Matrix Film Investment One Pty Limited v Alameda Films LLC

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.