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[2006] FCA 591
Federal Court of Australia
2006-05-19
Tamberlin J
Original judgment source is linked above.
REASONS FOR JUDGMENT 1 This is an application under O 15A r 6 of the Federal Court Rules ("the Rules")for preliminary discovery in relation to moneys in respect of which the applicants say they may be entitled to recover from the respondents. The relevant rule provides: '6 Discovery from prospective respondent Where: (a) there is reasonable cause to believe that the applicant has or may have the right to obtain relief in the Court from a person whose description has been ascertained; (b) after making all reasonable inquiries, the applicant has not sufficient information to enable a decision to be made whether to commence a proceeding in the Court to obtain that relief; and (c) there is reasonable cause to believe that that person has or is likely to have or has had or is likely to have had possession of any document relating to the question whether the applicant has the right to obtain the relief and that inspection of the document by the applicant would assist in making the decision; the Court may order that that person shall make discovery to the applicant of any document of the kind described in paragraph (c).' (Emphasis added) 2 In summary, the applicants provided funding to produce a film "The Matrix", which was released in March 1999 and proved to be very successful. It was produced by the Warner Bros Group ("Warner Bros") and the respondent companies are related to that corporation. 3 The applicants are considering whether to commence proceedings against the respondents for recovery of moneys, damages and other relief on the basis that they are entitled to receive payments in respect of licence fees under complex transaction documents that confer an entitlement to a proportion of the proceeds from distribution of the film by the respondents. They claim to have a cause of action arising out of a Distribution Agreement that was entered into by the parties on 1 March 1999. 4 The prospective entitlement depends on a formula which forms part of the series of transaction documents according to which funds were advanced through subsidiaries of National Australia Bank Limited ("NAB") and Leighton Holdings Limited ("Leighton"). Under the Distribution Agreement, there is an obligation to pay a share in the profits to the financiers by way of licence fees calculated by reference to the formula which is detailed and complex ("the Licence Fee formula"). In the Amended Application filed on 6 April 2006, the applicants set out, in more than thirty paragraphs and sub-paragraphs, a series of categories of documents of which they seek preliminary discovery in addition to the documents which have already been produced. 5 The applicants say that the documents necessary to prepare earning statements evidencing revenues and expenses in respect of the distribution of the film are within the possession of the respondents. The Distribution Agreement formula permits the financiers to carry out an audit of the earnings statements on an ongoing basis. This process has been commenced and implemented over several years. The principal auditor is Ms Elaine Douglas of Hacker Douglas, a Los Angeles consultant with considerable experience in auditing financial arrangements relating to film production, distribution and financing. 6 The applicants, through NAB and Ms Douglas, have made numerous requests for documents to permit a comprehensive audit to be completed and to enable Ms Douglas and the applicants to ascertain what licence fees, if any, are payable and to what extent earnings statements and information furnished to them are correct. To date, only an amount of approximately USD42,000 has been paid to NAB under the first earnings statement by way of licence fees. This is a relatively small sum when compared to the US box office takings in respect to the Matrix film which are said to be in excess of USD175 million. Ms Douglas has expressed a preliminary view that it is highly likely that further licence fees above USD42,000 are due and owing to NAB under the Licence Fee formula. Ms Douglas says that without obtaining further information from Warner Bros, she cannot determine whether the earnings statements are incorrect and if so, to what extent. Ms Douglas also claims she cannot advise as to the extent of the claims or a likely range of further fees that might be owing without seeing this information. She has provided an affidavit to the Court dated 2 September 2005 to this effect. 7 Similar opinions are in evidence from Mr Rodney Knight, a banker who has engaged in efforts to determine whether the earnings statements are false and whether licence fees are payable to the applicants. He has sworn an affidavit dated 11 August 2005 in which he states that his estimate of the licence fees owing in respect of the period to 31 December 2002 are likely to be at least approximately AUD2 to 3 million but no more than approximately AUD23 million. This conclusion is qualified by a statement that given the large number of assumption estimates he had to make in the process of his calculations, he considers it highly probable these figures would change upon receipt of the information sought by the applicants. 8 This is not a case where no documents have been provided to the applicants. In fact, over several years a large number of documents have been furnished to Ms Douglas as part of the audit, and an additional eighteen folders of documents have also been produced by the respondents. According to agreements between the parties, the contractual right to pursue the audit is not exhausted and has been extended to 31 May 2006. 9 In the event that the earnings figures provided are shown to have been misleading, the applicants contend they may have a claim for damages for breach of the Distribution Agreement and possibly a claim for damages under the Trade Practices Act 1976 (Cth). This dispute largely turns on the question whether preliminary discovery should be given in respect of both the contract suit and a possible trade practices action. 10 Mr Knight stated that in preparing his affidavit, he was shown copies of further document requests that have since been sent to Warner Bros. He recalled expressing an opinion at an earlier time that the list of documents sought by the applicants addressed most, if not all, of his most significant concerns relating to the shortcomings in the available information. Mr Knight says that if the information contemplated by the document request were forthcoming, he believes he would be able to refine his analysis and improve his advice as to the extent of the claims relating to the earnings statements. He also states he would be in a position to narrow his estimates as to the range of dollar amounts that he believes should be payable to the applicants under the Distribution Agreement in the period up to 31 December 2002. He does not contend that further examination of the documentation sought might reduce or extinguish the claim. 11 The applicants have also filed an affidavit by Mr David MacGregor of NAB dated 13 September 2005. Mr MacGregor was Head of the Structure Finance Australia Business Unit at the time it entered into the Matrix investment transaction, and this unit remains responsible for the transaction on an ongoing basis. 12 Mr MacGregor states that based on advice from Ms Douglas and Mr Knight in relation to a number of audit issues in the earnings statements, he considers it likely that further sums by way of licence fees over and above that paid under the earnings statements to date are owing and payable to the applicants. In addition, he states it appears likely to him that Warner Bros has misled the applicants in certain respects in relation the reporting of revenue and expenses for the Matrix film pursuant to the Licence Fee formula. 13 Mr MacGregor claims that given the cost and risk in commencing legal proceedings, NAB does not wish to commence proceedings if Warner Bros can justify what the applicants allege to be a number of serious irregularities in the earnings statements. He notes that Hacker Douglas has been unable to advise NAB of a possible dollar amount or range which Hacker Douglas believes is likely to be due and owing to the applicants. He further states that Mr Knight's range of figures representing the licence fees possibly owing to the applicants is subject to very heavy caveats and qualifications. Mr MacGregor also states that if it became clear that NAB has valid and substantive claims, it would take legal proceedings to recover such licence fees as are owing to it.
The principles 14 The relevant principles in relation to preliminary discovery were summarised by Hely J in St George Bank v Rabo Australia Ltd (2004) 211 ALR 147 at [153]-[154]. These indicate that O 15A r 6 is to be beneficially construed and given the fullest scope that its language will reasonably allow, with the proper brake on any excesses lying in the discretion of the Court in the light of the specific circumstances. Each of the elements in sub-paragraphs (a) to (c) of r 6 must be established. The test for determining whether the applicant has "reasonable cause to believe" as required by r 6(a) is an objective one. There is no requirement for the applicant to make out a prima facie case, but a mere assertion that there may be a right to obtain relief is not sufficient. There must be more than suspicion or conjecture. If there is no reasonable cause to believe that one of the necessary elements of a potential cause of action exists, that would dispose of the application in so far as it is based on that cause of action. 15 In relation to r 6(b), the authorities indicate that the question is whether an applicant has sufficient information for the limited purpose of making a decision as to whether to commence proceedings in the Court. It is permissible for an applicant to obtain discovery to determine what defences are available to the respondent, and the possible strength of these defences, but discovery is not available to an applicant so that it may exhaust every possible line of defence. The question as to whether sufficient information is available requires an objective assessment to be made. 16 The relevant principles were also considered by Lindgren J in Glencore International AG v Selwyn Mines Ltd (2005) FCA 801. In that case, his Honour indicated that the measure of preliminary discovery is the extent of information that is necessary, but no more than that which is reasonably necessary, in order to overcome the insufficiency of information already possessed by the applicant after it has made all reasonable inquiries to enable it to make a decision as to whether to commence proceedings. 17 In Alphapharm Pty Ltd v Eli Lilly Australia Pty Ltd [1996] (unreported, No. NG 351 of 1996), Lindgren J stated at [41]: 'The fact that a particular applicant genuinely feels unable, because of a lack of information, to decide to commence a proceeding does not, without more, satisfy para 6 (b); the objective aspect of the paragraph requires it to be shown as an objective fact that the applicant lacks "sufficient information to enable a decision to be made whether to commence a proceeding."' 18 At [50], his Honour said: 'Having regard to the extensive scientific research which has been carried out by or on behalf of Alphapharm and its strong prima facie case, it is difficult to avoid the conclusion that in seeking re-action discovery, it is seeking to eliminate a possibility, rather than to obtain key information without which it is not able to commence a proceeding. No doubt inspection of the documents referred to in Alphapharm's application would assist it in taking that decision, but I am of the view that it already has reasonably sufficient information to enable it to decide. Another way of expressing the matter is to say that Alphapharm has not, after making all reasonable inquiries, come up against an obstacle consisting of the lack of key information which it reasonably needs to enable it to decide whether to commence a proceeding; rather, it hopes to be comforted in taking the decision which it already has sufficient information to enable it to take.' (Emphasis added) 19 These remarks, particularly at [50], are apposite to the present case. It is necessary for an applicant to show more than a mere assertion that there is a case against a prospective respondent: see C7 Pty Ltd v Foxtel Management Pty Ltd [2001] FCA 1864 at [39]. The purpose of preliminary discovery is not to produce material which will strengthen or enhance a decision to commence proceedings but rather to provide what is reasonably necessary to enable the decision to be made.
respondents' case and reasoning on application 20 The respondents resist the application and submit that the application must fail because essential elements which must be established under r 6(a) to (c) in order to found jurisdiction in the Federal Court have not been made out. In addition, the respondents submit that as a matter of discretion, the Court should refuse to grant the discovery sought on the basis that it is oppressive and so broadly cast as to encompass what are likely to be a substantial number of irrelevant documents. 21 In relation to r 6(a), the respondents submit that, objectively approached, there is no reasonable cause to believe that the applicant may have a right to obtain relief in the Federal Court. This is because the elements of the prospective cause of action advanced by the applicants which might attract federal jurisdiction, namely, a claim for misleading and deceptive conduct under the Trade Practices Act 1974 (Cth), are not present on the evidence. It is said that as an objective conclusion, it has not been established that the elements of such an action can be made out. For present purposes the respondents do not dispute that there may be a cause of action in contract, but say this is not sufficient to ground jurisdiction for the grant of preliminary discovery because it lacks the necessary federal element to satisfy r 6(a) so that there is a right to relief in the Federal Court. Unless there is reasonable cause to believe there is a federal cause of action, it is said that the preliminary discovery application must be refused for want of jurisdiction. 22 The respondents say that there is only an allegation that there may have been misleading and deceptive representations and that the other elements of the cause of action, including reliance, causation and loss or damage said to flow from any misrepresentation, have not been formulated or evidenced. Accordingly, the respondents submit that the application must be dismissed for failure to satisfy the preconditions which enliven r 6(a). 23 I do not accept this first line of submission. Rule 6(a) uses the expression "may have the right to obtain relief". If there is a misrepresentation in the present case in the sense that the earnings statements are false, then it follows, if it can be shown that there are underpayments, that the applicants suffer loss by not being paid the amount due. If no action is brought, the applicants will have relied on the earnings statements produced to them and will therefore have suffered a loss of the payments which they are entitled to under the Distribution Agreement. There is clearly a substantial overlap between a possible trade practices claim and a contract claim in the present circumstances, but I do not consider it can be said that preliminary discovery must be refused on the ground that there is no evidence of all the elements of the factual claim. The applicants also point out that if they can make out a misrepresentation, they have incurred a resultant loss in being put to the expense of engaging the US auditors. Having regard to these matters, and to the marked discrepancy between the total US box office takings (in the order of USD175 million) and the relatively insignificant amount of USD42,000 paid to the applicants, as well as to the allegations raised by the auditors and the other evidence of the applicants, I consider that the requirements of r 6(a) have been satisfied. The approach submitted by the respondents is, in my view, too narrow in circumstances where the purpose of the preliminary discovery is to evaluate whether proceedings should be commenced. 24 In relation to r 6(b), the respondents submit that all reasonable enquiries have not been made by the applicants because there is still a period in which further requests and audits can be carried out. Having regard to the history of this matter and the extensive investigation carried out over several years by the applicants, I do not consider this submission should be accepted. It seems to me that exhaustive enquiries have been made and persisted in and it cannot be said that all reasonable inquiries have not been made so as to exclude the operation of r 6(b). 25 The next submission of the respondents in relation to r 6(b) is that the applicants have not established they have insufficient information to enable a decision to be made as to whether to commence a proceeding in the Court to obtain relief. There is evidence that a very large amount of documentation has been provided over several years in the course of the audit and that an additional eighteen folders of documents have also been provided. Both Ms Douglas and Mr Knight have been able to formulate detailed, albeit tentative, appraisals of approximate amounts that may be recoverable, making allowances for elements of doubt. It is true that the evidence indicates that these figures are the subject of significant assumptions and that the deponents of the applicants have doubts as to their accuracy. Nevertheless, the detailed breakdown by Ms Douglas and the relatively precise figures arrived at by Mr Knight (including a three case scenario) demonstrate that there is a sufficiency of evidence for the purpose of commencing an action. The applicants are seeking comfort in taking the decision when they already have sufficient information to enable them to make a decision to commence proceedings. 26 Although highly qualified, the summary of possible audit claims by Ms Douglas in her report dated 12 May 2004 indicates that the possible claim of the applicants on a ten percent entitlement may be USD3,760,921 plus undetermined issues. I accept that the figure is subject to reservations and is based on extensive assumptions but the clear import of her report is that there appears to be a significant claim. In addition, this figure appears to be a base claim because her estimate makes reference to a possible additional sum in respect of undetermined issues. 27 In the case of Mr Knight, it is true that his estimates are also stated to be heavily qualified. However, the Court has been furnished with Exhibits 2, 3 and 4, which contain details and spreadsheets only available recently and go to substantiate a possible claim ranging between AUD3,244,772 on a low case basis to a AUD23,073,185 on a high case basis, with a best case figure of AUD5,631,478. The documents include notations on the rationale for each level of figures prepared by Mr Knight stating assumptions, suppositions and reductions. Mr Knight does not suggest in his affidavit that the base range he refers to is likely to be cut down by additional material. Rather, the implication is that the claim could be increased by additional material. 28 Based on this information, the detailed workings by Mr Knight and Ms Douglas, and the surrounding circumstances, including the discrepancy between the gross takings and the very small amount paid to the applicants to date, I consider there is sufficient information in the material already provided to enable a decision to be made as to whether to commence an action. I do not consider that the respondents' case on discovery is materially weakened by the fact that Ms Douglas and Mr Knight were not cross-examined, given the nature of the application, their current residence overseas, and the fact that their detailed workings only came to light relatively recently. 29 In relation to r 6(c), the respondents also argue that the classes of documents sought have not been shown to be relevant to the question of whether the applicant has the right to obtain relief. The submission is that the classes of documents on their face are manifestly too broad and that many documents sought could be said to be irrelevant and their production oppressive. 30 In my view, there is force in this submission and this is disclosed by an examination of the thirteen categories of documents sought and the breadth of these categories. I also consider that having regard to what has already been produced and the degree to which it has been able to be analysed and formulated, albeit with substantial reservations, this is not a case where a convincing argument has been made out for preliminary discovery of the documents sought. As a matter of discretion, and taking into consideration the breadth of the categories of the documents sought and the oppression likely to be caused to the respondents, I do not propose to grant preliminary discovery. 31 In these circumstances, it is not necessary for me to make determinations with respect of each of the classes individually. 32 For the above reasons, I dismiss the application for preliminary discovery in this matter with costs.
I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin.
Counsel for the Applicants: J Stevenson SC, J Hmelnitsky
Solicitor for the Applicants: Mallesons Stephen Jaques
Counsel for the Respondents: J Gleeson SC, T Wong
Solicitor for the Second Respondent: Gilbert & Tobin
Date of Hearing: 11 April 2006
Matrix Film Investment One Pty Limited
Alameda Films LLC
(2004) 211 ALR 147