Matrix Film Investment One Pty Ltd & Ors v Alameda Films LLC and Warner Bros Entertainment and Pictures Inc.

CITATION : Matrix Film Investment One Pty Ltd & Ors v Alameda Films LLC and Warner Bros Entertainment and Pictures Inc. [2007] NSWSC 523

HEARING DATE(S) : 23/05/07 JURISDICTION : Equity Division Commercial List

DECISION : Motion for separate determination of particular questions dismissed.

CATCHWORDS : Practice and Procedure - Separate question orders - Principles

Civil Procedure Act 2005 (NSW) LEGISLATION CITED : Trade Practices Act 1974 (Cth). Uniform Civil Procedure Rules 2005 (NSW)

Australian National Industries Ltd v Spedley Securities Ltd (in liq) (1992) 26 NSWLR 411 Carl Zeiss Stiftung v Herbert Smith & Co [1969] 1 Ch 93 CBS Productions Pty Ltd v O'Neill [1985] 1 NSWLR 601 Century Medical v THLD Ltd [2000] NSWSC 5 Dunstan v Simmie & Co Pty Ltd [1978] VR 669 Hadid v Australis Media Ltd (unreported, Supreme Court of New South Wales, Rolfe J, 29 March 1996) CASES CITED : Hathway v Cavanagh (2002) 43 ACSR 497 Idoport Pty Ltd v National Australia Bank Ltd [2000] NSWSC 1215 Law Society of NSW v Bruce (unreported, Supreme Court of New South Wales, Rolfe J, 23 April 1996) Love v Mirror Newspapers Ltd [1980] 2 NSWLR 112 Parramatta Stadium Trust v Civil and Civic Pty Ltd (unreported, Supreme Court of NSW, Hunter J, 27 August 1996) Rajski v Carson (1988) 15 NSWLR 84 Story of Sydney Pty Ltd v Ling (unreported, Supreme Court of New South Wales, Rolfe J, 15 November 1994) Tallglen Pty Ltd v Pay TV Holdings Pty Ltd (1996) 22 ACSR 130

Matrix Film Investment One Pty Ltd (First Plaintiff) Matrix Film Investment Two Pty Ltd (Second Plaintiff) Ewenissa Pty Limited (Third Plaintiff) PARTIES : Jackimort Pty Ltd (Fourth Plaintiff) Alameda Films LLC (First Defendant) Warner Bros Entertainment Inc (Second Defendant) Warner Bros Pictures Inc (Third Defendant)

COUNSEL : Mr J Stoljar (Plaintiffs) Mr J Gleeson SC, Ms S Mirzabegian (Defendants)

SOLICITORS : Mallesons Stephen Jaques (Plaintiffs) Gilbert & Tobin (Defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

Wednesday 23 May 2007 ex tempore Revised 24 May 2007

50175/06 Matrix Film Investment One Pty Ltd & Ors v Alameda Films LLC and Warner Bros Entertainment and Pictures Inc. JUDGMENT The notice of motion 1 There is before the court a notice of motion pursued by the defendants seeking an order that the questions raised in paragraphs 33 - 45 of the summons be decided separately from and before the trial of any other question in the proceedings. The proceedings 2 The proceedings concern a number of parameters of the arrangements made between the parties concerning the motion picture film "The Matrix" which was first theatrically released at the US domestic box office in late March 1999. 3 Broadly speaking the plaintiffs provided finance for the film, the second and fourth plaintiffs forming a partnership for the purpose of acquiring the copyright and related film assets and income rights for the film, while the defendants or some of them were the producers of the film. 4 Each of the defendants are incorporated in the United States. The first defendant is a subsidiary of Time Warner Entertainment Company LP which is in turn a wholly owned subsidiary of Time Warner Inc. At all material times it carried on the business of the distributor of films. 5 The second and third defendants are each subsidiaries of Time Warner Inc and at material times each carried on the business of producer and distributor of motion picture films. 6 The film was apparently extremely successful. The Commercial List Statement contends that:

i. upon the release in September 1999 of the DVD of the film, it became the highest selling DVD of all time;

ii. the film grossed approximately US $171,000,000 at the US domestic box office;

iii. the film was the defendant's highest grossing film for the 1999 year. 7 There are a number of disparate causes of action pleaded. An important issue concerns the financing arrangements between the parties and in particular the profit-sharing formula contained in a Distribution Agreement dated 31 March 1999. That dispute concerns the amount of the licence fees payable to the plaintiffs by the defendants under the Distribution Agreement. 8 Amongst the coterie of their causes of action, the plaintiffs allege that the Distribution Agreement was varied; that the defendants are in breach of that agreement (whether varied or not), including in respect of their duties of good faith and additionally that the defendants are also in breach of the Trade Practices Act 1974 (Cth). 9 The carefully drawn Summons/Commercial List Statement extends across some 87 paragraphs.

10 The present state of the proceedings is that the proceedings have been fixed for hearing for two weeks on 13 May 2008 and there has been an exchange of categories of documents in terms of discovery. Of some further relevance, after the fixing of the proceedings for final hearing and in relation to the motion for separate questions, the list judge ordered on 11 May 2007 that the parties file with the court by no later than 4 p.m. on 18 May 2007 an agreed statement of facts. The parties have been unable to agree to any such agreed statement of facts. The principles 11 The court may order the separate determination of a question pursuant to r 28.2 of the Uniform Civil Procedure Rules 2005 (UCPR) and s 62(2) of the Civil Procedure Act 2005 (NSW) (CPA). Whether such an order should be made is a matter for the court's discretion. 12 The principles which inform the proper approach to applications for the separate determination of particular questions have often been identified. 13 In Idoport Pty Ltd v National Australia Bank Ltd [2000] NSWSC 1215 at [7] some of the general principles were chronicled as follows and to my mind correctly so:

(1) The power of the Court to order the separate determination of an issue is a discretionary power which must be exercised judicially, but cannot otherwise be fettered: Dunstan v Simmie & Co Pty Ltd [1978] VR 669 at 670 per Young CJ and Jenkinson J.

(2) In exercising the power…, the Court is enjoined to give effect to the overriding purpose of the Supreme Court Rules; namely to facilitate the just, quick and cheap resolution of the real issues in the proceedings and cannot be stated in a more confined way.

(3) The Court begins with the proposition that it is ordinarily appropriate that all issues in a proceeding should be disposed of at the one time: Tallglen Pty Ltd v Pay TV Holdings Pty Ltd (1996) 22 ACSR 130 at 141 per Giles CJ in Comm D, Hadid v Australis Media Ltd (unreported, Supreme Court of NSW, 29 March 1996 per Rolfe J). Accordingly, it is for the party who wishes to have a question separately determined to show that it is desirable for that to occur.

(4) Without being exhaustive, the separate determination of an issue may prove to be an appropriate procedure in at least the following sets of circumstances: (a) where the resolution of that separate issue will have the effect of resolving the entirety of the litigious controversies or of substantially narrowing the field of litigious controversy: CBS Productions Pty Ltd v O'Neill [1985] 1 NSWLR 601 at 606 per Kirby P, Dunstan v Simmie & Co Pty Ltd (supra, at 671 per Young CJ and Jenkinson J);

(b) where the resolution of that separate issue carries with it a strong prospect that the parties will thereafter be able to resolve their dispute themselves and thus avoid further litigation: Tallglen Pty Ltd v Pay TV Holdings ( supra, at 141 - 142 per Giles CJ in Comm D);

(c) where there is a clear demarcation between that issue and all other issues in the case, including issues going to the credit of witnesses: CBS Productions Pty Ltd v O'Neill (supra, at 606 per Kirby P), Tallglen Pty Ltd v Pay TV Pty Ltd (supra, at 142 per Giles CJ in Comm D), Rajski v Carson (1988) 15 NSWLR 84 at 88 per Kirby P and Hope JA. (5) Conversely, the separate determination of an issue will rarely be an appropriate procedure where: (a) there are intertwined issues of fact or law between the separated question and the other questions such that the determination of the separate question will not have any substantial effect upon the width of the field of litigious controversy or the prospect of the settlement of the balance of the litigation: Law Society of NSW v Bruce (unreported, Supreme Court of NSW, 23 April 1996, per Rolfe J), Parramatta Stadium Trust v Civil and Civic Pty Ltd (unreported, Supreme Court of NSW, 27 August 1996, per Hunter J).

(b) where there is a commonality of witnesses and issues of credit as between the separate issue and other issues in the case which will or may necessitate a ruling on the credit of one or more of the common witness, thus possibly precluding that same judicial officer from again dealing with the matters going to the credit of the common witness in accordance with the decision of the Court of Appeal in Australian National Industries Ltd v Spedley Securities Ltd (in liq) (1992) 26 NSWLR 411: Story of Sydney Pty Ltd v Ling (unreported, Supreme Court of NSW 15 November 1994, per Rolfe J), Century Medical v THLD Ltd [2000] NSWSC 5; (unreported, Supreme Court of NSW, 3 February 2000, per Rolfe J).

(c) there is a possibility that the resolution of the separate issue will not finally determine the issue but will merely result in an appeal from that decision in relation to that separate issue, creating a multiplicity of proceedings, interruption to the court and undesirable fragmentation of the proceedings: Story of Sydney Pty Ltd v Ling (supra), Century Medical v THLD (supra). (6) The experience of courts suggests that the separation of proceedings often does not result in the quicker and cheaper resolution of proceedings as anticipated, but often has the reverse effect, merely causing added delay and expense to the resolution of the litigation. Thus, before an issue is to be separately determined, it must be possible to clearly see that it will facilitate the quicker and cheaper resolution of the proceedings: Tallglen Pty Ltd v Pay TV Pty Ltd (supra, at 142 per Giles CJ in Comm D), Parramatta Stadium Trust v Civil and Civic Pty Ltd (supra), Century Medical v THLD (supra). 14 As Giles CJ in Comm. D (as his Honour then was) said in Tallglen (supra, at 142):

"[The Rules] empower the court to make orders for the decision of any questions separately from any other question, whether before, at or after any trial or for the trial in the proceedings, and for the statement of a case and the question for decision. In the ordinary course, all issues in proceedings should be decided at the one-time, but separate decision of a question may be appropriate where, for example, the decision of the question is critical to the outcome of the proceedings and ( at least if decided in one-way) will bring the proceedings to an end. In particular circumstances the separate decision of a question may be appropriate even if it will not bring the proceedings to an end, such as where there is a strong prospect that the parties will agree upon the result when the core of their dispute is decided or where the decision will obviate unnecessary and expensive hearing of other questions, but such occasions must be carefully controlled lest fragmentation of the proceedings (particularly when the exercise of right of appeal is borne in mind) brings delay, expense and hardship - that which the making of an order was intended to avoid. It is often the case that the need to make findings of fact for a decision of the separate question, especially findings which may involve issues of credit, tells strongly against the making of an order because related facts, and renewed issues of credit, will or may arise at a later stage in the proceedings. Experience teaches that it should be able to be seen with clarity that decision of a separate question will be beneficial in the conduct of the proceedings and the resolution of the parties dispute." 15 The separate determination of issues is not a suitable process for determining wide-ranging and contested factual matters: Hathway v Cavanagh (2002) 43 ACSR 497 at 506 [40]. 16 In the result, subject to the matters referred to by Giles J in Tallglen, the Court will have regard to the following matters in exercising its discretion whether or not to make an order for the separate determination of a question: · whether there is some preliminary question of fact or law that is dispositive of the proceedings: Carl Zeiss Stiftung v Herbert Smith & Co [1969] 1 Ch 93; CBS Productions Pty Ltd v O'Neill (1985) 1 NSWLR 601 at 606; · whether resolution of the separate question may promote early resolution of the proceedings or, by narrowing the disputed issues, avoid expense and delay: Love v Mirror Newspapers Ltd [1980] 2 NSWLR 112; Tallglen Pty Ltd v Pay TV Holdings Pty Ltd supra at 141-2; CBS Productions Pty Ltd v O'Neill at 606; · whether the question is clearly severable, as opposed to where the question proffered: - involves the whole subject matter of the proceedings;

• involves alternative causes of actions or defences;

• requires findings of fact likely to be contentious on remaining issues in the proceedings; or

• involves the credibility of witnesses' material to the remaining issues in the proceedings. 17 Naturally each set of circumstances requires to be carefully examined and the defendants have here sought to contend that this is a case in respect of which separate determination is appropriate even if it will not dispose of the proceeding. Their particular contention includes the following:

i. Separate determination may also be appropriate even if it will not dispose of the proceeding. An application for separate determination may be granted where resolution of the question will " substantially narrow the field of controversy " and therefore " obviate unnecessary and expensive hearing of other questions ": CBS Productions Pty Ltd v O'Neill (1985) 1 NSWLR 601 at 606; Tallglen Pty Ltd & Anor v Pay TV Holdings Pty Limited & Ors (1996) 22 ACSR 130 at 141. Hence separate determination may be appropriate where it is likely to save inconvenience and expense by, for example, reducing the time of preparation for trial and of the trial itself: Love v Mirror Newspapers Ltd [1980] 2 NSWLR at 126-7.

ii. Separate determination may also be ordered where "there is a strong prospect that the parties will agree upon the result when the core of their dispute is decided": Tallglen Pty Ltd & Anor v Pay TV Holdings Pty Limited & Ors (1996) 22 ACSR 130 at 141.

iii. Further, considerations of efficiency and cost are now statutorily mandated as factors to be taken into account when determining whether to make a particular order for the management of a proceeding, including an order for separate determination. Pursuant to s 58(1) of the CPA, " the court must seek to act in accordance with the dictates of justice " in determining whether to make such an order. The "overriding purpose" of the CPA and the UCPR and the objects of case management set out in s 57 of the CPA must be considered when determining the dictates of justice in a particular case: CPA, s 58(2)(a).

iv. Section 56 of the CPA provides that the overriding purpose of the Act and the rules is " to facilitate the just, quick and cheap resolution of the real issues in the proceedings ." Pursuant to s 57, in order to further the overriding purpose, proceedings are to be managed having regard to, inter alia, the efficient disposal of the court's business, the efficient use of judicial and administrative resources and the timely disposal of the proceedings and other proceedings in the court at an affordable cost to the parties. Returning to the instant application The Variation Question as pleaded by the plaintiffs 18 The defendants have conveniently summarised the variation question as pleaded by the plaintiffs in the following terms:

"The Variation Question is pleaded by the plaintiffs as follows:

i. before 20 August 2001, the first defendant " decided to vary " the Agreement by preparing the 2000, 2001 and 2002 Earnings Statements on a basis which included projected revenues and projected expenses: Summons at [34];

ii. the second and fourth plaintiffs " accepted the variation " of the Agreement by accepting payment of the licence fees under the 2000 Earnings Statement and by making no objection to the 2000, 2001 and 2002 Earnings Statements on the basis that they included projected revenues and projected expenses: Summons at [38]; and

iii. the consideration for the alleged variation of the Agreement was that the second and fourth plaintiffs and companies associated with them " continued to give favourable consideration and pursued efforts to give effect to a proposal made by the defendants in or about mid to late 1999 " that one or more of the plaintiffs enter into financing arrangements similar to the arrangements the subject of this proceeding but with respect to 5 films other than The Matrix : Summons at [39].

iv. In response to a request for further and better particulars, the plaintiffs sought to clarify the basis of their claim regarding the Alleged Variation Agreement as follows:

a) the first defendant offered to vary the Agreement, which offer was to be implied from the fact that the 2000, 2001 and 2002 Earnings Statement delivered by the first defendant calculated licence fees on a basis which included projections: SDG1 at 18, [2.6(iii)] and [2.7];

b) the offer was accepted by the plaintiffs - acceptance of the offer was to be implied from the fact that the plaintiffs accepted payment of the licence fees under the 2000 Earnings Statement and made no objection to the inclusion of projected figures in the 2000, 2001 and 2002 Earnings Statements: SDG1 at 19, [4.5(ii)] and [4.5(iii)]; and

c) upon acceptance, the first defendant's offer became an agreement to vary the Agreement: SDG1 at 19, [4.1].

v. The defendants deny that the Agreement was varied as alleged by the plaintiffs: Commercial List Response at [16] - [21]. The defendants' short answers to the contentions in which they seek to argue on the proposed separate question include: a) it is simply not possible to infer from the fact that the first defendant prepared the first 3 Earnings Statements on a basis more favourable to the plaintiffs than it was strictly obliged to under the contract that it was thereby promising to prepare statements for the whole of the contract period on that more favourable basis;

b) nor is it possible to infer that the first defendant was promising never to exercise its rights under the contract to revisit the statements for the first 3 years;

c) the plaintiff has not squarely pleaded, particularised or established that whatever dealings there were between the parties relating to the proposed 5 film deal were made referable to the alleged variation of the Agreement; and

d) pursuant to clause 16.9 of the Agreement, the Agreement could not be amended or varied except in writing signed by the parties and neither the plaintiffs nor the defendants have ever signed any written variation or amendment of the Agreement.

vi. The plaintiffs claim that the first defendant's failure to account for and pay licence fees in accordance with the Alleged Variation Agreement was a breach of contract: Summons at [46]. More than one quarter of the allegations of breach with respect to the calculation of the licence fees relate to the inclusion or failure to include projected revenues and expenses in the Earnings Statements (the Projections Allegations): Summons at [47]; SDG2 at [4].

vii. The Projections Allegations include, inter alia: a) an allegation that the first defendant failed to prepare the 2003, 2004 and 2005 Earnings Statements on the basis of projected figures: Summons at [47(a)];

b) allegations that certain projected revenues were omitted from the 2000, 2001 and 2002 Earnings Statements: Summons at [47(c)] and [47(o)]; and

c) allegations that certain projected expenses were overstated or included without proper basis in the 2000, 2001 and 2002 Earnings Statements: Summons at [47(g)], [47(i)] and [47(j)]." 19 The defendants have also contended as follows:

"i. It is likely that the plaintiffs might make further allegations of breach of contract relating to the projected figures following discovery: Summons at [47]; SDG2 at [21].

ii. The Projection Allegations also form part of the plaintiffs' case that the defendants engaged in misleading or deceptive conduct: Summons at [79].

iii. The Alleged Variation Agreement is a critical part of the plaintiffs' damages case. The plaintiffs claim that the loss and damage suffered as a result of the alleged contract breach and the alleged misleading or deceptive conduct is, inter alia, lost licence fees to which they would have been entitled had the first defendant calculated licence fees in accordance with the Alleged Variation Agreement - that is, on the basis of projected revenues and expenses: Summons at [73] and [80]; SDG2 at [26]."

Decision 20 I have come to the very firm view that the principled exercise of the relevant discretion is not to accede to the application for a separate question order. In general terms the reasons are as follows:

i. the litigation covers many causes of action, it being quite clear that even if the separate question order was made, very many of the contentions will still be in contest and remain resolved;

ii. Naturally each of the parties has been extraordinarily cautious with the terms used by them on this application . However: · in their Contentions the plaintiffs claim, first, that the defendants engaged in some 28 breaches of the Distribution Agreement (see paragraphs 47(a) - (bb) of the Contentions). · as the opening words of paragraph 47 of the Contentions make clear, the said 28 breaches are agitated on the basis of the material currently available to the plaintiffs; the plaintiffs reserve their right to raise further breaches following discovery and inspection of documents. · the great majority of the said 28 breaches of the Distribution Agreement will be pressed regardless of whether or not the Distribution Agreement was varied in the manner in which the plaintiffs contend. · as appears in the Variation Particulars, only the breaches of the Distribution Agreement alleged in sub-paragraphs 47(a), (c), (g) and (o) depend on the plaintiffs succeeding in proving a variation to the Distribution Agreement; the balance will be pressed regardless. · in an affidavit affirmed on behalf of the defendants in this application, it is asserted that nine of the sub-paragraphs in paragraph 47 are affected by the Variation Agreement. · it would appear from this paragraph of the affidavit that the defendants contend that two of the allegations in paragraph 47, namely sub-paragraphs 47(k) and (m) will be resolved "in part" if the separate question is heard in advance of the trial (the "parts" which will apparently be resolved having been unidentified), · for present purposes the important point is that even on the defendants' case, the great majority of the allegations in paragraph 47 of the Contentions, namely 19 of the 28 in total, together with "part" of two additional allegations, will still need to be determined at a final hearing even if the Court were to accede to the hearing of a separate question. · the plaintiffs allege that the defendants have further breached the Distribution Agreement by failing to determine when various "Contractual Start Points" (as defined in the Licence Fee Formula) were deemed to have occurred ([48] - [49]). These allegations will be pressed regardless of whether the variation to the Distribution Agreement is proved. · the plaintiffs allege that the defendants have breached their duty of good faith through engaging in various dealings, including dealings with related parties ([50] - [73]). The plaintiffs' case in relation to these matters will be pressed regardless of whether the Variation Agreement is successful or otherwise. · raising general allegations of a lack of good faith in relation to the party's conduct after the Distribution Agreement was entered into will inevitably involve an analysis of the general factual matrix in relation to which this conduct was carried on, including the preparation of the initial earning statements (prepared on the basis, on the plaintiffs' case, of the variation to the Distribution Agreement) and the subsequent purported issuing of "new" or revised Earning Statements. · the plaintiffs raise various allegations under the Trade Practices Act. These relate to the general conduct of the defendants, and will require an analysis of the factual background giving rise to that conduct. Again, it inevitably follows that the factual enquiry in relation to this conduct will overlap with the factual enquiry relating to whether the Variation Agreement was entered into. · at least it has been contended by the plaintiffs that if the separate question were to proceed they would need to adduce detailed further evidence and would also seek discovery in relation to the issues raised in respect of the Variation Agreement. It is simply not practicable to dismiss that possibility. 21 There is absolutely no doubt but that the fact that the proposed separate question will not resolve the entirety of the proceedings, even on liability, can give rise to particular problems, often unforeseen at an earlier stage. For example, it is possible that the same witnesses could be called on the hearing of the separate question as at trial, giving rise to a risk of adverse findings in relation to the credibility of witnesses. 22 In part the defendants have submitted that a determination on the separate question could easily lead to the Court being in a position to refer all of the remaining issues for initial determination by a referee. This contention cannot be accepted in a situation in which the credibility of particular witnesses may have been determined on the separate question. If that were to be the case, the referee would be in an invidious situation for the reason that he or she would likely be constrained by the credibility decision of the Court and in relation to witnesses who may also have been required to be called before the referee. 23 The continuing inability of the parties to reach a consensus as to the Agreed Facts for the purposes of a separate order regime, for whatever reason, is a clear indicator of the likely difficulties to be faced if such a regime was to be ordered. 24 Of course one must take into account the possibility, likely of high order, that whatever the decision on the separate question may have been, an appeal would have been lodged from that decision. 25 During the course of the exchanges between counsel and the Court, the Court raised for the consideration of both parties, the possibility that outside of a separate question regime, it may or may not be possible for the Court, in case management mode, to simply determine that the first issue would be determined and then proceed to reserve judgment, following which the same judge would continue to hear the balance of the case. As the transcript will record, the Court having raised that matter, both counsel addressed on it, and indeed Mr Gleeson SC for the defendants ultimately sought to have the Court embrace, as part of the application pursued by the motion, that very matter. It seems to me not inappropriate for the Court to permit the notice of motion to be amended accordingly, as the matter has been raised with both counsel. Having said that, in my view the possibility of a case management approach of that type being taken presently is also misconceived for the general reasons already given.

26 At the end of the day, whilst the proffering of the particular separate question may seem at first blush attractive, in my view the principled exercise of the discretion is not to make the orders sought by the defendants. As so often occurs, the long route is probably the shortest route at the end of the day.

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