Universal Music Australia Pty Ltd v Pavlovic & Ors; Pavlovic & Anor v Universal Music Australia Pty Ltd

Supreme Court of NSW|2017-03-13|Before: Gleeson JA, Brereton J

Solicitors: Gilbert & Tobin (Universal Parties) Blueprint Law (Pavlovic Parties) File Number(s): 2015/776912015/347134

Judgment

GLEESON JA: Application is made by certain parties in related proceedings for disclosure of documents under Uniform Civil Procedure Rules 2005 (NSW), r 21.2. The two proceedings have been listed together for hearing for a number of weeks commencing on 2 May 2017. It seems that the parties have filed their lay and expert evidence and neither party suggested that Practice Note SC Eq 11 (the Practice Note) requires exceptional circumstances be established on these applications to warrant disclosure. Insofar as the parties intend to serve further expert evidence, it is arguable that the Practice Note would not apply to the present applications: Graphite Energy Pty Ltd & anor v Lloyd energy Systems Pty Ltd [2014] NSWSC 1326 at [15] (Brereton J). If that view be wrong, and the Practice Note applies, then I am satisfied that there are exceptional circumstances warranting disclosure at this stage, where the parties have already served their lay and expert evidence, but may seek to supplement their expert evidence.

Nature of the dispute

The parties are in dispute in relation to a number of matters. It is unnecessary for present purposes to identify in which proceeding the issues are raised.
One issue is the calculation of the Adjustment Amount, which prior to the service of the sale notice, Universal had estimated was approximately $4,844,649.27. This figure comprised unrecouped profit advances of $1,109,606.81 and unrecouped losses of Modular said to have totalled $7,470,084.91 (half of which being $3,735,042.46 were claimed to be part of the Adjustment Amount). Universal now contends that this figure is understated principally by reference to the applicable interest to be charged by Universal to Modular.
Mr Pavlovic alleges that the Adjustment Amount, as contended for by Universal, is incorrectly calculated and overstated. This allegation is made with reference to two matters. One is the alleged wrongful withholding of revenue due to Modular from two affiliates of Universal that distributed the music recordings of Modular (referred to by the parties as the Modular Repertoire), in the United Kingdom and the United States from 2006 to 2008. Those affiliates are Island Records Limited (Island) and Interscope Incorporated (Interscope). The other matter is the alleged passing on to Modular of expenses incurred by these Universal affiliates, such as marketing costs and distribution fees, which Mr Pavlovic contends either ought not to have been debited to Modular, or were debited to Modular in excess of that permitted under the shareholders agreement.
Another issue is whether Mr Pavlovic breached cl 3.2(a)(ii) of the shareholders agreement by failing to provide documentary evidence, to Universal's reasonable satisfaction, on the financial capacity question. A related issue is whether any such breach by Mr Pavlovic sounds in damages by way of the difference between the nominated offer price and the price at which Mr Pavlovic had the financial capacity to buy Universal's shares in Modular if the Warner letter is properly excluded from consideration. Universal seeks to set-off any such damages against its obligation to pay Mr Pavlovic the offer price of $8,000,000 less the Adjustment Amount.
Another issue is Universal's claim that Mr Pavlovic wrongly distributed the Modular Repertoire outside of Australia without accounting to Universal and/or Modular for the revenue associated with that distribution. Mr Pavlovic contends that such distribution was permitted under an express agreement between Universal and Modular made in May 2010 (being the International Distribution Agreement) or was otherwise with the knowledge, consent and approval of Universal.
Mr Pavlovic also brings an oppression claim in relation to the affairs of Modular. This claim treats Universal's position as to the sale notice as correct, namely, that the documentary evidence from Warner was insufficient and that Mr Pavlovic had to demonstrate his capacity to pay, from his own resources, the amount necessary to acquire Universal's shares. Upon that assumption, it is contended that reliance by Universal on the terms of the shareholders agreement was unconscionable and demonstrative of oppression.

The disclosure requests

The disputed categories of documents sought by the parties have been narrowed since the parties filed their respective applications. The orders for disclosure will reflect the parties' agreement as recorded in the transcript (T4, lines 31-39; T37, lines 12-17).
As to the disputed categories, I have considered the pleadings and the affidavit evidence relied upon by the parties in support of their arguments for and against disclosure. It is not necessary to outline that evidence. Nor is it necessary to refer to or address each of the competing arguments advanced by the parties. These reasons will state only the dispositive reasons for ordering or refusing the disclosure sought by the parties in respect of the disputed categories the subject of argument on the hearing of the applications.
To the extent that disclosure is ordered, I am satisfied that the category of documents is relevant to a fact in issue in one or other of the proceedings. In some cases, the category is relevant to a fact in issue in both proceedings. As the proceedings are to be heard together, it is unnecessary to identify to which proceedings the category of documents is relevant to a fact in issue.

Universal's application for disclosure

Universal's further amended interlocutory process dated 10 March 2017 sought disclosure in Annexure A of 15 identified categories of documents. Five categories, some of which are related, remain in dispute.

Category 4 and 4A

Category 4 seeks all documents evidencing or referring to discussions and confidential negotiations between Mr Pavlovic and Warner Music Group which are referred to in Mr Pavlovic's affidavit sworn 15 February 2017 in paragraphs 111 and 114.
Category 4A seeks all written communications sent or received by Mr Pavlovic (a) referring to the sale notice dated 29 February 2016, including any consideration of the offer price specified in that notice in a stated period shortly preceding the issue of that notice and (b) referring to Universal's letter dated 11 March 2016, electing to buy Mr Pavlovic's beneficial shareholding in Modular, including consideration of the form of the election, in the period after 11 March 2015 to 6 May 2016.
In each case, the only objection to disclosure is on the basis of relevance.
As to category 4, Universal pointed to the issues raised by the amended statement of claim in the Pavlovic proceedings, where Mr Pavlovic alleges that if Universal was not satisfied on the documentary evidence provided by Mr Pavlovic that he had sufficient financial resources to acquire Universal's shares at the offer price plus the Adjustment Amount, then Universal should acting reasonably have been so satisfied. The particulars to par 50B of the amended statement of claim include that an inference arose, from the Warner letter, that Mr Pavlovic had entered into a commercial relationship with Warner in relation to the potential acquisition of Universal's shares in Modular and that Mr Pavlovic had Warner's "apparent financial backing". Mr Pavlovic's affidavit also refers to his negotiations and discussions with Warner concerning Warner's willingness to assist him to buy Universal's shares, including the memorandum of understanding issued by Warner to Mr Pavlovic on 12 February 2015.
Universal submits that Mr Pavlovic relies on the inference as to a commercial relationship with Warner which is not apparent on the face of Warner's letter. Universal emphasised that it has put in issue in both proceedings the nature of Warner's financial support for Mr Pavlovic's sale notice, including the limitations on, and conditionality of, that support.
Mr Pavlovic pointed to the "reasonable satisfaction" requirement in cl 3.2(a)(ii) of the shareholders agreement and submitted that this question turned only on the material available to Universal derived from the sale notice and other matters known to it at the time. Accordingly, it was submitted, that the background to Mr Pavlovic's negotiations with Warner and the consideration he gave to the offer price prior to issuing the sale notice are entirely irrelevant.
The difficulty with that submission is two-fold. First, Universal alleges in its defence (par 50B) that Mr Pavlovic chose not to reveal to Universal the terms of any commercial relationship or agreement with Warner and asserts that the Warner letter was not capable of constituting documentary evidence which met the reasonable satisfaction requirement.
It seems to me that documents evidencing Mr Pavlovic's negotiations and discussions with Warner are relevant to the defence raised by Universal that Mr Pavlovic did not reveal to Universal the terms of any commercial relationship or agreement with Warner.
Secondly, the category 4 documents are relevant to Universal's allegation that Mr Pavlovic breached the shareholders agreement, in particular, cl 3.2(a)(ii) by not including documentary evidence to the reasonable satisfaction of Universal on the financial capacity issue. Insofar as counsel for Mr Pavlovic suggested that there are difficulties, with Universal making out its claim for damages for breach of cl 3.2(a)(ii) of the shareholders agreement, having regard to its proper construction, as well as matters of causation, including the relevant counter-factual, those matters are properly left for the trial.
At this point, the position is that there is a pleaded allegation of breach of cl 3.2(a)(ii) of the shareholders agreement and no application has been made to strike out that allegation. The disclosure sought by Universal is directed to facts in issue raised by that allegation.
As to the category 4A documents - there are two difficulties with Mr Pavlovic's objection which, as indicated, is solely on the ground of relevance. First, it is said by Universal, and without dispute by Mr Pavlovic, that this category mirrors category 8 of the disclosure application by the Pavlovic parties, to which Universal has consented. In those circumstances, there is little merit in an objection based on relevance.
Secondly, and importantly, in the Pavlovic proceedings, Mr Pavlovic raises an oppression claim. He asserts that if he was required to comply with the terms of cl 3.2(1)(ii) of the shareholders agreement (that is, if he was required to provide documentary evidence to Universal's satisfaction that he had sufficient financial resources), then reliance on the clause by Universal was unconscionable. Universal pleads by way of defence that Mr Pavlovic was a commercial party capable of complying with, and even seeking a commercial benefit or advantage from, the buy-out regime under cl 3 of the shareholders agreement. Communications referring to Mr Pavlovic's sale notice and Universal's election are relevant to the oppression claim insofar as Mr Pavlovic asserts that reliance on cl 3.2(a)(ii) by Universal was unconscionable.
Categories 4 and 4A will be allowed.

Category 6

Category 6 seeks certain bank statements for identified bank accounts said to be connected with the Pavlovic parties as listed in annexure B. Only two items remain in dispute. (a) Item 4
Item 4 concerns an account in the name of Modular Ideja (in Croatia) and seeks bank statements for all periods up to 17 June 2013. Bank statements after that date have already been provided pursuant to earlier Mareva orders. Mr Pavlovic objects on the ground of relevance and also asserts that no such documents exist.
Mr Tang, solicitor, deposed as to instructions received from Mr Pavlovic that this account was only opened in June 2013. Accordingly, the submission by Mr Pavlovic is that there are no documents to produce.
Universal does not accept that response and says that it is entitled to verified discovery with respect to these bank accounts. I do not agree. No basis has been shown for going behind the earlier disclosure by Mr Pavlovic in response to Mareva orders, nor for doubting that Mr Tang has made appropriate enquiries of Mr Pavlovic when seeking instructions as to the existence of any documents referred to in Item 4.

(b) Item 7

Item 7 seeks bank statements for two bank accounts with the account names "ING Direct - 023686037" and "Trust Company".
Mr Pavlovic objects on the ground of relevance. It is submitted that Universal has not demonstrated any nexus between the disclosure sought and any issue in the proceedings. In support of this submission, Mr Pavlovic points to the statement by Universal's expert, Mr Ross, that these accounts "may" have received certain monies from other Pavlovic accounts the subject of the failure to account claim.
Having reviewed the report of Mr Ross and taking into account the substantial amounts paid into these two accounts, directly or indirectly, from other accounts said to have received royalties from exploitation of the Modular Repertoire, I am satisfied that Item 7 is relevant to a fact in issue. This part of Category 6 will be allowed.

Categories 9 and 10

Category 9 seeks all documents recording or evidencing any agreement relating to the exploitation of sound recordings and other copyright works in the Modular Repertoire on certain identified on-line music services and also any on-line music services not yet disclosed in the proceedings.
Category 10 seeks all accounting statements or other documents recording or evidencing payments received in relation to the exploitation of Modular Repertoire.
The Pavlovic parties object on the grounds of relevance pointing to the absence of any claim in the Universal proceedings regarding monies received by the Pavlovic parties as a result of exploitation of Modular Repertoire on on-line music services, apart from iTunes.
Universal accepted that these categories raised issues not presently pleaded and sought leave to file a further amended statement of claim which included these new allegations. Counsel for the Pavlovic parties was not in a position to deal with that amendment application and sought until Friday, 17 March 2017 to obtain instructions.
In the circumstances, a ruling on these categories should be deferred until the amendment application is addressed. Nonetheless, as the matter has been argued, I will indicate my preliminary views as this may assist the parties and avoid the necessity for the court to revisit the matter if the amendment application is consented to or otherwise granted.
Universal's further amended statement of claim presently refers only to revenue that the Pavlovic parties received from the iTunes on-line service. The proposed amended statement of claim covers revenue that the Pavlovic parties received from other identified on-line services - eMusic, Beatport and LimeWire. The Pavlovic parties submitted that even if the proposed amendment was granted, the evidence relied upon by Universal to support claims involving revenue received from Beatport and LimeWire, as referred to in the affidavit of Mr Williams (pars 44-47), was speculative and disclosure should be refused on this ground.
Having reviewed the underlying documentary material referred to in the Williams affidavit, I reject that submission. There is evidence of a presently unexplained gap in revenue received by Universal or Modular from Beatport after February 2011 up until May 2012 when a Universal entity referred to as UMG entered into an agreement to license, among others, the Modular Repertoire to Beatport. If the amendment is granted, disclosure of the documents referred to in categories 9 and 10 is appropriate in relation to Beatport for the period February 2011 to May 2012.
As to the on-line music service known as "LimeWire", the annexures to Mr Williams affidavit support the view that there is a plausible contention that Mr Pavlovic or his companies entered into an agreement to license Modular Repertoire to LimeWire in or around September 2010. The "Subject" heading in the relevant emails refers to "Modular Catalogue on LimeWire Store", and the emails refer to particular musical recordings that may or may not be uploaded through the LimeWire store. It seems that Universal contends that at least some of the musical recordings uploaded on LimeWire comprised part of the Modular Repertoire.
Insofar as the proposed amendment would include licensing to the on-line music service eMusic, no submission was advanced by the Pavlovic parties that revenue had not been received by eMusic after January 2012 as referred to in Mr Ross' report.
In my view, subject to obtaining leave to make the proposed amendment, Universal has demonstrated that disclosure by the Pavlovic parties of the documents referred to in categories 9 and 10 is appropriate. However, the categories should be qualified by subject to specifying the relevant period for each on-line service. For example, the disclosures relating to Beatport should be limited to the period February 2011 to May 2012.
I am otherwise not persuaded that any wider disclosure would be appropriate in relation to on-line music services which have not been identified by Universal in its pleading or foreshadowed amendment.

The Pavlovic disclosure application

The disputed categories of documents are those referred to in pars 1, 2, 5, 6, 7, 9, 10 and 11 of annexure A to the amended interlocutory process filed 10 March 2017. Again, some of these categories are related.

Category 1

This category, as amended, seeks all documents created by or on behalf of, or otherwise received by, Universal, during the period 1 January 2006 to 31 December 2008 that record or evidence the "Joint Venture Accounting Policy". That expression, as amended, is defined in annexure A to The Pavlovic parties' amended interlocutory process provided to the court on 14 March 2017. Annexure A will be marked MFI-1.
Category 1 is agreed except for the commencement date of the relevant period - 1 January 2006 as put forward by the Pavlovic parties on the hearing and accepted by Universal, or 1 July 2005 as subsequently contended for by the Pavlovic parties in submissions sent to the court by email after the conclusion of oral argument. Since the commencement date of the shareholders agreement was 2 December 2005, the 1 January 2006 date seems to be an appropriate commencement date.
Category 1 will be allowed in those terms.

Category 2

Category 2 seeks all agreements between Universal and its affiliates, Island and Interscope, recording or evidencing the treatment of the costs incurred by those affiliates for distributing or marketing the Modular Repertoire between 2005 and 2008.
The clarifications suggested by Universal in its submissions have now been agreed. Category 2 will be allowed as agreed.

Category 5

This category seeks Modular's annual balance sheets and trial balances in respect of the period from 1 December 2005 to 31 December 2015. Category 5 will be allowed as it was agreed to by Universal in the course of oral argument.

Category 6

This category seeks all documents "recording or evidencing the transactional level of electronic data" in Universal's accounting system in relation to the revenue and costs of Modular from 1 December 2005 to date. These documents are sought in order for Mr Pavlovic to calculate what he considers to be the correct Adjustment Amount.
The reference to the "transactional level of electronic data" seems to be directed to what in ordinary accounting terms would be the general journal for Modular. Affidavit evidence was given by Mr Williams, Universal's solicitor, on information and belief concerning the difficulties in extracting from Universal's accounting system, the "JD Edwards system", information at a general journal level. Among other things, it is said that such information is not stored in one place in the accounting system, but is stored across numerous sub-accounts within the system, most of which involve other Universal businesses and labels. It is said that there would be a need to segregate records for Modular from those relating to other labels. It is also said that Universal does not currently have the capability to interrogate its accounting system to recall all past transactions and put them together in one report or file.
Mr Williams did acknowledge in his affidavit that Universal has the capacity to seek information in the accounting system by running queries or searches for specific information and that Universal is willing to respond to specific search requests made by Mr Pavlovic (in a reasonable number and scope).
In its present form, disclosure in the terms of Category 6 should not be ordered. First, the category is too broadly expressed. It seeks all transactional level electronic data over a 12-year period. A review of the pleadings indicates that little attempt has been made by the Pavlovic parties to particularise the basis of their challenge to the unrecouped losses of Modular, which is a component of the Adjustment Amount. The documents sought, being the entire general journal for Modular for a 12 year period, go well beyond the broad allegation that the Adjustment Amount, as claimed by Universal, is incorrect and overstated.
Secondly, in view of the evidence of Mr Williams referred to above, it is inappropriate and burdensome to require Universal to, in effect, recreate the entirety of its general journal for Modular over 12 years in circumstances where the Pavlovic parties have not yet identified with any particularity the nature of their challenge to the unrecouped losses which Universal contends should be included in the Adjustment Amount.
Thirdly, the Pavlovic parties are shortly to be provided with the trial balances of Modular for a 10-year period (Category 5). After review of the trial balances, it is open to the Pavlovic parties to indicate to Universal what specific search requests they have in relation to specific items recorded in the trial balances for particular financial years. That should hopefully lead to a more targeted disclosure request by the Pavlovic parties directed to documents relevant to a fact in issue. In this regard, the Court expects the parties and their legal representatives to act in a reasonable and co-operative manner, both in making any such requests (including the number and scope of any requests), and in responding to such requests. If necessary, the Pavlovic parties can bring forward a further application for disclosure. That, however, should not to be taken as any encouragement for that to occur.
Category 6 is refused.

Category 7

This category seeks all documents about Universal's assessment of the value of Modular leading up to the events of the buy-out regime in March 2006.
The Pavlovic parties submit that these documents are relevant for three reasons. First, they are said to bear on Universal's election to purchase the Pavlovic shares in Modular. I do not agree. Universal's subjective view as to the value of Modular does not bear upon whether it exercised its contractual right to purchase the Pavlovic shares.
Secondly, and contrary to the Pavlovic parties' submissions, it does not seem to me that Universal's subjective view of the value of Modular bears upon whether Universal, in fact, suffered any loss or damage consequent upon Mr Pavlovic's alleged breach of cl 3.2(a)(ii) of the shareholders agreement. Counsel for Universal expressly disclaimed any suggestion that Universal's damages claim was based on any lost opportunity claim by Universal to obtain a financial benefit arising from the cascading down effect of cl 3 on the sale price at which it could acquire the Pavlovic shares under the buy-out mechanism. As indicated, the damages claim advanced by Universal is that, but for the alleged breach of cl 3.2(a)(ii) by Mr Pavlovic, it would have received an offer price in an amount significantly less than $8,000,000, being an offer in an amount reflecting Mr Pavlovic's financial capacity to pay at that time.
Thirdly, Mr Pavlovic says that the documents sought are relevant to the oppression claim, in particular, that Universal's assessment of the value of the equity in Modular, bears on whether the affairs of the joint venture were conducted unfairly, prejudicially or oppressively to the Pavlovic parties in the context of the events when the buy-out regime was taking place. Universal responded that its conduct in relying on the alleged non-satisfaction of the requirement in cl 3.2(a)(ii) of the shareholders agreement could not be characterised as unconscionable between two sophisticated commercial parties. Whether that is so is a matter for trial. It seems to me that the documents sought are relevant to the facts in issue on the oppression claim.
Category 7 will be allowed.

Categories 9, 10 and 11

These documents are said to be relevant to the contention by the Pavlovic parties that the activities involved in the distribution of the Modular Repertoire were not wrongful, but were carried out with the knowledge, consent and approval of Universal. In broad terms, documents relating to that issue would be relevant to a fact in issue in the proceedings, however, I accept Universal's submission that, as presently drafted, the categories are bad in form. They "make no attempt to identify … limited categories of documents that would advance" the defence by the Pavlovic parties: In the Matter of Colorado Products Pty Ltd (in prov liq) [2013] NSWSC 611 at [84] (Black J).
Insofar as the Pavlovic parties sought to address the width of these categories by confining, in particular, categories 9 and 10 to documents emanating from 14 identified Universal employees, this does not address the difficulty that the categories go well beyond the issues raised by the defence filed by the Pavlovic parties in the Universal proceedings.
First, to the extent that the defence of consent is based on the proper construction of the International Distribution Agreement of May 2010 and a narrow range of particulars of "surrounding circumstances" are relied upon as being relevant to the construction question, I am not satisfied that categories 9, 10 or 11 are relevant to a fact in issue raised by the construction argument.
Secondly, to the extent that the defence of knowledge and consent of Universal is pleaded in relation to particular distributions in the United Kingdom or elsewhere, and the Pavlovic parties plead a defence of waiver or estoppel, again these categories are far too broadly expressed. Despite these difficulties being raised in oral argument, no application was made by the Pavlovic parties to reframe these categories with reference to the specific allegations pleaded in their defence.
Categories 9, 10 and 11 are refused.

Costs of the applications

Each of the parties has achieved a measure of success on the disclosure applications, either by way of agreement with the other side or the disclosure order which will be made. The appropriate costs order seems to me to be that costs of the respective applications be that party's costs in the proceedings in which it is the plaintiff.
Accordingly, I make the following orders:

Universal's proceedings - 2015/77691 1. That the first to fourth and sixth to eighth defendants (the Pavlovic parties) give disclosure to the plaintiffs (Universal) of documents within the classes set out in Categories 1, 2, 3, 4, 4A, 5, 6 (Items 1, 2, 3 and 7), 7, 8 and 11-14 of Annexure A to the further amended interlocutory process dated 10 March 2017. 2. That the Pavlovic parties serve a list of documents in accordance with UCPR, Pt 21, Dvn 1 on or before 29 March 2017. 3. Stand over the disclosure application in par 2 (Categories 9 and 10 of annexure A) and the amendment application in par 3 of the further amended interlocutory process dated 10 March 2017 before the Corporations List Judge on 20 March 2017 at 9.45am. 4. Otherwise dismiss Universal's further amended interlocutory process dated 10 March 2017. 5. Costs of the further amended interlocutory process dated 10 March 2017 be Universal's costs in the proceedings.

Pavlovic parties' proceedings - 2015/347134 (6) That the first and second defendants (the Universal parties) give disclosure to the first plaintiff (Mr Pavlovic) of documents within the classes set out in Categories 1, 2, 3, 4, 5, 7 and 8 of annexure A (as amended on 14 March 2017 and marked MFI-1 subject to order 6A below) to the amended interlocutory process filed 10 March 2017 (other than those that have been filed in proceedings 2015/347134 or proceedings 2015/77691) by serving a list of documents on or before 29 March 2017. (6A) That in relation to Category 1 of MFI-1, the commencement date for the disclosure period shall be "1 January 2006" not "1 July 2005". (7) Otherwise dismiss the amended interlocutory process filed 10 March 2017. (8) That the Universal parties serve a list of documents in accordance with UCPR, Pt 21, Dvn 1 on or before 29 March 2017. (9) Costs of the amended interlocutory process filed 10 March 2017 be the Pavlovic parties' costs in the proceedings.

Amendments 16 March 2017 - [53] - typographical error 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: 16 March 2017

At a glance

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Judgment (21 paragraphs)

Legislation Cited (1)

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