Network Ten Pty Ltd v Centriq Insurance Company Limited
[2016] VSC 768
•14 December 2016
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
S CI 2013 06434
BETWEEN:
| NETWORK TEN PTY LTD (ABN 91 052 515 250) | Plaintiff |
| and | |
| CENTRIQ INSURANCE COMPANY LIMITED | Defendant |
AND BETWEEN:
| CENTRIQ INSURANCE COMPANY LIMITED | Plaintiff by Counterclaim |
| and | |
| NETWORK TEN PTY LTD (ABN 91 052 515 250) | First Defendant by Counterclaim |
| and | |
| LI’L LARIKKINS PRODUCTIONS PTY LTD (ABN 82 101 280 497) | Second Defendant by Counterclaim |
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JUDGE: | Judd J |
WHERE HELD: | Melbourne |
DATES OF HEARING: | 1, 2, 5, 6, 7 December 2016 |
DATE OF JUDGMENT: | 14 December 2016 |
CASE MAY BE CITED AS: | Network Ten Pty Ltd v Centriq Insurance Company Limited |
MEDIUM NEUTRAL CITATION: | [2016] VSC 768 |
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CONTRACT – Guarantee – Performance – Beneficiary – Proof of loss – Causation.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr N De Young with Ms R Howe | Webb Henderson |
| For the First Defendant | Mr J Tsalanidis | Marshalls & Dent |
| For the Second Defendant by Counterclaim | Mr J Ribbands | Melbourne Legal Chambers |
HIS HONOUR:
The plaintiff, Network Ten Pty Ltd, brought a claim against the defendant, Centriq Insurance Company Limited, under a Completion Guarantee granted in favour of three named beneficiaries. They were Network Ten, L & D O’Brien Holdings Pty Ltd, as trustee for the O’Brien Holdings Trust, and the National Bank of California. The beneficiaries had bound themselves, under various arrangements, to fund the production of an animated film series known as Li’l Larrikins. There were to be 26 episodes to be delivered between 31 July 2009 and 25 June 2010.
Under the guarantee, subject to certain conditions precedent to the assumption of risk, Centriq undertook to ensure completion and delivery of the episodes on or before the delivery date. The conditions precedent had been satisfied.
The nominated producer was Li’l Larikkins Productions Pty Ltd, which had been incorporated for that purpose. It was joined in the proceeding as the second defendant by counterclaim. The first defendant by counterclaim was Network Ten.
One condition precedent to the assumption of risk was the execution of Transaction Documents, defined to mean the agreements and documents that had been, or were to be, entered into in relation to the financing, production, distribution, marketing and exploitation of the animated series. They were listed in Schedule 6 to the Guarantee, and included a Basic Producer’s Agreement between Centriq and Li’l Larikkins, and a Production Loan Agreement between O’Brien Holdings and Li’l Larikkins. Network Ten was to provide a total of $2,080,000, payable by instalments, under a licence agreement with Li’l Larikkins. The National Bank was to provide $1,996,108, made available for drawdown in three tranches, commencing on the date of the facility agreement. The agreed budget for the project was $10,375,000.
Drawdowns by Li’l Larikkins on funds to be made available by O’Brien Holdings, under the loan agreement, were to be made pursuant to an agreed schedule which, apart from an initial drawdown, were to commence in February 2009. The loan was to be drawn down in tranches of between $200,000 and $700,000 at prescribed intervals over the life of the project up to a limit of $6,270,300.
Most of the production work was to be undertaken at the animation production facility owned and operated by Ettamogah Entertainment Pty Ltd, a company controlled by Leigh O’Brien. Li’l Larikkins and O’Brien Holdings were also controlled by Mr O’Brien.
Production difficulties occurred almost immediately, with resulting delays. The delays were initially caused by inadequate production control and management. In about October 2009, the person in charge of production, Jessica Bierne, resigned and was later replaced by a consultant, Rodney Witham. The O’Brien group of companies also suffered severe financial difficulties, which Mr O’Brien attributed to the global financial crisis. These resulted in the collapse of the project in late 2010. In early 2011 Liquidators were appointed to O’Brien Holdings and Ettamogah Entertainment.
By the time production ceased, Network Ten had paid instalments of $1,864,000 under its licence agreement with Li’l Larikkins. The National Bank had contributed the whole of the amount it had agreed to advance under the facility agreement. Li’l Larikkins had only delivered three episodes to Network Ten, notwithstanding an agreed extension of time for delivery.
The claim by Network Ten was straightforward. With the collapse of the production, and resulting failure to deliver the episodes, Centriq became liable under the Guarantee. Network Ten claimed the sum of $1,864,000 paid by it into a bank account or accounts maintained by Li’l Larikkins, pursuant to cl 7.1 of the Guarantee.
Clause 7.1 provided:
7.1 If the Guarantor:
7.1.1fails to ensure that Completion and Delivery of the Film pursuant to clause 3.1 of this Guarantee is effected; or
7.1.2elects not to effect Completion and Delivery of the Film pursuant to clause 3.1 of this Guarantee
then the Guarantor shall within 7 days from the date of such failure to Complete and Deliver the Film or election not to effect Completion and Delivery of the Film pay to each of the Beneficiaries an amount equal to the total amount actually paid and advanced by the Beneficiaries to the Production Bank Account or as otherwise directed by the Guarantor, which amount shall not exceed, in respect of the Beneficiaries, the total amounts to be advanced by them pursuant to the relevant Transaction Document towards the Cashflow Schedule less any amounts which may, subject to clause 8.1 have been refunded to the Beneficiaries by insurance or otherwise. To the extent that the Beneficiaries advances and pays to the Producer sums in excess of those due to be advanced by such Beneficiaries pursuant to the relevant Transaction Document, the Guarantor shall not be obliged to pay such Beneficiaries any sums in respect of such overspend but such overspend shall not affect the Guarantor’s obligation to pay sums due to any other Beneficiaries hereunder..— The total of such amounts paid by the Guarantor pursuant to this clause 7.1, shall not exceed the Budget.[1]
[1]Emphasis added.
The dispute between Network Ten and Centriq primarily concerned the construction of cl 7.1. Centriq contended that a Production Bank Account, as defined in the Guarantee, and Basic Producer’s Agreement, had never been established. It argued that such an account required a representative of Centriq to be a ‘signatory on all cheques and other forms of withdrawals from the’ account. Centriq contended that in the absence of such an account the plaintiff’s claim must fail, as nothing had been paid into it.
There was an additional limb to Centriq’s defence. It contended that its obligation to pay under the Guarantee only arose in the event that it took over control of production under cl 3.1, which provided:
Without limiting the provisions of clause 2.1, if the Guarantor has reason to believe, in its sole judgement, at any time during the production of the Film, that:
3.1.1there is in the reasonable opinion of the Guarantor a risk that the cost of production of the Film will exceed the Budget; or
3.1.2the cost of production has exceeded the Budget; or
3.1.3the Producer is in default under the Transaction Documents, any other agreements entered into by the Producer with respect to the financing, production or distribution of the Film or under any other material agreement pertaining to the financing, production or distribution of the Film; or
3.1.4the Guarantor is of the opinion that there is risk that the Producer will fail to Complete and Deliver the Film by the Delivery Date; or
3.1.5the Guarantor becomes aware that the Producer has an obligation to incur costs in excess of the amounts in the Budget; or
3.1.6the Guarantor is of the opinion that there is a risk that the Final QAPE may be less than 85% of the Provisional QAPE
then the Guarantor shall inform the Beneficiaries by written notice, and may, in lieu of its obligations pursuant to clause 2.3 take over control of production of the Film and cause the Completion and Delivery of the Film to occur by the Delivery Date, provided that if, in the Guarantor’s sole judgement, it is not reasonably possible or reasonably practical to Complete and Deliver the Film on or before the Delivery Date, then the Guarantor may, in lieu of its obligations in clause 2.3, elect (at its sole option) to abandon the production of the Film and to pay immediately to the Beneficiaries the amount determined in accordance with clause 7 of this Guarantee.
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Centriq relied upon the reference in cl 7.1.1, to ‘clause 3.1’ of the Guarantee. It argued that as it had never taken over control, it was not liable under the Guarantee.
Network Ten contended that Centriq, through its representatives, had agreed to or acquiesced in the use of the bank accounts already established for Li’l Larikkins, without the need for direct participation by additional signatories. There was evidence, in any event, that the accounts were wholly electronic. That is not to say there was no complaint by Centriq about its inability to control the accounts. Network Ten further contended that there was no requirement that Centriq take over control of production of the films, and that the reference to ‘clause 3.1’, in the second line of cl 7.1.1, was an obvious error and, if necessary, ought to be rectified to refer to ‘clause 2.3’.
The principal claim and counterclaim between Network Ten and Centriq settled during the course of the trial, and it became unnecessary to adjudicate on the competing contentions between those parties.
The remaining issues in the trial were raised by Centriq’s counterclaim against Li’l Larikkins, and a crossclaim by Li’l Larikkins against Centriq. In its closing submissions, Centriq informed the Court that, in the event Li’l Larikkins was unsuccessful in its crossclaim, Centriq would not press its counterclaim. In my opinion the counterclaim by Centriq against Li’l Larikkins, and the crossclaim by Li’l Larikkins against Centriq, are both without merit and should never have been advanced.
Given the approach adopted by Centriq, it is convenient to deal first with the crossclaim by Li’l Larikkins. Its claim was based upon an allegation that Li’l Larikkins was a beneficiary under the Guarantee, and had made a net investment in the production of the film of $1,084,000, recoverable under cl 7.1 of the Guarantee. There were four limbs to its claim. First, it contended that O’Brien Holdings had entered into the Guarantee as an agent for and on behalf of Li’l Larikkins; second, Li’l Larikkins was a joint promisee; third, Centriq was estopped from denying any obligation to Li’l Larikkins as a beneficiary; and fourth, Li’l Larikkins had been misled or deceived, or subjected to unconscionable conduct by Centriq and had thereby suffered loss and damage. A further claim made under the Insurance Contracts Act 1984 was pleaded, but not advanced.
Li’l Larikkins submitted that the common element to each such allegation was that prior to, and at the time of, entering into the Guarantee, Roger Brewitt and George Adams, as the principals of Media Risk Management, Centriq’s representative, knew that O’Brien Holdings was merely a vehicle for the purpose of completing the Guarantee; and that the primary responsibility for production, and the investment, was Li’l Larikkins. It submitted that Li’l Larikkins was the entity that was to incur the liabilities, and which carried the primary risk.
The terms of the Guarantee, and the Transaction Documents, read as a whole, make it abundantly clear that Li’l Larikkins was not, and could not properly have become, a beneficiary under the Guarantee. Its function was to receive payments from the three contributors (the beneficiaries under the Guarantee) and undertake the work of production. While it would incur expenses, it was not exposed to the financial risk of the kind guaranteed by Centriq. It was a conduit for funding. Under the contract documents, the agreed budget was to be paid to the producer by instalments. The amounts and timing were agreed. The activities of the producer were to be monitored, supervised and, if necessary, taken over in certain circumstances. It would have been antithetical to the scheme of the Guarantee and Transaction Documents for Li’l Larikkins to be added as a beneficiary.
There were other clear indicators that it was not the intention of any of the parties to the Guarantee or any of the Transaction Documents that Li’l Larikkins become a beneficiary under the Guarantee. It did not make a contribution of its own funds, requiring the protection of a guarantee. It was the borrower under a loan agreement with O’Brien Holdings, who was a beneficiary under the Guarantee, obliged to contribute $6,260,623 under the agreed budget. There was no evidence that any consideration had been given to the inclusion of Li’l Larikkins as a beneficiary. Mr O’Brien, the person in control of O’Brien Holdings and Li’l Larikkins, said in evidence that the agreed beneficiary was to be O’Brien Holdings. As a party to the Guarantee, O’Brien Holdings did so ‘as trustee for the O’Brien Holdings Trust’. It did not purport to do so on behalf of any other entity.
There was no evidence to be found within the Guarantee, Transaction Documents or elsewhere, including oral evidence, to support the allegation that Centriq knew that Li’l Larikkins would rely upon the Guarantee as a beneficiary. Such a concept would, in any event, have contradicted the structure of the agreements.
The case for misleading or deceptive conduct was without any evidentiary foundation. Representations concerning payment of the insurance fee were entirely misplaced. The class of representations, said to have been inconsistent with the terms of the Guarantee, had no support in evidence given by any witness. Nor was there any evidence that Li’l Larikkins was induced by any representation to do anything.
The monetary claim by Li’l Larikkins, as if a beneficiary under the Guarantee, was equally misconceived. It claimed $1,084,000. That sum was the product of adjustments made to an assessment of total contributions made by two experts. It was incapable of qualifying as an advance for the purpose of cl 7.1 of the Guarantee. While Li’l Larikkins paid expenses from its bank account, the amounts claimed were not paid into any such account. Nor were any such payments made pursuant to the Cashflow Schedule.
The claim as formulated by Li’l Larikkins seemed to assume that it could stand in the shoes of O’Brien Holdings, now deregistered, to make the claim as if satisfying a drawdown obligation, or making some other form of contribution towards the budgeted cost. In any event, the evidence disclosed that O’Brien Holdings had only ever paid $15,797 into Li’l Larikkins’ bank accounts. The balance of the claim, as formulated by Li’l Larikkins, was based upon ‘in kind’ contribution, mostly through the provision of services by Ettamogah Entertainment.
Insofar as it is necessary to resolve the construction of cl 7.1 for the purpose of the crossclaim, I find that cl 7.1.1 contained an obvious error by its reference to ‘clause 3.1’. Clause 7.1.1 described an event defined by reference to the producer’s failure to ensure completion and delivery under cl 2.3. Clause 7.1.2 describes an event by reference to a decision by Centriq not to take over production under cl 3.1. Insofar as it may be necessary I would rectify the Guarantee by substituting for the reference to ‘clause 3.1’ in cl 7.1.1, a reference to ‘clause 2.3’. By its language and context, cl 7.1.1 is a reflex of cl 2.3; and cl 7.1.2 is a reflex of cl 3.1.
Insofar as it may be necessary to decide, for the purpose of the crossclaim by Li’l Larikkins, I am satisfied that, while Centriq, through its representatives, Messrs Brewitt and Adams, complained about the lack of transparency in the operation of the bank accounts operated by Li’l Larikkins, they permitted contributions to be made to those accounts by Network Ten, as if those accounts were Production Bank Accounts under the Guarantee and the Basic Producer’s Agreement.
I reject the contention, made on behalf of Li’l Larikkins, that all other production related bank accounts ought to be so characterised, in order to capture, for the purpose of the Guarantee, payments made to accounts other than the accounts of Li’l Larikkins. There is an obvious purpose and utility in confining the recipient of budgeted funds to the producer, and requiring payment to a bank account. It is to facilitate the management and supervision of those funds on behalf of the insurer, and the calculation, if necessary, of any amount to be paid out under cl 7.1. It would be commercially absurd to extend the liability of the insurer, under cl 7.1, to all money that has been spent on the production. To so construe the Guarantee would erode the intended purpose of those parts of the agreement providing the insurer with risk management tools in the form of the right to supervise and control the account or accounts.
Having rejected the crossclaim by Li’l Larikkins, Centriq does not press its counterclaim. However, in the event I may hereafter be found to be wrong in rejecting the claim by Li’l Larikkins, I would also reject the counterclaim by Centriq.
By its counterclaim Centriq alleged that Li’l Larikkins breached the Basic Producer’s Agreement, by failing to deliver the film episodes; failing to open the Production Bank Account; failing to deposit all funds into the Production Bank Account; terminating the services of key staff without the knowledge or approval of the defendant; failing to provide bank statements, a budget and Cashflow Schedule, tax opinion letter, an updated financial plan, cost reports, and a copy of a deed of variation. It further alleged that Li’l Larikkins failed to make Centriq a signatory to the Production Bank Account; failed to provide proof of insurance and evidence of its tenure of the premises in Bay Street, Brighton; failed to provide evidence that it had all necessary production crew and equipment; failed to deliver certain documents, including a power of attorney; and failed to consult.
The allegations of breach were based upon obligations imposed on Li’l Larikkins under the Basic Producer’s Agreement. It was further alleged that in breach of that agreement and the Guarantee, payments were made by the plaintiff directly to Li’l Larikkins and were not deposited in the Production Bank Account; the plaintiff paid almost USD300,000 to the National Bank pursuant to an arrangement between Mr O’Brien and the bank; Li’l Larikkins gave a fixed and floating charge over its assets to the National Bank; Li’l Larikkins did not draw down the full amount of its loan under the loan agreement with O’Brien Holdings; and Li’l Larikkins failed to ensure that all moneys to be advanced in accordance with the budget were advanced. A claim of uncertain scope was made in the prayer for relief. Let it be assumed that the plaintiff intended to make a claim for damages against Li’l Larikkins.
In final submissions, Centriq did not develop its case against Li’l Larikkins. I am not persuaded there was a case to develop, even if there had been merit in Li’l Larikkins’ crossclaim.
Under the Basic Producer’s Agreement, Li’l Larikkins undertook to produce the animated series in consideration for Centriq providing the Guarantee. There were conditions precedent, which included the same conditions as found in the Guarantee, although with some elaboration. The Basic Producer’s Agreement introduced the notion of representative signatories to the Production Bank Account in cl 10 under the heading, ‘Production Controls’.
The purpose of the Basic Producer’s Agreement was to provide assurances, information and risk mitigation tools to Centriq. If Li’l Larikkins, as producer, was in default under the Basic Producer’s Agreement, Centriq had the right to ‘immediately enforce any and all of its rights hereunder, and any other rights and remedies now or hereafter available to the Guarantor at law’.
Centriq was specifically authorised to take over the production or require delivery of the elements of the film then in the possession and under the control of Li’l Larikkins. In the events that occurred, apart from giving notice of certain breaches, and seeking to escalate its involvement, Centriq did nothing to assert its legal rights. It must be taken to have elected not to exercise any of the express powers it had to mitigate its loss.
Furthermore, the loss and damage claimed by Centriq was the amount of any ‘exposure to judgment in this proceeding in the amount of $1,864,000’. The only judgment, as between Network Ten and Centriq, was an order that the claim and counterclaim be dismissed with no order as to costs. There was no evidence of any liability suffered by Centriq. Even if such evidence existed, the liability was brought about by performance of an obligation to indemnify Network Ten under the Guarantee, and not because of any breach on the part of Li’l Larikkins.
There was no evidence of any causal connection between the alleged breaches, insofar as they could be established, and the loss and damage claimed by Centriq. Such evidence as there was, pointed to the financial collapse of the O’Brien group as the cause of the failure by Li’l Larikkins to perform its obligations.
The counterclaims are dismissed.
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