Eden Productions Pty Ltd v Southern Star Group Ltd (No. 2)

[2003] NSWSC 434

CITATION:	Eden Productions Pty Ltd v Southern Star Group Ltd (No. 2) [2003] NSWSC 434 revised - 13/06/2003
HEARING DATE(S):	23/05/03
JUDGMENT DATE:	23 May 2003
JUDGMENT OF:	Gzell J
DECISION:	Matter stood over for further hearing
CATCHWORDS:	CONTRACTS - General Contractual Principles - Construction and Interpretation of Contracts - "Interest" includes bill discounts - Profit share year by year includes restitutionary amounts under cross-claim
LEGISLATION CITED:	Supreme Court Act 1970
CASES CITED:	Westdeutsche Bank v Islington London Borough Council [1996] AC 669 Commissioner of Taxation v Hurley Holdings (NSW) Pty Ltd (1989) 23 FCR 435 Willingdale v International Commercial Bank Ltd [1978] AC 834 Brown v National Provident Institution [1921] 2 AC 222 Lomax v Peter Dixon & Son [1943] KB 671
PARTIES :	Eden Productions Pty Ltd - Plaintiff Southern Star Entertainment Pty Ltd - 1st Defendant Siuthern Star Group Limited - 2nd Defendant
FILE NUMBER(S):	SC 50022/00
COUNSEL:	Mr D J Hammerschlag SC/ Mr A P Coleman - Plantiff Mr P M Wood/ Mr V F Kerr - Defendants
SOLICITORS:	Holding Redlich Freehills, Solicitors

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

GZELL J

FRIDAY 23 MAY 2003

ENTERTAINMENT PTY LTD & ANOR (No 2)

EX TEMPORE JUDGMENT

1 On 17 December 2002, I published my reasons for judgment (“Reasons”) for allowing certain claims of the plaintiff and certain claims of the defendants. The claims I allowed affected the calculation of the net profit of the Hal McElroy- Southern Star Division (“Division”) within Southern Star Entertainment Pty Ltd (“SSE”) over a number of financial years. I stood the matter over to allow the parties to make submissions on appropriate orders and appropriate calculations of interest.

2 On 4 February 2003, the defendants provided calculations of the plaintiff’s share of the net profit of the Division over the years in question on their understanding of my Reasons. On 11 February 2003, written submissions on behalf of the plaintiff were delivered that joined issue on several matters of principle with respect to the defendants’ calculations with which I deal hereunder.

Losses Carried Forward

3 The plaintiff submitted in its written submissions of 11 February 2003 that the defendants had recouped losses with respect to some projects against profits with respect to other projects in their calculations and this process was inconsistent with my Reasons.

4 The Division was brought to an end on 31 December 1977 under a Termination Deed. I concluded that after termination, recoupment of advances continued to be limited to a project by project basis but, instead of Southern Star Pty Ltd (“SSD”) being limited to recoupment from its receipts with respect to a project, SSE was entitled to recoup advances from any other funds coming into its hands from a project (Reasons par 23). For this purpose I said that net profit before recoupment had to be determined on a project by project basis (Reasons par 25) and this process required indirect costs and overheads to be apportioned project by project on some rational basis (Reasons par 26).

5 The plaintiff submitted that the recoupment of losses across the Division was inconsistent with these conclusions.

6 In written submissions on behalf of the defendants of 21 February 2003 it was submitted that cl 4.1(b) of the Second Revenue Sharing Deed of 5 May 1995 required the calculation of net profit on a project by project basis only for the purpose of recoupment. In other respects charges were to be made to projects whether profitable or not. For example, cl 4.1(c) required operating costs of the Division to be such costs as were referable to the projects of the Division.

7 The plaintiff provided further written submissions dated 19 May 2003 in which it was submitted that my Reasons led to the requirement of a series of separate calculations of net profit of each project and not to a Divisional calculation of net profit. The plaintiff claimed that its entitlement to 50% of net profit was limited to profitable projects and losses of unprofitable projects were to be carried forward to be offset against subsequent profits of those projects. It contended, in effect, that it ought not to bear a share of the losses of unprofitable projects.

8 Clause 2.1 of the Second Revenue Sharing Deed entitled the plaintiff to an amount equal to 50% of the net profit of the Division. That entitlement was not altered after termination. For example, cl 4.1(c) still required ascertainment of operating costs on a Divisional basis. The term “net profit of the Division” was defined in cl 3.1 to mean the balance of income of the Division after recoupment of operating costs of the Division and the recoupment of any losses of the Division for any previous year together with interest on those losses.

9 Having made the calculations of net profit, project by project, for the purpose of making allowance for recoupment of all advances from within the Southern Star Group (“Southern Star”), the Divisional net profit had to be calculated before any entitlement to a share in the plaintiff arose. The computation of the net profit of the Division in terms of cl 3.1 of the Second Revenue Sharing Deed required recoupment of losses and the charging of interest. I agree with the defendants’ submissions.

Music Royalties

10 I concluded that SSE was not entitled to allow SSD to withhold charges from music royalties (Reasons par 114 to par 117). In their calculations, the defendants added to previously calculated net profits, amounts with respect to those charges but then deducted 40% for royalties due to Nine Network Australia Pty Ltd (“Channel 9”).

11 The plaintiff in its written submissions of 11 February 2003 raised a question with respect to this approach but agreed, in its subsequent written submissions of 19 May 2003, that if I was referring in my Reasons to the 60% share of music royalties due to SSE, the defendant’s approach was correct.

12 In their written submissions of 21 February 2003, the defendants pointed out that the amounts included before the 40% reduction were the entirety of the commission wrongly retained by SSD and not the 60% share to which SSE was entitled, Channel 9 being entitled to the remaining 40%.

13 I thought I had made it plain (Reasons par 114 to par 117) that I was dealing with the 60% share of the musical content of a project to which SSE was entitled. The defendants’ calculations on this issue are correct in principle.

$225,000 profit advance

14 The defendants conceded that for the year ended 31 March 1998, the plaintiff was entitled to more than $225,000. They calculated the entitlement and deducted the $225,000 that had been advanced to the plaintiff against its share of the net profit of the Division.

15 In its written submissions of 11 February 2003, the plaintiff pointed to cl 3.8 of Second Revenue Sharing Deed which provided that if the advance exceeded the amount properly payable to the plaintiff, the amount of the excess was repayable within one month after the date the net profit of the Division had been calculated and advised to the plaintiff.

16 The plaintiff submitted that that calculation will only be made when I deliver judgment and the defendant was not entitled to reduce the plaintiff’s share of the net profit of the Division by the amount of the advance. The plaintiff claimed that it was entitled to interest on the re-calculated net profit from 1 April 1998 to the date of payment. The plaintiff further submitted that I should exercise my discretion under the Supreme Court Act 1970, s 94(1) and award the defendants no interest on the advance.

17 It was submitted on behalf of the plaintiff that cl 3.3 of the Second Revenue Sharing Deed, which required the payment of 50% of the net profit of the Division to the plaintiff as soon as practicable after the amount had been calculated, had the effect that the $225,000 was not repayable until that calculation had occurred. It was submitted that will not happen until I give final judgement in this matter.

18 It was submitted that it was not in the contemplation of the parties that interest would be payable on the advance or that there would be a deduction of that amount from the 50% share of the net profit of the Division.

19 The defendants’ written submissions of 21 February 2003 pointed out that cl 3.8 of the Second Revenue Sharing Deed dealt with the obverse situation and did not apply in the instant circumstances where the profit share was greater than the advance.

20 Clause 3.3 of the Second Revenue Sharing Deed required the defendants to pay the plaintiff’s 50% share of the net profit of the Division as soon as practicable after the amount had been calculated. It also required the defendants to pay interest on those moneys from 31 March of the year in question to the date of payment. Clause 3.4(c) required the defendants to pay the plaintiff $225,000 as an advance against the share of net profit of the Division payable to it for the period 1 April 1996 to 31 March 1997.

21 In its written submissions of 19 May 2003, the plaintiff pointed out that cl 3.3 of the Second Revenue Sharing Deed made no provision for a reduction of the amount upon which interest was payable.

22 In my view it could not have been the intention of the parties that the plaintiff should be entitled to an advance against its share of the net profit of the Division and yet be entitled to interest on the entirety of that share up to the date of payment.

23 The obligation to pay interest under cl 3.3 of the Second Revenue Sharing Deed is limited by the date of payment. When $225,000 was paid to the plaintiff, there was no longer an hiatus between entitlement and payment of $225,000 of the net profit of the Division. To that extent the net profit of the Division had been paid.

24 In my view, the plaintiff was not entitled to interest on the entirety of its share of the net profit of the Division and the defendants’ approach in deducting the advance was correct.

25 The entitlement to reduce the net profit of the Division by the advance was not dependent upon the giving of notice to the plaintiff after a final calculation of the net profit of the Division had been made. Clause 3.8 of the Second Revenue Sharing Deed had no application to the year ended 31 March 1998.

26 Nor do I regard cl 3.3 of the Second Revenue Sharing Deed as requiring the result that it is not until judgement is delivered that the entitlement to repayment of the advance arises.

Blue Heelers Commission

27 I concluded that SSE was entitled to recover $605,580 that had not been charged against the net profit of the Division in relevant years (Reasons par 233). I am told by counsel that the figure may be less than $605,580 and the parties are agreed it is 50% of that figure that will be taken into account, that representing the extent of the benefit of the mistaken payments to the plaintiff.

28 In its written submissions of 11 February 2003, the plaintiff submitted that set-off of this amount should only occur at judgment and no interest should be awarded because, amongst other reasons, SSE deducted the full amount from the net profits of the Division for the year ended 31 March 2002. The plaintiff further submitted that if interest was to be awarded, it should be at the same rates to which the plaintiff was entitled under the Second Revenue Sharing Deed and not at the rates under the Supreme Court Rules 1970, Sch J.

29 I based my judgment with respect to this entitlement in the defendant on restitution (Reasons par 220). The cause of action accrues from the date of payment (Mason and Carter, Restitution Law in Australia, Butterworths, Australia, 1995, at par 2808). In their written submissions of 21 February 2003, the defendants pointed out that where restitution arose, interest was payable from the date of mistaken payment and not from judgment (Westdeutsche Bank v Islington London Borough Council [1996] AC 669). The defendants further submitted that in the absence of a contractual rate of interest, I should adopt Sch J rates.

30 In its written submissions of 19 May 2003, the plaintiff submitted that the defendants’ claim was a discrete one and re-calculations of annual net profits of the Division taking into account portions of the $605,580 should not be made. It was submitted that I had made a clerical error and that I should have limited the amount due to the defendants by way of separate judgment to 50% of the amount involved as the measure of benefit received in error by the plaintiff. The Supreme Court Rules 1970, Pt 20 r 10 was invoked.

31 I do not regard the appropriate relief available to the defendants to be a separate judgment in a discrete amount. In my view, the defendants are entitled to offset, as at the date of mistaken payment, the amount involved. A proper calculation of the net profit of the Division cannot be made unless this course is adopted. I agree with the principle adopted by the defendants in their calculations in this regard.

32 This form of relief in my view stems from the Supreme Court Act 1970, s 91 or equitable set-off, or a Court of equity moulding its order to suit the case.

33 I reject the plaintiff’s submission that no interest should be awarded on the amounts offset. In particular, the fact that the net profit of the Division for the year ended 31 March 2002 was depleted by set-off will be taken into account for the purpose of calculating interest on moneys due in one direction or the other. Just as the defendants are required to pay interest on amounts due to the plaintiff, so I see no reason to deny the defendants an entitlement to interest on amounts payable by the plaintiff.

34 Throughout the Second Revenue Sharing Deed when provision was made for payment of moneys by the defendant to the plaintiff, there was created a liability to pay interest at bank interest rates payable by Southern Star from time to time (cl 3.1(b), cl 3.3, cl 3.7 and cl 3.8). In circumstances where the remedy appropriate to both parties requires a re-calculation, year by year, of the net profit of the Division it is appropriate, in my view, that there be uniformity of interest rate calculation in both directions.

35 When, in those calculations, moneys were due to the defendant from the plaintiff, they are to bear interest at the same rate as would have been payable in the period in question by the plaintiff in terms of the Second Revenue Sharing Deed.

Allocation of overheads

36 In their calculations, the defendants allocated overheads on the basis of the relative revenues of the projects in the Division. In its written submissions of 11 February 2003, the plaintiff argued for an allocation based on cost of sales.

37 In cross-examination, Roger Michael Amos, a chartered accountant called on behalf of the defence, was asked how he would apportion overheads. He nominated relative cost of sales rather than relative revenues as an appropriate basis. Mr Amos said that revenue allocations with respect to prior projects did not take account of the fact that their current revenue was relatively high compared with their current costs.

38 This view was endorsed by Stuart Matthew Clark in a statement of 11 April 2003 and a further statement of 8 May 2003 upon which the plaintiff relied.

39 The defendants relied on a statement of Peter John Anderson of 15 April 2003 and pointed out in their written submissions of 21 February 2003 that it was the revenue receipts that generated activity within the Division.

40 In my view, when one is dealing with an allocation of overhead costs to already completed projects, cost of sales is a more appropriate basis for allocation. Cost of sales reflects the costs of the remaining activities of the Division, most of which are in relation to episodes of programmes completed by 31 December 1997. I agree with the plaintiff’s submissions.

Interest

41 The defendants relied upon a statement of Ross Gavin McCreath of 11 April 2003. In their written submissions of 19 May 2003, the defendants pointed out that Mr McCreath had established that bank bills rather than bank overdraft formed the basis of the defendant’s borrowings from 10 June 1993 and that between January and June 1997 and since June 2002 there were no borrowings.

42 The plaintiff relied upon the earlier statement of Mr Clark in which he computed interest based upon rates payable by the defendants under their overdraft facility.

43 The provisions of the Second Revenue Sharing Deed applicable to interest, specify it “at the bank interest rates payable by the Southern Star Group from time to time”.

44 The defendants submitted that the purpose of that identification of an interest rate was not to punish or to reward the defendants but to ensure that they paid interest at their cost of borrowed funds.

45 In the plaintiff’s written submissions of 19 May 2003, it was submitted that what the provision identified was interest “payable” by the defendants and the defendants were seeking to substitute interest “paid” for interest “payable”.

46 Mr McCreath established that the defendants’ overdraft facility was generally in credit and the main source of funding was the bank bill facility. That evidence was not challenged by Mr Clark.

47 In supplementary submissions of 22 May 2003, the plaintiff submitted that a bill discount is not interest. Attention was drawn to the bill discount agreement between SSD and one of its bankers that referred to discount as being “in the nature of interest” and provided separately for interest on arrears.

48 It is true, as Gummow J pointed out in Commissioner of Taxation v Hurley Holdings (NSW) Pty Ltd (1989) 23 FCR 435 at 437, that for various purposes in the law, the raising of funds by the discounting of accommodation bills is quite distinct from the raising of funds by borrowing moneys.

49 In Weaver and Craigie, Bank and Customer, Vol 2 at par 24.240 the learned authors say that when a bank is the provider of the actual moneys it is discounting (ie, buying) bills of exchange and from the strictly legal viewpoint that is not the same as lending.

50 In Willingdale v International Commercial Bank Ltd [1978] AC 834 the House of Lords held that discount on a commercial bill differs from interest because, unlike interest, it does not accrue from day to day. If the discount is income, it is assessable to the holder at maturity or when the bill is sold by the holder to a third party because only in that year can the profit be ascertained and earned. No income is earned before that year because the holder of the bill is entitled to either sell the bill at any time or keep it until maturity.

51 In Hurley Holdings, Gummow J held that a bill discount had the character of recompense to the taxpayer for loss of the use of the moneys invested by the taxpayer during the currency of the term of an accommodation bill and was thus income according to ordinary concepts.

52 It is not a universal proposition, however, that bill discount is to be distinguished from interest. That it is in the nature of interest cannot be disputed. In Brown v National Provident Institution [1921] 2 AC 222 at 255 Lord Sumner said that in discounting bills there are two economic elements, the one the value of the usufruct foregone, as measured by interim interest, and the other the risk that the money will never be repaid. To that observation, Lord Greene MR added a gloss in Lomax v Peter Dixon & Son [1943] KB 671 at 682:

“… if the bill of a solvent debtor is discounted at a low rate and the profit from the discount is regarded as interest, it seems logical to regard as interest also the profit from the discount where the bill of a debtor in poor credit is discounted at a high rate…”

53 Mr Hammerschlag SC, who with Mr Coleman appeared for the plaintiff, submitted that the question is whether the parties intended that the rate was to be that which accrued under a bank overdraft from day to day, or whether they intended that it should be determined over the life of a bill under a complicated calculation which could only be made in arrears.

54 Mr Wood, who with Mr Kerr appeared for the defendants, pointed out that the facility agreement between the Southern Star Group and its subsequent banker contained provisions that called for the payment of interest in the strict sense. Clause 5.1 and cl 5.2 of the facility agreement provided for the calculation of interest in arrears and provided that it should accrue from day to day.

55 Mr Hammerschlag pointed out, however, that the question must be determined when the Second Revenue Sharing Deed was executed and not with respect to the subsequent facility agreement with a later banker. He submitted that one had also to look at it from Mr McElroy’s point of view.

56 Mr Wood submitted that a construction which excluded the cost of borrowed funds by not taking into account a bill discount, supposed a commercial naivety in the parties to the contract. The plaintiff and the defendants should be regarded as commercial entities. He posed the hypothetical question what would happen if the Southern Star Group did not use its overdraft facility at all but relied entirely on its bank bill facility in raising funds. Could it be in the contemplation of the parties in those circumstances that the interest calculation would, nonetheless, be required to be made with respect to an overdraft facility that had not been called in aid?

57 I agree with the defendants’ submission that the purpose of the identification of an interest rate payable by the Southern Star Group was not to punish or to reward the defendants but to ensure that they paid interest at their cost of borrowed funds. That purpose is defeated if the Second Revenue Sharing Deed is interpreted to be confined to interest to the exclusion of bill discounts.

58 In my view, the document should not be so interpreted and the word “interest” should be given a wide meaning so as to include amounts in the nature of interest or be given the meaning attributed to it in National Provident and in Lomax.

59 I agree with the defendant’s approach that interest should be calculated on the bank bill discount rates from time to time. It was the bank bill facility that formed the basis of the defendants’ call on their bankers. I agree that the purpose of the provisions dealing with interest in the Second Revenue Sharing Deed was to apply the rate that represented the defendants’ cost of borrowed funds. In my view, those provisions looked to what was actually paid for borrowed funds and not to a rate which might have been payable if a call had been made on a different facility.

60 In a further statement of Mr McCreath of 22 May 2003, he calculated rates that would have been payable had the defendants drawn down under their bank bill facility during the periods of non-borrowing.

61 In the exercise of my discretion under the Supreme Court Act 1970, s 94(1), I find that the above described rates are those applicable to moneys due to the plaintiff from the defendants from the date the moneys ought to have been paid until payment.

62 Mr Clark calculated interest due to the plaintiff from the defendants under claim 16 at the rates in the Supreme Court Rules 1970, Sch J. The defendants submitted that the parties were ad idem that this was the appropriate rate for that purpose.

63 I do not agree that Sch J rates are appropriate. As I have said, in dealing with debt and set-off re-calculated on an annual basis over a number of years, I am of the view that there ought to be uniformity of interest rate calculations in both directions.

64 So far as the defendants’ successful claims are concerned, moneys due by the plaintiff from the date they ought to have been offset if then accurately calculated, should bear interest at the same rates as those payable by the plaintiff until payment and should be offset against the defendants’ liability to the plaintiff.

65 I direct the parties to bring in short minutes of orders to reflect these reasons. I will hear the parties on costs. I reserve the costs of today’s hearing.

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Last Modified: 06/16/2003