Matrix Film Investment One Pty Limited v Alameda Films LLC - [2010] NSWSC 771

NEW SOUTH WALES SUPREME COURT

CITATION:
Matrix Film Investment One Pty Limited & Ors v Alameda Films LLC [2010] NSWSC 771

JURISDICTION:
Equity Division
Commercial List

FILE NUMBER(S):
2006/00268593

HEARING DATE(S):
5/07/10 - 9/07/10, 12/07/10

JUDGMENT DATE:
13 July 2010

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

JUDGMENT OF:
Einstein J

LOWER COURT JURISDICTION:
Not Applicable

LOWER COURT FILE NUMBER(S):
Not Applicable

LOWER COURT JUDICIAL OFFICER:
Not Applicable

COUNSEL:
Mr T Bathurst QC, Mr J Stoljar SC, Ms V Whittaker (Plaintiffs)
Mr J Gleeson SC, Ms T Wong (Defendants)

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

CATCHWORDS:
Practice and Procedure
Late changes in status approach to experts retained
Critical necessity for applications for extensive additional discovery to be made prior to commencement of final hearing
Courts acceptance that as the final hearing approaches all parties will be working apace to prepare their cases

LEGISLATION CITED:

CATEGORY:
Procedural and other rulings

CASES CITED:

TEXTS CITED:

DECISION:
Plaintiffs application to add a further particular to their case dismissed.

JUDGMENT:

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

Einstein J

Tuesday 13 July 2010

2006/268593 Matrix Film Investment One Pty Limited & Ors v Alameda Films LLC & Ors

JUDGMENT

The state of these proceedings

These proceedings were fixed to commence for final hearing on 5 July 2010. Counsel opened their respective cases. The plaintiffs’ central witnesses have been cross-examined, and the plaintiffs have closed their case.

Overview of the nature of the proceedings

These proceedings arise out of a distribution agreement between the first plaintiff, Matrix Film Investment One Pty Limited (“Matrix One”) and the first defendant, Alameda Films LLC (“Alameda”) dated 1 March 1999 (“Distribution Agreement”), by which Matrix One granted a six year licence to Alameda of the rights to distribute the film, The Matrix, in return for payment of a licence fee.
Schedule 2 to the Distribution Agreement, and in particular, Exhibit “A” to that Schedule, states a formula by which the licence fee was to be calculated (“Licence Fee Formula”). Clause 10 of Exhibit A required Alameda to issue earnings statements to Matrix One, setting out in summary form the calculations required by the Licence Fee Formula. Warner Bros. Entertainment Inc. (“Warner”), as representative for Alameda, issued those statements to Matrix One during the period August 2001 to August 2005. A set of revised earnings statements were issued by Warner on 9 June 2006.

In these proceedings, the plaintiffs seek damages for the alleged failure of Matrix One to account to and pay licence fees to the plaintiffs in accordance with the Licence Fee Formula.

The Matrix film

The film The Matrix was filmed during 1998 in Sydney, Australia.
During that year NAB and Leighton had negotiations with representatives of Shooting Star Holdings Limited (Shooting Star) concerning an investment by NAB and Leighton in The Matrix.
On 31 March 1999 The Matrix was released in cinemas across the United States. It was clear from the day or days of its initial release that The Matrix would be a significant box office success.
In due course The Matrix achieved gross US box office receipts of in excess of US$171,000,000. It was Warner Bros highest grossing release of 1999. One of the plaintiffs’ witnesses, Ms Elaine Douglas, who specialises in participation and contract compliance audits for motion picture, television and merchandising participants, deposed as follows:
Based on my experience in the industry, I am able to say that gross revenue of US$175 million represented, as at 1999, and for that matter still represents, a highly successful film. The Matrix was Warner Bros’ highest grossing film in 1999. In addition, The Matrix has been extremely successful in terms of its sales in other media such as home video cassette and DVD, selling over a 15 million home video units in the United States alone.

The current issue

The parties are at issue as to whether or not the plaintiffs should be permitted to add a further particular to their case alleging that the first defendant failed to account for and pay licence fees to the second and fourth plaintiff's for the Matrix in accordance with the licence fee formula contained in the exhibit A to schedule 2 of the distribution agreement.
The proposed particular would form sub-paragraph 46(xxiii).
The plaintiffs seek to insert into their amended commercial list statement a particular in the following terms:
“that the Earnings Statements erroneously included deductible expenses for which no supporting documentation has been retained – Sills report at paragraph 31.11; Sills report in reply at paragraphs 17, 83, 85, 90 and 98.”
Both parties have been given an opportunity to address both orally and in writing in relation to the issue.
I am satisfied that the proposed amendment substantially enlarges the issues currently before the Court by requiring consideration of whether the defendants have failed to retain records substantiating more than $100 million of distribution expenses.
In essence the written submissions furnished to the court by the defendants are of substance. Those written submissions canvas a deal of correspondence passing between the parties in relation to discovery matters.
It is clear from the communications between the respective solicitors that there were many differences separating them through an extensive effort treating with discovery matters.
Ultimately the plaintiffs had the burden of dealing directly with a re-opening of the categories of discovery following their service of the Mr Sills report [referred to in what follows]. The materials before the court make clear that this burden was not properly discharged.
Whilst I acknowledge that leave to amend pleadings to formulate or expand claims within a cause of action or defence which has already been pleaded will often be given, there are cases where that approach is simply inappropriate.
In relation to the present dispute it has been necessary for the court to look extremely closely at many of the interlocutory steps concerning the adducing of evidence as well as the forensic positions taken in respect of discovery. As the material background which is set out below makes clear, the notion that following the production of Mr Sills report, the defendants were put on notice that an entirely new stage of discovery was expected is simply incorrect.
The closer the final hearing, the more it is usually understood that the respective parties will be working apace to interview witnesses and to prepare their respective cases. And it is not possible for a party to blithely eschew making a proper application for additional discovery to the court where the plaintiffs case has moved to now requiring consideration of whether the defendants have failed to retain records substantiating more than $100,000,000 of distribution expenses.

The relevant background

In endeavouring to travel through the relevant background it is obviously impossible for the court to examine every communication between the respective solicitors. In what follows the court has set out the matters which seem germane to the instant dispute.

Appointment of Hacker Douglas

The plaintiffs first appointed Hacker Douglas & Company (“Hacker Douglas”) to undertake an audit of the earnings statements on 5 December 2002. Ms Douglas of Hacker Douglas was the person with primary responsibility for the conduct of the audit. From September 2003 to July 2005, Ms Douglas and her associates attended Warner Bros’ offices to review documentation and also made audit requests for certain information to be provided.
In May 2004 and January 2005, Ms Douglas prepared two draft audit reports for the plaintiffs. On 30 May 2006, the plaintiffs lodged their objections to the earnings statements (“Objections”), within the time period that had been agreed between the parties.
The Objections specifically adverted to the plaintiffs’ contention (now repeated in paras. 72A and 72B of the ACLS) that Alameda had failed to provide to NAB and its auditors, all records and other information necessary to enable NAB to “complete the audit of the books and records of the Film” in breach of cl.11 of Exhibit A to the Distribution Agreement.
Nowhere within the Objections was it suggested that the defendants had “erroneously included deductible expenses for which no supporting documentation has been retained.”
Importantly, the claims raised in paragraph 47 of the CLS as originally drafted, consistently with the contract, were confined to matters which fell entirely within the scope of the Objections. Those claims fell within the following broad areas:
(a)Failure to include projected revenues and expenses: paras. 47(a);
(b)Understatement of theatrical, free-to-air and pay television revenues: para. 47(b), (c), (o), (p), (v);
(cOverstatement of theatrical print expenses: para. 47(x), (y);
(d)Understatement of home video revenues: para. 47(d), (t), (u);
(e)Overstatement of projected and actual home video expenses: para. 47(i)-(n), (q), (r), (s);
(f)Misclassification of certain costs as advertising costs and inclusion of certain costs which ought to have been properly classified and charged within the advertising overhead: para. 47(e), (f);
(g)Overstatement of residuals, participations, sales taxes and deferments: para. 47(g), (h), (z), (aa) and (bb); and
(h)Understatement of revenues for merchandising: para. 47(w).
The CLS, as originally filed, did not include any claims with respect to a failure to retain documents. That is, this part of the Objections, was deliberately not taken forward into the litigation.

First Motion for Further and Better Discovery

Counsel for the plaintiffs has submitted that his instructing solicitors “made the most strenuous efforts to obtain discovery in respect of all categories, including in respect of the primary materials”. The facts in relation to discovery in relation to the period following the Sills report do not bear this out.
Discovery was ordered to be given by categories. On 18 May 2007, the plaintiffs served their categories of documents for discovery by the defendants (“plaintiffs’ discovery categories”), which once again mirrored the allegations in the Objections and CLS. The particular categories upon which the plaintiffs rely in support of the proposed new amendment are as follows:
(a)Category 35, which refers to all documents necessary to substantiate the projected and actual video expenses and revenues in respect of the Earnings Statements;
(b)Category 50, which refers to any further files, books of account, vouchers, exhibition contracts and/or similar records in relation to The Matrix for the period 1 August 1998 to 31 December 2006 not falling within the above categories.
I accept that on any reasonable or proper reading of these categories in light of the Objections and the CLS, they did not require the production of the hundreds of thousands of source documents. Other than in exceptional circumstances (where, for example, document destruction or fraud is alleged) it would indeed be surprising for a court to impose or enforce discovery of such a vast number of historical documents that in many cases are now difficult to retrieve, and all the more so when many business records in the form of general ledger print-outs and the like have already been discovered (for example, ledgers for home video are discovered and in evidence: see Ex D1; and there are ample ledgers for non home video, included in the court bundle and to be tendered). I accept that it is unreasonable to expect that the defendants would have read categories 35 and 50 as requiring them to do so. Nor did the plaintiffs contend that these categories were intended to have this reach, until recently.
On 11 April 2008 Mallesons wrote to Gilbert + Tobin about concerns it had with the extent of the defendants’ discovery. Complaints were made to the effect that the plaintiffs expected to see more documents in response to a number of categories, but no complaint was made about failure to discover documents falling within categories 35 or 50.
On 23 April 2008, the plaintiffs filed a Notice of Motion (the “First Notice of Motion”) seeking the following orders:
“1.that the defendants provide discovery in accordance with categories 17, 18 and 32(ii)-(iv) of the plaintiffs’ categories of documents for discovery served on 18 May 2007 (plaintiffs’ Categories);
2.the defendants provide further and better discovery of documents falling within the plaintiffs’ Categories, including discovery of documents stored electronically;
3.any other order the Court thinks fit.”
The Motion did not in terms refer to categories 35 or 50, although the defendants accept that paragraph 2 of the Motion could potentially cover all categories.
Ms Douglas’s affidavit in support of the Motion, sworn on 8 May 2008, set out the alleged deficiencies in the defendants’ discovery solely by reference to the plaintiffs’ discovery categories, which in turn, correlated to particular allegations in the CLS. Although there is a reference to categories 35 and 50 in the Douglas Affidavit:
i.in relation to category 35, she stated that she would expect to see documents evidencing the relationship between projected and actual home video expenses, and documents substantiating the WEA charges (the Court has heard evidence that the WEA documents are no longer in the defendants’ possession or power); and
ii.in relation to category 50 she does not identify any additional documents that she would expect to see falling within this category.
In relation to neither category did Ms Douglas say that the plaintiffs were expecting the defendants to discover each and every purchase order, invoice and receipt for each and every line item in the defendants’ accounts. As the defendants have contended one can understand why: her evidence made clear she was well satisfied with the level of primary documentation, save for discrete areas.
On 9 May 2008 a “without prejudice” meeting was held between the solicitors for the parties to resolve the outstanding issues in relation to discovery. On 21 May 2008 the defendants gave discovery of further documents evidencing theatrical settlements.
On 18 June 2008 Gilbert + Tobin wrote to Mallesons, referring to the “without prejudice” meeting on 9 May 2008, and stating:
“Our client has made further enquiries and has identified, and is prepared to discover, the following additional files/documents:”
Another 13 files of documents to be discovered were identified.
On 19 June 2008 the defendants discovered two additional folders of documents.
On 25 June 2008 the defendants discovered 13 additional folders of documents.
On 7 July 2008, Katherine Chilton, senior litigation counsel for the defendants, affirmed an affidavit responding to Ms Douglas’s affidavit on the discovery motion. She deposed to the searches that she had caused to be conducted for documents. In relation to category 35 (the video expenses category) she said:
“Warner Bros has produced documentation showing actual video expenses by year. This documentation includes the summary printouts given to NAB’s auditors and various supporting schedules…”
At no time following this affidavit in July 2008, and before the first report of Mr Sills was served in March 2010, did the plaintiffs indicate that they considered that discovery in relation specifically to home video expenses was incomplete or inadequate. In fact:
i.on 11 July 2008 Mallesons wrote to Gilbert + Tobin about their concerns arising from the Chilton affidavit, and no complaint was made relating to either category 35 or 50; and
ii.on 6 May 2010 Mallesons specifically indicated that they were not seeking discovery of additional home video documents.
At about this time the plaintiffs’ concerns moved on to questions about discovery of electronically stored documents, and they filed an affidavit from a Mr Mark Garnett in relation to this.
On 30 July 2008 Gilbert + Tobin sought the following clarification from Mallesons:
“As at the time of sending this facsimile, we are not aware of what outstanding issues, if any, your client wishes to press in relation to the plaintiffs’ Motion.”
On 31 July 2008 the plaintiffs served an amended Notice of Motion seeking the following orders:
“1.the defendants provide discovery in accordance with categories 17, 18 and 32(ii)-(iv) of the plaintiffs’ categories of documents for discovery served on 18 May 2007 (plaintiffs’ Categories);
2.the defendants provide further and better discovery of documents falling within the plaintiffs’ Categories including discovery of documents stored electronically;
3.the defendants produce, for inspection by the plaintiffs, the documents referred to in paragraphs 34, 35 and 53 of the Affidavit of Katherine Chilton affirmed on or about 30 June 2008, including but not limited to, the analyses and binders referred to therein;
4.any other order the court thinks fit.”
Once again, there was no reference in this motion to discovery categories 35 and 50. None of the paragraphs of the Chilton affidavit referred to in paragraph 3 of the Motion related to discovery category 35. Paragraph 53 of the Chilton affidavit did relate to discovery category 50, but was limited to a claim for legal professional privilege in respect of a single document.
On 12 September 2008 the defendants discovered an additional folder of documents.
On 15 September 2008 the defendants again sought clarification of the outstanding discovery issues:
“You have not identified the precise issues in relation to our client’s discovery that remain in issue and that you intend to raise at the hearing on Thursday. A short response from you today or tomorrow addressing these matters would be appreciated.”
On 16 September 2008, the plaintiffs responded to this query as follows:
“The matters that remain in issue and will be raised at this Thursday’s hearing are those that have been the subject of correspondence between us since February this year, namely:
1.in accordance with paragraph 2 of the amended notice of motion (the Motion), further and better discovery of documents falling within the categories of documents requested by our clients, including in relation to categories 21, 23, 24, 26, 30, 37 and 38, referred to in the affidavit of Elaine Douglas sworn 8 May 2008 (the Douglas Affidavit);
2.discovery of electronic material in accordance with paragraph 2 of the Motion;
3.in accordance with paragraph 3 of the Motion, discovery of the material referred to in paragraphs 34, 35 and 53 of the Affidavit of Katherine Chilton affirmed on or about 30 June 2008;
4.the discovery of documents relating to the five-picture proposal, originally requested in our letter of 11 April 2008; and
5.the resolution of recently asserted claims for privilege by your clients (including in your letter of 20 August 2008) as they have a direct impact on matters relevant to the Motion….
We trust that this clarifies the issues that remain in dispute….”
None of the issues so identified related to discovery categories 35 or 50. I accept that from this time, and unless and until the plaintiffs said anything to change the position expressed in this letter, the defendants were entitled to conduct the litigation on the basis that no further documents responsive to categories 35 or 50 were required to be discovered.

On 18 September 2008 the Amended Notice of Motion was listed for hearing. As can be seen from the transcript, the hearing dealt only with privilege issues and with issues relating to electronic discovery, however, there were discussions outside Court in relation to additional hard copy discovery.
On 24 September 2008 Mallesons wrote to Gilbert + Tobin as follows:
“We refer to our discussions at the hearing of our clients’ Notice of Motion on 18 September 2008.
As discussed, we enclose a schedule of documents that currently appear to have been omitted from your clients’ discovery (the Schedule). Please provide discovery of the documents referred to in Part A of the Schedule and identify the discovery numbers of the documents described in Part B of the Schedule.”
A schedule of eight documents or classes of documents said to be required by way of further discovery was attached to the letter. No issue was raised about categories 35 or 50, and there was no request for primary level documents underpinning ledgers which had already been discovered.
On 5 November 2008 the defendants agreed to give discovery of all of the documents in the Schedule attached to the Mallesons letter of 24 September, other than documents that were not in their possession and documents that had already been discovered.
I accept that from this time, and until after the Sills report was served in March 2010, the only complaints made by the plaintiffs were about electronic discovery. In relation to electronic discovery, Bergin J relevantly ordered, on 12 December 2008, as follows:
“3.the plaintiffs, by 23 December 2008, to provide the defendants with a list of searches and search terms they require to be conducted to identify discoverable [electronic] documents;
4.the defendants, by 30 January 2008, to provide by way of further discovery, any further documents identified as a result of the searches referred to in order 3 that respond to the categories of documents for discovery by the defendants dated 18 May 2007 and the additional category of documents being “all documents relating to proposals for the plaintiffs, or companies associated with the plaintiffs, to invest in further films being made by Warner Bros…”
On 18 March 2009 the defendants, seeking once and for all to ensure that there were no outstanding issues other than in relation to electronic discovery, wrote:
“We assume from the response that all of the other complaints regarding discovery deficiencies made by Ms Douglas in her affidavit of 8 May 2008 – that is, those concerning hard-copy documents – have now been fully addressed. Please confirm that this is the case… If you claim Ms Douglas’ complaints have not been fully addressed, please let us know exactly which ones remain outstanding…. We make this observation in the context where approximately:
i.20,000 hard copy documents have been discovered;
ii.1,000 microfilm documents have been discovered;
iii.each relevant employee has been asked to search his or her computer for relevant documents and those employees have each given written confirmation that they have done so and provided discovery of all relevant documents relating to the Matrix; and
iv.Ms Douglas, a participation accounting expert, has reviewed the discovered documents and identified in her affidavit all of the further materials she would have expected to see, and that material has been provided (in some cases, by our client waiving legal professional privilege in it), apparently to your clients’ satisfaction.”
I accept that if ever there was a time for the plaintiffs to say that discovery of categories 35 and 50 were inadequate, or that the plaintiffs demanded that the defendants conduct searches for primary level documents, this was their opportunity. They did not do so at any time prior to the Sills report being served in March 2010.
I accept that there is simply no basis for the assertion by counsel for the plaintiffs that the plaintiffs have “made the most strenuous efforts to obtain discovery in respect of all categories, including in respect of the primary materials.” Not very much effort at all would have been required to respond to the defendants’ letter of 18 March 2009 and, if the assumption expressly stated in it was wrong, the plaintiffs could and should certainly have done so.

Second Motion for Further and Better Discovery

On 27 March 2009 the plaintiffs file a fresh Notice of Motion (“Second Notice of Motion”) in relation to further and better discovery, seeking the following orders:
“1.the defendants provide further and better discovery of all electronic documents and files however stored in whatever format;
2.the defendants appoint an independent service provider to be agreed by the parties within seven days, to conduct searches for the purpose of order 1 above;
3.costs; and
4.any other order the Court thinks fit.”
Thereafter, this became the operative notice of motion. It related only to electronic documents. The First Notice of Motion was never pursued any further. I accept that this fact, taken together with the correspondence referred to above, demonstrate that the April 2008 Notice of Motion was treated by the plaintiffs as having been discharged by the production of further documents by defendants which had occurred.
On 10 July 2009 the Second Notice of Motion was finally disposed of by consent orders made by Hammerschlag J in the following terms:
“1.The defendants to serve an Affidavit from the relevant Warner Bros. employees setting out the steps taken by Warner Bros. to comply with the orders made by Rein J on 8 May 2009, by 14 July 2009;
2.The defendants to provide Discovery of the documents referred to in paragraphs 25, 30, 33, 35, 37 and 39 of the Affidavit of Alexandra Cameron sworn 1 July 2009, by 17 July 2009.
3.The defendants to serve a revised verified List of Documents which includes all of the documents discovered by the defendants since the date on which they served their verified List of Documents, in 2 November 2007, by 24 July 2009.
4.The plaintiffs’ Notice of Motion dated 30 March 2009 be dismissed upon compliance with Orders 1-3 above, with no further Orders as to the costs of the Motion since 8 May 2009.
5.The plaintiffs to serve a Draft Amended Commercial Statement incorporating all amendments, by 7 August 2009.
6.The Plaintiff to serve any Expert Report on which they intend to rely by 2 October 2009.”
Order 4 is significant. On compliance with orders 1-3 (which occurred – see immediately below), the motion was dismissed. All discovery issues were concluded, such that expert evidence could (after much delay) be filed and the matter proceed to the final hearing it long had awaited.
As to compliance, on 13 July 2009, Stacey Davidson swore an Affidavit as required by paragraph 1 of the Orders made by Hammerschlag J deposing to the steps taken to conduct the electronic searches ordered by Rein J.
Further, on 16 July 2009, the defendants provided the plaintiffs with copies of the documents referred to in paragraph 2 of the Orders made by Hammerschlag J.
Finally, on 24 July 2009, the defendants completed the process of discovery by the service of a Supplementary List of Documents in accordance with paragraph 3 of the Orders made by Hammerschlag J. By this date, the defendants had:
i.discovered twenty-thousand hard-copy documents, including 938 accounting reports from Warner Bros’ accounting systems;
ii.discovered seventy rolls of microfilm, comprising over one hundred thousand micro-film documents;
iii.conducted a time-consuming search for what the plaintiffs had identified as the additional emails and electronic documents stored on Warner Bros central file server which they needed, which search yielded very few additional relevant documents.

Appointment of Mr Sills

The plaintiffs admit that it was not until after the process of discovery had concluded that they appointed their independent expert, Mr Steven Sills, to review the calculations in the Earnings Statements. This appointment did not occur until 26 August 2009, three years after the proceedings had commenced and after the lay evidence had been served. The instructions the plaintiffs had provided to Mr Sills were to “conduct an audit of each line item of each of the earning statements and all of the supporting documentation in respect of each such line item”.
This, however, was not the basis upon which the issues had been joined in the summons or upon which discovery had been requested or provided. At no stage have the plaintiffs requested discovery of each and every document which relates to each and every line item of the six earnings statements.
Further, on 7 July 2009, in reply to a letter in which the plaintiffs alleged that the defendants may have failed to retain their documents, the defendants wrote:
“If you are able to identify such documents, it would be of great assistance if you would kindly let us know what they are. This information will be invaluable in enabling us to target our searches of both electronic and paper records to ensure that the relevant material has been discovered.”
The plaintiffs declined to identify any specific documents in response. In addition, to the extent that the plaintiffs made a general request in one of their discovery categories for “books of account”, the defendants offered to generate further reports from Warner Bros’ accounting systems, to which the plaintiffs did not respond.
Meanwhile, as emerged only during the final hearing, having now retained Mr Sills as their new expert, the plaintiffs were advised by Mr Sills on 2 October 2009 about precisely the kinds of reports and supporting documents he would need to see to prepare his report. Mr Sills asked the plaintiffs:
“Could you please direct us to this information if it is there and we missed it or could you please request it from Warner.”
Despite:
i.this advice from Mr Sills about the missing information, and his request that the defendants be asked to supply it; and
ii.the request by the defendants on 7 July 2009 to be told of any documents said to be missing so that they could be located and discovered;
the information that Mr Sills said he required was never requested from the defendants. No explanation for this conduct has to date been offered by the plaintiffs.
On 8 October 2009, Ms Mills, the solicitor for the plaintiffs, swore an affidavit stating:
“For these reasons, and also due to the nature (limited identification of documents discovered by type or class) and form of the discovery given by the Defendant during the proceedings (which includes among other things, 70 rolls of microfilm containing a number of accounting records and other documents that need to be reviewed in detail), in my estimation, the process of finalising the plaintiffs’ position in respect to expert evidence will take a further two to three weeks to complete.”
Nowhere in Ms Mills’ affidavit did she refer to the fact that she had been advised by Mr Sills that he required additional documents to complete his report.
Ms Mills swore a further affidavit on 22 October 2009 in which she said:
“On 26 August 2009, the plaintiffs retained a specialist motion picture audit expert based in Los Angeles, Mr Stephen Sills, who has over 25 years experience in auditing motion pictures, to prepare a report in respect of the earnings statements issued by the defendants ...
I am informed Mr Sills and verily believe that preparation of a report in respect of the earnings statements requires him to undertake an audit of each line item of each of the earnings statements and all of the supporting documentation in respect of each such line item. The defendants have discovered documents, including microfilms of documents, which in terms of the number of pages that need to be reviewed will exceed 250,000. I am informed by Mr Sills and verily believe that he is undertaking an assessment of the work involved and that because of the necessity to undertake a detailed review of all these documents, the process of the review and preparation of a report following that review, will take a further 6 to 8 weeks.”
Again, nowhere in this affidavit did Ms Mills refer to Mr Sills’ document request.
The divergence in approach between Mr Sills and Ms Douglas first started to emerge openly upon the plaintiffs’ service of a Notice to Produce dated 24 December 2009 requesting documents to assist Mr Sills in the preparation of his report, which had not been requested by Ms Douglas, nor at any time during the discovery process, and were not discoverable documents. Even this Notice to Produce, however, did not call for production of documents in relation to home video or non home video expenses – which make up the $100,000,000 part of the earnings statements in issue. Specifically the Notice did not call for production of the hundreds of thousands of supporting documents that Mr Sills said he required, a fact confirmed by Sills in evidence.
Further, in subsequent correspondence regarding additional Notices to Produce issued by the plaintiffs after Mr Sills’ report was served in March 2010, the plaintiffs said:
“The Sills Report acknowledges that your clients have discovered documents evidencing video distribution expenses. It is documents relating to other expenses that your client has failed to discover.”
By the time the suggestion first emerged that further documents might be needed at a primary level, it thus did not relate to home video (some $62 million of the expense claim). So far as it did relate to non home video, this was an area Ms Douglas had been essentially happy with, which was why no requests had been made earlier.
I accept that the final hearing was now imminent. The defendants were fully engaged with the production of their expert evidence. The issue was not yet in the pleadings. Even then, the plaintiffs did not take the appropriate step of filing a motion to seek to reopen the closed subject of discovery.
As the above chronology demonstrates, not only did the plaintiffs fail to make any effort at the appropriate time to obtain discovery of all the supporting documents they now say they require, but in correspondence between the parties and in sworn affidavits filed in the proceedings they failed to disclose that their expert had 6 months earlier requested additional documents to complete his report, even in the face of an invitation by the defendants to take steps to discover further documents if they were appropriately identified by the plaintiffs’ expert.
In these circumstances, the current attempt to now amend the CLS has very obvious difficulties

Plaintiffs’ motion for amendment

On 7 May 2009, in the midst of a flurry of correspondence regarding electronic discovery, the plaintiffs said:
“Our clients have no intention to amend the substantive allegations relating to breach of contract…. but may further particularise the current allegations in light of your clients’ lay evidence and following the completion of your clients’ discovery. Until such time as your clients’ discovery is finalised, our clients are not in a position to assess what, if any, further particulars of its claim it may wish to add.”
On 2 July 2009 the plaintiffs foreshadowed the possibility of an amended pleading that would allege that there had been a failure by the defendants to retain documents. A draft amended CLS was sent on 28 August 2009, but this was never filed and no application to amend was made.
On 7 April 2010, the plaintiffs gave further notice of a proposed amendment to the CLS. The proposed amended CLS deleted twenty-six of the previously pleaded twenty-eight accounting breaches, and added twenty new alleged breaches. No breach in the form of proposed new particular 46(xxiii) was included or foreshadowed until the plaintiffs’ letter dated 28 June 2010, one week prior to hearing.

The claim substantially enlarges the issues in dispute

The plaintiffs claim that the new claim does not raise any new factual issues, because the substance of the claim was already raised in paras. 72A to 72B of the ACLS. This ignores the fact that the central allegation in paras. 72A to 72B is that the records that the defendants allegedly failed to retain were those “necessary for the second and fourth plaintiffs to complete the audit referred to in paragraphs 25 and 26 above”: see paragraph 72A of the ACLS. Paragraphs 25 to 27 of the ACLS, in turn, define the “Audit” as the audit commenced on 5 December 2002 in respect of the Earnings Statements which “is being conducted by Hacker, Douglas and Company LLP, of Los Angeles and has not been completed”.
Unlike paras. 72A and 72B, proposed particular 46(xxiii) is not constrained by the scope of the audit conducted by Hacker Douglas. Instead, it proceeds on the premise that the defendants did not retain “supporting documentation” in respect of all categories of deductible distribution expenses, in circumstances where Hacker Douglas was satisfied that:
i.in relation to the area of non-home video expenses (with the possible exception of distributor enhancements) her enquiries produced areas of uncertainty which were confined and discrete as to both amount and subject matter;
ii.in relation to home video expenses, Ms Douglas’ concerns were limited to two areas:
(a)failure to retain records in relation to $2 million of co-operative advertising expenses; and
(b)failure to substantiate manufacturing costs of the videos in the sum of approximately $36 million. (in turn a concern that led to a request for only 3 specific categories of documents: agreements, budgets and the WEA documents referred to in (i).
I accept that these limited areas of concern in relation to distribution expenses are a far cry from the more than $100 million of expenses that are now sought to be excluded from the Earnings Statements by the plaintiffs via particular 46(xxiii). They are also claims that the defendants are prepared to meet by adducing the evidence of Ms Amie Doft from the participations audit group of Warner, who gives evidence of the requests made by Hacker Douglas, which were answered during the ordinary course of the audit process.
I accept that the new claim therefore suffers from the same vice as the other claims which have been belatedly raised by the plaintiffs in the ACLS, namely that it was not the subject of any relevant objection by the plaintiffs within the contractually stipulated time period, and that pre-trial preparations, in particular, the processes of discovery, were undertaken without any reference to this type of allegation.
I further accept that the fact the fact that discovery was not undertaken in relation to the proposed new particular is particularly prejudicial to the defendants for the following reasons:
i.without being constrained by reference to the scope of the audit undertaken by Hacker Douglas, the allegation of failure to retain records now relates to almost all of the distribution expenses claimed by the defendants, being some $100 million of expenses;
ii.the defendants are now being required to prove the existence and retention of each and every document which might be said to support hundreds of thousands of individual transactions, every one of which could have several supporting documents (including a contract, a purchase order, an invoice, a payment voucher and a receipt);
iii.these documents could have been produced during discovery subject to appropriate limitations to ensure that any requests made by the plaintiffs were not oppressive in nature. An appropriate regime for sampling could have been ordered. If discovery had proceeded in this manner, the defendants would have been protected from any adverse inference that could otherwise arise from the failure to produce each and every single document in support of the particular item of expense.

The principled exercise of the relevant discretion is for the court to approach this question through the framework of the overriding purpose of the court: as the defendants have rightly submitted, why would an allegation of this magnitude be permitted so late, when it so magnifies the issues and discovery burden, when the fault lies with the plaintiffs for the timing of its raising? All the more so when it is vague and unparticularised.
For these reasons the proposed amendment requires to be disallowed.
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LAST UPDATED:
13 July 2010