1 of the Royalty Deed have not been paid. Particulars eOne AU is not otherwise able to give full details of the amounts that should have been paid by Hopscotch Features to Mr Lum and by Mr Lum to eOne Au by reason of Lum's breach of the Audit Obligations and or the Document Retention Obligation. The precise quantum of the unpaid amounts will be particularised following discovery and subpoenas. 61. In the premises, Mr Lum has breached cl 1.1 and 2.1 of the Royalty Deed and the Document Retention Obligation. 62. By reason of Mr Lum's breaches of the Royalty Deed, eOne AU has suffered loss and damage. Particulars eOne AU is not able to give full details of its loss and damage by reason of Mr Lum's breach of the Audit Obligations and or the Document Retention Obligation. Full particulars will be provided following disclosure and subpoenas.
2. In my opinion, those paragraphs repeated the problems with the earlier versions of the list statement. It is not alleged that Mr Lum received any amounts from Features that he has not paid to eOne AU. Rather, it seems to be alleged that Mr Lum, in breach of his duty of good faith, failed to cause amounts payable to Features (after deducting expenses) to be paid to him and then to eOne AU. However, not a single amount is identified or apparently can be identified and there is no pleading of the facts and matters which support the allegation (which itself is unpleaded) that the failure to make the payment involved a breach of the duty of good faith.
3. A pleading in those terms was said to be justified for two reasons. First, the relevant information is peculiarly within the knowledge of the defendants and Mr Lum, in particular. Second, the plaintiffs' lack of information arises from the failure of Mr Lum to comply with his obligations under cl 5 of the Royalty Deed.
4. In my view, the first submission was tantamount to a submission that the plaintiffs ought to be permitted to advance a case for which they have no basis for the purposes of obtaining information which might give them a basis for doing so. Proceedings of that type would be an abuse of process. The second submission presupposed a favourable outcome to the plaintiffs of one of the issues in the case.
5. In written submissions filed by the plaintiffs in relation to the hearing on 13 November 2023, the plaintiffs pointed to a number of decisions which were said to support the view that a plaintiff may be permitted to advance a case which is not fully particularised on the basis that further particulars will be provided after discovery either because the defendants alone know the relevant facts or because there is an anterior relationship between the parties which entitles one to obtain information from the other: see, Kimberly College Ltd v Thomson [2019] QSC 227; Newcrest Mining Ltd v WA NorthWest Pty Ltd [2022] WASC 315; Proctor v Kalivis [2009] FCA 795 at [82] per Besanko J; WA Pines Pty Ltd v Bannerman (1980) 30 ALR 559 (WA Pines).
6. However, as Brennan J explained in WA Pines, the principle is not as broad as the plaintiffs suggest. In that case, the applicant sought a declaration that it was not obliged to produce documents in response to a notice issued by the Trade Practices Commission under s 155 of the Trade Practices Act 1974 (Cth). One ground, advanced in para 6 of the statement of claim, was that "the notice was issued without the Trade Practices Commission, the respondent or the Deputy Chairman having reason (or alternatively any legally sufficient reason) to believe any of the matters set out in s 155(1) of the said Act" (at 563). The respondent sought particulars of that allegation, which were not provided. It then sought to strike the paragraph out. At first instance Toohey J rejected that application. He also refused the applicant's applications for discovery and interrogatories and for an order by way of particulars that the respondent state the reason to believe any of the matters set out in s 155(1) of the Trade Practices Act 1974 (Cth). The applicant appealed against the orders refusing discovery, interrogatories and further particulars. The respondent cross-appealed against his Honour's refusal to strike out para 6. The Full Court held that the paragraph should be struck out. As Brennan J (with whom Bowen CJ and Lockhart J agreed) explained (at 566): In the present case, discovery is sought before there is a tittle of evidence to suggest that the Chairman did not have the requisite cause to believe which para 6 of the statement of claim would put in issue. Some assistance was sought to be derived from cases where discovery had been given to a party before he was required to give particulars of his claim: cases such as Ross v Blake's Motors [1951] 2 All ER 689, but in cases of that kind there is either an anterior relationship between the parties which entitles one to obtain information from the other, or sufficient is shown to ground a suspicion that the party applying for discovery has a good case proof of which is likely to be aided by discovery. This is not such a case. This is a case where a bare allegation is made by para 6 of the statement of claim and, the paragraph being denied, the applicant seeks to interrogate the Chairman and ransack his documents in the hope of making a case. That is mere fishing.
7. The current case is analogous. Here, the plaintiffs had an opportunity to exercise their audit rights, and they did so. For reasons which are not properly explained, they elected not to pursue those rights before commencing proceedings. There is a serious question whether in those circumstances any rights they had have been lost. As in WA Pines, paras 57 to 62 contain a bear allegation. In my opinion, the plaintiffs were not entitled to advance that allegation in the hope that they might obtain material on discovery that would support it.

Gross sum costs order

1. The defendants seek a gross sum costs order in the amount of $138,744.52 in respect of their costs of the motion for discovery filed on 26 April 2023, the strikeout application filed on 2 May 2023, the amendment application filed on 28 July 2023 and the application for a separate question filed on 2 November 2023. In support of the application for a gross sum costs order, they rely on an affidavit sworn by Ms Clare Young, a Special Counsel with Simpsons Solicitors, who is the solicitor on the record for the defendants. Ms Young gives evidence of how the costs charged by Simpsons were allocated between the four motions and the other work performed for the defendants. That involved another solicitor, Ms Esther Ting, reviewing all items of work done since 17 February 2023. If a particular item appeared to relate to more than one issue that item of cost was divided equally between the issues to which it related. Almost all of the work on the matter has been done by either Ms Young or Ms Ting, whose charge out rates are $630 per hour in 2023 and $675 per hour in 2024 in the case of Ms Young and $300 per hour in 2023 and $320 per hour in 2024 in the case of Ms Ting. Those amounts were discounted by ten percent in 2023 and 15 percent in 2024. Attached to the affidavit were the detailed time records showing the description of each item that has been included in the calculation of the gross sum.
2. The plaintiffs do not take issue with Ms Young's evidence including the apportionment of costs or the amount, at least on a solicitor and client basis. They do, however, make three points. First, they submit that this not an appropriate case in which to make a gross sum costs order because the costs relate to interlocutory applications, some of which have already been the subject of a costs order, and the evidence is that the plaintiffs will ultimately be able to pay any costs order against them. Second, they submit that if a gross sum costs order is made some discount should be applied to reflect the fact that the defendants should only be entitled to recover their costs on a party/party basis. Third, they submit that it would not be appropriate to make a gross sum costs order in respect of the application for a separate question, since that application was made after being raised by the Court. There is also a question whether a gross sum costs order is appropriate in circumstances where some of the amendments sought by the plaintiffs were allowed.
3. I have concluded that it is appropriate to make a gross sum costs order in this case. It was not suggested that such an order is unavailable because of the costs orders made on 18 May 2023 (in relation to the strikeout motion) and 13 November 2023 (in relation to leave to amend): cf Raffy Nominees Pty Ltd v nib Holdings Ltd (No 2) [2023] NSWSC 1294. One circumstance where it may be appropriate to make a gross sum costs order is where the party against whom the order is sought has unnecessarily and unreasonably caused the costs to be incurred: Ireland v Retallack (No 2) [2011] NSWSC 1096; Chaina v Presbyterian Church (NSW) Property Trust (No 6) [2014] NSWSC 1009. That principle applies equally to interlocutory as well as final costs orders.
4. In the present case, the plaintiffs have persisted over an extended period of time in seeking to advance a case in one form or another for which they have no factual foundation in the hope that with extensive discovery they may ascertain facts which support the case they seek to advance. The difficulties with the approach taken by the plaintiffs were brought to their attention as early as 30 March 2023 in a letter from the defendants' solicitors. Those difficulties were apparent at the hearings on 22 September 2023 and 13 November 2023, but despite what was said at those hearings, the plaintiffs continued to press a claim that had no factual basis. In doing so they have put the defendants to considerable expense and have largely wasted the best part of a year. The defendants should not be out of pocket for the expenses that they have incurred unnecessarily over that time.
5. I do not think that the conclusion of the previous paragraph is affected by the fact that some of the amendments sought by the plaintiff have been allowed or by the fact that the costs sought by the defendants include the costs of the motion for a separate question. As to the first of these points, the dispute has largely related to the amendments which it was said would justify extensive discovery. Indeed, the defendants did not object to the original list statement even though it was inadequately particularised until the plaintiffs indicated that they sought extensive discovery. Consequently, the real dispute between the parties has been whether the plaintiffs were entitled to advance an unparticularised case and to obtain extensive discovery to see whether they could then particularise it. It is that issue that has taken so much time and on which the plaintiffs have been unsuccessful.
6. As to the second point, it is true that the issue of a separate question was first raised by the Court. However, shortly after the issue was raised, the defendants' solicitors (on 5 October 2023) wrote to the plaintiffs' solicitors explaining why a separate question was not appropriate. Ultimately, it was for that reason that the plaintiffs did not seriously press the application for a separate question and the application was dismissed. In that context, the application was part of the plaintiffs' strategy to obtain documents in the context of the proceedings to see whether they could adequately particularise a case they wished to advance. In those circumstances, the costs of the application for a separate question should be treated in the same way as the costs of the application to amend.
7. In my opinion, it is appropriate to reduce the amount claimed by the defendants to reflect an appropriate discount for party/party costs. The defendants did not suggest that this was an appropriate case in which to assess costs on an indemnity basis. The defendants were correct not to seek costs on that basis. Although the plaintiffs' conduct unnecessarily contributed to the costs, some of the amendments they sought were allowed and, as I have explained, the application for a separate question was first suggested by the Court. It would be inappropriate to assess costs on an indemnity basis in those circumstances.
8. The defendants point out that the charge out rates they have used were not high by comparison to rates that have been accepted in other cases. They also point out that their standards rates were discounted. All that may be accepted. However, it does not alter the fact that some discount is appropriate to allow for the fact that not all items of work that would be recoverable on a solicitor and client basis (irrespective of the rates charged for the work) would be recoverable on a party/party basis. The defendants' submissions also do not take into account the fact that in fixing an amount for a gross sum costs order, the Court should take a broad-brush approach which reflects the advantages to the costs applicant of a gross sum costs order and the imprecision of the exercise, which in this case in part arises from the splitting of costs between work the subject of the gross sum costs order and work that is not the subject of that order.
9. Taking those matters into account, I have concluded that it is appropriate to discount the figure claimed by the defendants by 20 percent and round it to arrive at a figure of $110,000.

Orders

1. The plaintiffs accepted at the hearing on 28 March 2024 that they should pay the costs thrown away by reason of their amended claim.
2. Accordingly, the orders of the Court are: 1. The plaintiffs are to pay the defendants' costs for the period 17 February 2023 to date in connection with: 1. The plaintiffs' proposed amendments to its commercial list statement; 2. The plaintiffs' discovery motion filed on 26 April 2024; 3. The defendants' strike out motion filed on 2 May 2024; 4. The plaintiffs' motion seeking a separate question filed on 2 November 2023, as a gross sum in the amount of $110,000, payable forthwith; 1. The plaintiffs are to pay the defendants' costs incurred prior to 17 February 2023 thrown away by reason of the amendment, as agreed or assessed; 2. The costs order in order (1) above involves the discharge of the following costs orders made in favour of the defendants: 1. Order 4 made on 18 May 2023 (costs of the strike out motion); 2. The costs order made on 13 November 2023 (in connection with the costs of the hearing on 22 September 2023 and 13 November 2023).

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 10 April 2024