The Delinquents Pty Ltd v Village Roadshow Corporation Ltd

[1991] FCA 938

- motions for security - investments in feature film -

applicant's contribution limited to writing and conception of film - claim for expected share of proceeds and for other hoped for benefits - applicant impecunious before and after entering agreements with respondents - applicant must establish why statutory entitlement to security should not be enforced - no causal connection between alleged liability and alleged losses and damage - whether present impecuniosity of applicant caused by matters complained of - capacity of controllers of applicant to provide security - no evidence that if alleged breaches had not occurred an additional proportion of the film's proceeds would have enured to benefit of applicant - no identified loss capable of quantification or recompense - amounts to be provided for security to be calculated on a party/party basis up to end of pleadings and discovery

1974 sections 52, 82

Cor~orations Law section 1335

Tradestock Ptv Ltd v TNT fmnaaement! Ptv Ltd & Ors [l9771 14
ALR 52

Bell Wholesale CO Ltd v Gates EX DO^^ Corporation [l9841 2 FCR

1

Pat-sel Ptv Ltd v Brambles Holdinas Ltd [l9851 ATPR 40-544
Beaumont J

Gates v Mutual Assurance Society Ltd [l9861 160 CLR 1

18 October 1991 ~~m4w

THE DELINOUENTS PTY LIMITED v VILLAGE ROADSHOW CORPORATION

LIMITED & ORS

Einfeld J	F E D E a ~ COURT
OF AUST~PALIA
Sydney	1 14 N 2003
IN THE FEDERAL COURT OF AUSTRALIA)	NO NG 276 of 1991
NEW SOUTH WALES DISTRICT REGISTRY)
GENERAL DIVISION	1

Between: THE DELINOUENTS PTY

LIMITED

Applicant

And:  V I L L A G E R O A D S H O W

CORPORATION LIMITED

First Respondent

And: VILLAGE ROADSHOW PICTURES

USA INC
Second Respondent

And: THE AUSTRALIAN FILM FINANCE CORPORATION PTY LIMITED

Third Respondent

MINUTE OF ORDERS

1.   Order that within 28 days applicant provide security for costs of first and third respondents each in sum of

$6,000 by lodging with the Court in cash or by way of

bank or other guarantee satisfactory to a Registrar of
the Court.

2.  Liberty to same respondents to apply to increase these sums after close of pleadings and discovery and inspection of documents.

3.   Applicant to pay same respondents' costs of motions.

m:	Settlement and entry of orders are dealt with in accordance with Order 36 of the Federal Court Rules.
Einfeld J  Sydney

18 October 1991

IN THE FEDERAL COURT OF AUSTRALIA)	No NG 276 of 1991
NEW SOUTH WAIES DISTRICT REGISTRY)
GENERAL DIVISION	1

Between: THE DELINQUENTS PTY

LIMITED

Applicant

And:  V I L L A G E R O A D S H O W

CORPORATION LIMITED

First Respondent

And: VILLAGE ROADSHOW PICTURES

USA INC
Second Respondent

And: THE AUSTRALIAN FILM FINANCE CORPORATION PTY LIMITED

Third Respondent

REASONS FOR JUDGMENT

INTERLOCUTORY MOTIONS FOR SECURITY FOR COSTS

Einfeld	Svdnev	18 October 1991
FACTS

An action has been commenced in this Court by The Delinquents	Pty Ltd (the applicant) for declarations and damages for
breach of contract and of the Trade Practices Act 1974 for misleading and deceptive conduct in commerce. The applicant also seeks a declaration that the conduct of the first and second respondents was fraudulent. The applicant alleges that on or about 15 November 1988, when it was known as Saxlos Pty Ltd, it entered into a written agreement (the 1988 agreement) with an entity called "Village Roadshow Pictures" (Village) with respect to the acquisition by Village of rights in and relating to the production, financing and distribution of a feature motion picture entitled The Delinquents (the picture). The applicant owned the copyright of the picture, its shareholders having been responsible for its conception and writing. There is some doubt as to which of Village Roadshow Corporation Limited (the first respondent) and Village Roadshow Pictures USA Inc (the second respondent) was the other party to this agreement. The statement of claim says that it was the first respondent although the first respondent suggests that the second respondent was the contracting party. For present purposes, I will proceed on the assumption, without finding, that it was the first respondent.
Under clause 6 of the 1988 agreement, the applicant granted and assigned to the f,irst respondent the sole and exclusive rights to distribute, exhibit, advertise and otherwise exploit the picture. Subject to certain payments, these rights were to revert to the applicant automatically under clause 7 if within nine months from the date of the agreement the first
or play" for the picture. In return for the assignment, respondent had not made the director and principal cast "pay
Village agreed to provide 50% of the financing for the production of the picture (clause 8). The remaining 50% of the production costs came to be financed by the Australian Film Finance Corporation Pty Limited (the third respondent). In the events which occurred, the first and third respondents invested about $4 million each in the picture, as its half of the production budget of around SUS8.033 million.
The time, manner, terms of distribution, exhibition and exploitation of the picture were in the complete and exclusive discretion and control of the first respondent, on the proviso in clause 9 that the first respondent was obliged to consult with the applicant in relation to sub-distribution agreements. Clause 14 provided that the parties would in due course enter into what was described as a long-form agreement in place of the 1988 agreement.
The applicant alleges that some time later, the first respondent caused the second respondent to enter into an agreement with Warner Bros Inc (the Warner agreement) relating to the distribution of the picture. This agreement was dated
12 May 1989 but it may not have been executed until 23 May 1989. By clause 4(a) of the Warner agreement the second
respondent purported to sell and assign to Warner Bros the sole and exclusive right to exhibit, distribute, market and otherwise deal in and exploit the picture throughout the world, excluding Australia, New Zealand, USA and Canada, in consideration of a $US4 million advance by Warner Bros against
Warner Bros an option to distribute and exploit the picture in receipts from distribution. The agreement also conferred on
USA and Canada in consideration of a further $US4 million
advance against receipts from distribution, but this option was apparently not exercised.
By clause 5(a) of the Warner agreement, the second respondent warranted and represented that it was the sole and absolute owner of all such rights. By clause 5(f), the second respondent warranted and represented that it owned and controlled all the rights to the performance of the picture and all other rights in or to the picture.
The applicant alleges that before the Warner agreement was executed, the second respondent had no rights in the picture. Thus the applicant alleges that the second respondent's representations in the Warner agreement were false and that the warranties were breached. The applicant further alleges that neither the first nor the second respondent consulted with the applicant on the Warner agreement at any time prior to its execution. According to the applicant, the existence of the Warner agreement was not disclosed until about 10 May 1990 when it was informed by the first respondent.
The applicant says that on or about 23 May 1989, the applicant and the second respondent entered into two agreements with the third respondent (the Film Corporation agreements). The applicant alleges that shortly before the execution of the
Film Corporation agreements, the first and second respondents represented to the applicant that if it did not execute both
of the agreements, the second respondent was entitled, and
intended forthwith, to withdraw its participation in the production of the picture. The applicant alleges that this representation was false in that by reason of the obligations the second respondent had undertaken in the Warner agreement, it was imperative that the first and second respondents obtain the applicant's signature on the Film Corporation agreements come what may. The applicant says that it would not have entered into the Film Corporation agreements had it known of the Warner agreement.
One of the Film Corporation agreements was a Production and Investment agreement. Clause 18.3 of this document provided that upon becoming aware of a material breach of any agreement relating to exploitation of the film, the party concerned was obliged to notify the other parties in writing, detailing the nature and extent of the breach. It is alleged that both the 1988 and the Warner agreements were such agreements. The applicant says that prior to the execution of the Film Corporation agreements, all respondents were aware of the 1988 agreement, and therefore that the failure to notify the applicant of the Warner agreement until about 10 May 1990, in clear breach of the 1988 agreement, also represented a breach of clause 18.3.
The other was a Sales Agency agreement, by which the three
parties retained the services of the second respondent as sales agent to distribute the picture. The Sales Agency
agreement also made specific provision for the order of distribution to various interests of the moneys derived from the picture's distribution. In this list of intended beneficiaries of the takings, the applicant comes well after the third respondent which as at recent times is said to have recovered only a very small proportion of its $US4 million investment with little more in view.
In its statement of claim the applicant has alleged that the first respondent's conduct in relation to the Warner agreement constituted a breach of the 1988 agreement and was misleading or deceptive in contravention of section 52 of the Trade Practices Act. The second and third respondents are alleged to have aided and abetted, and to have been directly or indirectly knowingly concerned in, the contravention by the first respondent of the Act. The applicant does not complain about the recoupment of the two portions of $US4 million but disputes the entitlements of Warner Bros and the first respondent to interest and a share of the profits after repayment of the investors' contributions.
There are now before the Court motions by the first and third respondents for the applicant to provide security for costs pursuant to section 1335 of the Corporations Law. As at the date of hearing, the second respondent had apparently not been served with the application and statement of claim. It is therefore only a party in name in that it has not appeared in the proceedings thus far. The first and third respondents
claim initial costs in the amounts of $15,000 and $16,000
respectively which they say the applicant will have to pay if the proceedings are unsuccessful.
The applicant is without funds and claims that the order sought will kill the action. The applicant says that its impecuniosity has been brought about by the matters relied on as its causes of action:
Ptv Ltd & Ors [l9771 14 ALR 52 at 59. Although or because its financial position has not changed since before and at the time of the 1988 agreement, the applicant appears to be alleging that the respondents' conduct deprived it of the opportunity to negotiate a higher ranking in the distribution of the picture's income.
The first respondent submits that an order for security is warranted on three grounds. First, regardless of any liability the Court might find on the part of the first respondent, the applicant's claim will not lead to any substantive relief. This is principally because the applicant cannot demonstrate a causal nexus between the lack of consultation and an increased share or earlier priority in the picture's proceeds. Secondly, the impecuniosity of the applicant is attributable to the manner in which the applicant has chosen to manage and control its financial affairs, not any act or omission of the first respondent. Thirdly, the evidence adduced by the applicant does not establish that its actual controllers are themselves unable by reason of their
own impecuniosity to provide security for costs.
The first respondent says that the clause 9 obligation of the 1988 agreement to consult the applicant on agreements such as the Warner agreement was superseded by the long-form agreement contemplated by clause 14 when the Film Corporation agreements were entered into at or about the same time. These are said to have either relieved the respondents of the obligation of
consulting the applicant on the Warner agreement or to have given the first respondent ample authority to negotiate it or something in identical terms and have the second respondent enter into it. The first respondent argues that the applicant cannot make out its case that it would not have entered the Film Corporation agreements had it known of the Warner agreement, because in the Film Corporation agreements, the applicant gave the second respondent even wider authority and discretion than had been given in the 1988 agreement.
In Fat-sel Ptv Ltd v Brambles Holdinas Ltd [l9851 ATPR 40-544, Beaumont J said at page 46,428 that an applicant must demonstrate in a security for costs application that, as a matter of "economic causation", the respondent's alleged conduct "was in [a] material sense responsible for the applicant's impecuniosity". His Honour went on:

Moreover, there are difficulties in making out a case of impecuniosity attributable to the respondent's conduct as a ground for denying security for costs where the applicant relies on an alleged loss of a promissory kind rather than

awarded under sec.82: it is one thing to refuse

'reliance' damages of the type conventionally

security where the party claiming relief can show that the party sued brought about the impecunious party's insolvency by causing him to act to his detriment and to lose funds in that connection; it is a different thing where, as here, the applicant has not thrown away funds in reliance on the respondent's conduct but rather seeks to recover profits which the respondent's representations are alleged to have led it to expect to earn in the future. In the latter class of case the respondent's conduct may not have improved the applicant's financial position but, in contrast to the former class of case, the conduct complained of has not worsened the applicant 'S financial condition.

I respectfully agree with his Honour's views. On the evidence, this applicant put no money into this venture at all. Assuming the breaches of the Act and of contract alleged, any "losses" the applicant suffers can only be by way of a failure to recover money it hoped or expected to receive. There is no evidence, and it is not alleged in the statement of claim, that the applicant could or would have ranked higher in the income distribution scale if the alleged breaches had not occurred. Indeed it is difficult to imagine that the people and entities ahead of the applicant, including the substantial actual investors, Warner Bros and the third respondent, would in any circumstances have stood aside for a participant in the venture which was risking nothing. In this situation the applicant has not made clear how it intends to establish a case for damages under section 82 of the Act.

So far as concerns the people who stand behind the applicant, a Full Court of this Court said in Bell Wholesale CO Ltd v

Gates [l9841 2 FCR 1 at 4:

In our opin ion a Court i s n o t j u s t i f i e d i n d e c l i n i n g

t o order s e c u r i t y on the ground t h a t t o do s o w i l l

f r u s t r a t e the l i t i g a t i o n u n l e s s a company in the

p o s i t i o n o f the appe l lan t here e s t a b l i s h e s t h a t those who stand behind it and who w i l l b e n e f i t from the l i t i g a t i o n i f i t i s success fu l (whether they be

shareholders o r c r e d i t o r s o r , a s i n th is case ,

b e n e f i c i a r i e s under a t r u s t ) a r e a l s o wi thout means.

I t i s n o t f o r the p a r t y seek ing s e c u r i t y t o r a i s e

the mat t e r ; i t i s an e s s e n t i a l part o f the case o f a

company seek ing t o resist an order for s e c u r i t y on

the grounds t h a t the grant ing o f s e c u r i t y w i l l

f r u s t r a t e	the	l i t i g a t i o n	to r a i s e	the	i s s u e o f	the
impecun ios i t y	o f	those	whom	t h e	l i t i g a t i o n	w i l l

benefit and to prove the necessary f a c t s .

- l0 -

This approach applies to the present case where the evidence led by the applicant to discharge the onus referred to by the Full Court fell far short of establishing that those who control the applicant cannot supply the necessary security.

On the evidence thus far, the applicant's present impecuniosity was not caused by the matters complained of. Moreover, the third respondent did not enter the scene until after or at the same time as the Warner agreement came into effect. The second respondent was given greater rights by the applicant in the Film Corporation agreements than were given away in the 1988 agreement. So far as I can see, the Warner agreement did little to bring about a financial result for the applicant which was not even more emphatically achieved by the Film Corporation agreements. Apart from the applicant's bald assertion, there is nothing to support, and commonsense would refute, the suggestion that these agreements would not have been entered into if the Warner agreement had been known. There is no evidence that another potential investor was standing by to invest $US4 million in this picture.

made, the applicant had to move down the order of those	The Film Corporation agreements meant that to get its picture
seeking access to the earnings. The evidence shows that Warner Bros and the third respondent have not yet recovered their basic investments in the picture. While the first respondent appears to have received approximately its basic investment, neither it nor Warner Bros seems to have recovered any sums that might conceivably be called "interest". There is no complaint that the picture has not been adequately marketed. On the contrary, the evidence shows that profitability may have been based on a concept that in Australia and the United Kingdom, every teenager would want to see the picture some thirteen times. Unsurprisingly, this has thus far apparently been too tall an order. On the facts as they stand, the applicant is unlikely to receive any funds from the picture, not because of the Warner agreement, but because the picture's proceeds are insufficient to reimburse its major funders and participants, let alone provide a profit element.
The 1988 agreement gave the applicant a right to be consulted on certain things. The consultation rights did not extend to the right to seek changes, still less a right of veto. There is no evidence that if consulted about the Warner agreement:
(a) the applicant could and would have been able to stop it;

(b)	the applicant could have secured alternative terms with Warner Bros or a better agreement with another distributor, especially as to a production fee and a more favourable definition of the net profits of the picture;
(c)	another agreement would have become available by which additional funds would flow to the applicant from the picture's proceeds.

Yet this is the necessary requirement for this case of the High Court's decision in Gates v Mutual Assurance Societv Ltd

[l9861 160 CLR 1 that the losses to be compensated for in

section 52 cases are those which would not have been sustained
but for the misrepresentations established.

General knowledge and the evidence in this case impel a conclusion that film-making is highly speculative endeavour, even when sporting a performer of renown such as MS Kylie Minogue. This applicant was not a cash- or asset-rich company whose assets or funds have been used or used up because of conduct of the respondent corporations acting in contravention of the Trade Practices Act. It did not sell the picture or its concept to either Bf the respondents or to Warner Bros but merely allowed them to produce and distribute it. The applicant took its chances on the picture's profitability.

The case on liability made against the third respondent is particularly weak. If the third respondent was in breach of clause 18.3 of the Production and Investment agreement, it	could only be in respect of matters which arise after its	signing. The Warner agreement was at the latest signed on the
same day as the Film Corporation agreements but it must have been negotiated and agreed to be signed some time before. There is no evidence that the third respondent had anything to do with its terms or knew of it when it was negotiated and agreed to, although the third respondent obviously would have known of Warner Bros' financial involvement and entitlements as soon as the third respondent became an interested participant. It does not seem likely that the third respondent can be held liable for a breach of clause 18.3 on the basis of the Warner agreement. Furthermore, as presently pleaded and particularised, I cannot see how the allegations of fraud can succeed.
The applicant says that it has lost the benefit of what it describes as "the underlying rights" to the picture. The evidence does not disclose what these are in this case, let alone how and at what sum they can be quantified. Of course difficulty in the calculation, assessment or proof of damages is not the same as an absence of damage but the problem here is that no loss has been identified which is capable of quantification or of recompense. The applicant made submissions to the effect that, despite the respondents' evidence to the contrary, the picture may well have already earned sufficient to pay money to the applicant. However, no evidence was tendered 'to this effect and none was apparently attempted to be obtained by subpoena or other means. It was
also suggested that the Warner agreement was not for the "optimum benefit" of the parties as required, but again no
evidence was led to suggest that it was in any way contrary to sound business judgment and practice. The applicant carried the onus of proving these matters if it wished these arguments to succeed.
In my opinion the first and third respondents are each entitled to an order for security. Although the statement of claim is less than an ideal pleading and will require amendment and particularisation before defences can be filed, I think that the respondents' monetary claims are excessive at this stage. This is partly because the estimates include amounts clearly attributable to the costs of the motions for security which will be separately provided for. In addition the costs appear to be calculated on a solicitor and client basis and the applicant is at this stage unlikely to be called upon to indemnify the respondents to this degree if unsuccessful.
I order that within 28 days the applicant provide security for the first and third respondents each in the sum of $6,000 to be lodged with the Court in cash or by way of a bank guarantee satisfactory to a Registrar of the Court. Liberty will be reserved to these respondents to apply for an increase in these sums after the close of the pleadings and discovery and inspection of documents. The applicant will pay these
respondents' costs of the motions. : f
As soon as security has been supplied, the parties may submit a timetable for the preparation of the matter up to the close of pleadings and discovery and inspection of documents. If consented to, this may be submitted to me in Chambers by personal or facsimile delivery of the agreed directions duly signed by the parties. The agreed directions should contain a
mention/further directions date at the end of the processes covered. My associate will advise the parties if there is any change in the directions/orders provided for in the document submitted. The matter will be formally listed for directions on 29 November 1991 but if agreed directions have been approved by that date, there will be no need for the parties to attend until the mention date fixed by those directions.

I certify that this and the fourteen (14) preceding pages are a true copy of the Reasons for Judgment herein of his Honour Justice Einfeld

Dated: 18 October 1991 Associate:

Counsel and solicitor	Mr C M Simpson
for the applicant	instructed by Bradfield & Scott Solicitors
Counsel and solicitor	Mr J V Nicholas
for the first respondent	instructed by Mallesons Stephen Jaques
Counsel and solicitor	Mr A J L Bannon
for the third respondent	instructed by Allen Allen and Hemsley
Date of Hearing	23 July 1991

Written Submissions Completed	9 August 1991
Date of Judgment	18 October 1991