Young v Elliott and Anor (Ruling)
[2017] VCC 1135
•18 August 2017
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
| GENERAL LIST |
Case No. CI-17-02849
| CARY YOUNG | Plaintiff |
| v | |
| ROBERT JOHN ELLIOTT | First Defendant |
| and | |
| RED MEDIA PTY LTD (ACN 076 688 572) | Second Defendant |
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JUDGE: | HIS HONOUR JUDGE COSGRAVE | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 7 August 2017 | |
DATE OF RULING: | 18 August 2017 | |
CASE MAY BE CITED AS: | Young v Elliott & Anor (Ruling) | |
MEDIUM NEUTRAL CITATION: | [2017] VCC 1135 | |
REASONS FOR RULING
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Subject: PRACTICE AND PROCEDURE
Catchwords: Pre-trial discovery – application by plaintiff for discovery of documents
Legislation Cited: County Court Civil Procedure Rules 2008; Civil Procedure Act 2010 (Vic)
Cases Cited:Glezer v Deals.com.au [2014] VSC 2002; United Energy Limited v Energy Risk Management Pty Ltd [1998] VSC 133
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr S Pitt | Mills Oakley Lawyers |
| For the Defendants | Mr R G Craig | Lander & Rogers |
HIS HONOUR:
Introduction
1 This is an application by the plaintiff, Cary Young (“Young”) against the first defendant, Robert John Elliott (“Elliott”) and a company controlled by him, Red Media Pty Ltd (“Red Media”).
Factual background
2 At all material times, Young carried on the business of preparing trivia-style questions and answers for use in various publications, games and other media.
3 Elliott is, and was at all material times, the sole director and company secretary of Red Media.
4 Red Media:
(a) is, and was at all material times, a company incorporated in Australia; and
(b) from about 2004 until about 2011, carried on the business of developing and marketing various board games including the trivia-style board games “Smart Ass” and “Dumb Ass”.
5 Elliott deposed that in 2003, he commenced the development of a new board game called “Smart Ass” (‘the game’). This was a trivia-based board game whereby:
· with every question asked, every player could yell out the answer at any time as soon as they thought they knew it
· there were four categories of questions:
§ who am I?
§ where am I?
§ what am I? and
§ High IQ!
· the questions were formulated into lots of clues, and the clues would get easier as the question was read out.
6 Red Media was the legal owner of the game. Elliott said that initially he engaged Mike McColl Jones to provide Red Media with questions for the game. However, after providing some questions, Mr Jones’ interest waned and Elliott was forced to look for alternate sources of questions.
7 Young and Elliott met in early February 2004. After some discussion, it was agreed that Young would provide questions for use in the game and would be paid from the sale of the game.
8 On 21 February 2004, Young and Red Media entered an agreement (‘the first royalty agreement’) pursuant to which Young agreed to provide 4,000 questions and answers to Red Media, and Red Media agreed to pay Young 10% of profits from sales of the game.
9 Young said that pursuant to the first royalty agreement, he supplied Red Media with approximately 4,165 questions and answers between February 2004 and November 2005.
10 In October 2005, Young and Elliott had a discussion in which Elliott advised Young that 500 questions in each category would be sufficient rather than the 1,000 questions in each category which he had previously sought and Young had agreed to provide under the first royalty agreement. Elliott was of the view that many of Young’s questions were unsatisfactory, as they were too difficult and they were not the length which Elliott required.
11 In November 2005, Young and Red Media entered into a second agreement (‘the second royalty agreement’) which supplanted the first royalty agreement. There were terms of the second royalty agreement that:
(a) Young was to supply 2,000 questions and answers to the satisfaction of Red Media, comprising 500 questions “Who am I?”, 500 questions “Where am I?”, 500 questions “What am I?” and 500 questions “High IQ” (Clause 2.1);
(b) Young would retain ownership of, and copyright in, the collection of questions and answers (Clause 2.2);
(c) Red Media would take all necessary steps to ensure that Young’s copyright was protected (Clause 2.3);
(d) Red Media would pay Young 20% of the profits earned by Red Media for all sales of the board game for as long as the board game was sold (Clause 3.3);
(e) Red Media would pay Young 20% of the profits on a quarterly basis, commencing on 1 June 2004, for any quarter in which a profit was recorded (Clause 3.4);
(f) In the event that Red Media sold or assigned the rights to the board game to any party, Red Media would pay Young 20% of the proceeds from the sale or assignment of the board game within 60 days of receipt of the proceeds (Clause 3.5);
(g) If Red Media sold or assigned the rights to the board game, Red Media would continue to pay Young 20% of all ongoing royalties or residuals from the sale of the rights to the board game within 60 days of receipt of the royalties or residuals (Clause 3.6);
(h) Young and Red Media agreed that the terms of the second royalty agreement overrode any previous arrangement or agreement between them.
12 Young said that between February 2004 and October 2009, he provided approximately 4,795 questions and answers to Red Media. He said that he continued to edit and correct the existing questions up until January 2010.
13 In November 2006, Elliott sent Young an email about reducing the royalty from 20% to the initial 10% referred to in the first royalty agreement. Elliott referred to a conversation with Young in which he said Young agreed in December 2006 to the reduction. Elliott also referred to, and produced, two emails from Young in which he appeared to consent to the reduction.
14 According to Elliott, in early 2007, Red Media entered into an agreement with University Games Corporation (“University Games”) for it to distribute the game and other board games in the United States of America, British and European markets. Elliott said he notified Young of the distribution agreement around that time. Elliott says he no longer has a copy of the agreement.
15 Elliott says that upon receipt of royalties from University Games, he would calculate the amount owing to Young and, after deducting expenses, would send him an email summarising the amounts payable to him and then send copies of supporting documents in the mail to him. These documents included a quarterly royalty report and copies of documents detailing the expenses which were deducted prior to the calculation of Young’s royalty.
16 On 2 April 2008, Red Media entered into an agreement with World Wide Games Limited (“WWG”) whereby WWG became the owner of the intellectual property in the game. Subsequently, in 2008, WWG assigned back to Elliott the intellectual property rights of the game as then existing in Australia. Elliott says that around the time of these assignments, he informed Young of the fact and told him that he would still receive his commission in accordance with past practice. However, Elliott said that his commissions relating to Australian sales would come from Red Media and his commission from overseas sales would come from WWG. Elliott says that, in relation to WWG, he arranged for Young to email his invoices to him, which he then forwarded to WWG. WWG would then pay Young the commission owing.
17 I note in passing that Elliott did not explain why Young would be sending him invoices or what they related to. In circumstances where there was an obligation to make royalty payments to Young, but Young did not have available to him all the information required to work out the number of units sold of the game and to thereafter calculate profits, this seems a little puzzling.
18 Elliott says that in late 2010, he was told by Drew Fyfe of Jedko Games, and believed, that WWG became aware of University Games breaching the distribution agreement and infringing intellectual property rights in relation to the game. Between early 2011 and December 2011, University Games and WWG were involved in a protracted dispute in connection with the game and other intellectual property rights as claimed by WWG.
19 In December 2011, WWG and University Games entered into a written agreement whereby they settled the dispute between them. The settlement agreement also provided University Games with an option to purchase the game from WWG, together with other intellectual property rights and trademarks. This settlement agreement entered between the parties is subject to a confidentiality clause.
20 Elliott says that at around the same time as WWG sold the game to University Games, WWG entered into an agreement with Young for the assignment of his intellectual property rights in the game for the sum of $50,000. Elliott further says that Red Media, WWG and he have not had anything to do with the game since the sale to University Games and have received no further royalties in respect of the game.
21 On 8 June 2016, Mills Oakley sent a letter to Elliott on behalf of Young with respect to rights claimed by Young in relation to the game.
22 In general terms, the letter constituted a demand that Elliott pay Young appropriate compensation for his copyright in the literary works he produced in respect of the game. In particular, there was a demand that Young be paid the correct percentage share of sale proceeds which resulted from WWG selling the game to University Games.
23 The letter denied that Young had agreed to the reduction of the royalty rate from 20% to 10% and said that no new agreement was ever reached. The letter referred to the deed of assignment between Young and WWG in which Young was paid USD 50,000 for assigning his rights in relation to the game. The letter said that it had subsequently come to Young’s attention that Elliott, or entities associated with him, had received in excess of US$5 million from University Games as proceeds from sales of the game, and that more than 1.5 million units of the game had been sold. If that information were correct, the US$ 50,000 paid to Young was not commensurate with Young’s entitlement to a 20% royalty.
24 The letter then continued with a reference to a claim for misleading and deceptive conduct and how a contract could be rendered voidable as a result of a misrepresentation. The letter said that false representations were made to Young.
25 The letter also referred to an alleged lack of capacity in Elliott to execute the settlement between WWG and University Games. This was said to be because Elliott was not the secretary or a director of WWG.
26 The letter concluded by seeking 20% of the sale proceeds paid by University Games to WWG and requiring the provision of books and records for Young to assess the amount owing to him. The letter stated finally that if Elliott did not comply with the request within seven days, Mills Oakley would issue proceedings.
27 After seeking an extension of time to respond, K & L Gates, on behalf of Elliott, replied by letter dated 28 June 2016. The letter took issue with a number of the matters raised by Young and referred to several documents which it appears Young did not have.
28 By letter dated 29 August 2016, Mills Oakley wrote to K & L Gates. They asked for copies of three documents referred to in the correspondence from K & L Gate and, in addition, asked that Elliott provide copies, or make available for inspection, copies of the following documents:
(a) “Correspondence between Elliott, Red Media, World Wide Games and/or University Games regarding the sale of rights in relation to the Smart Ass game (‘game’) between 1 January 2011 and 30 June 2012”;
(b) “Details of all questions submitted by our client, including those that were used, amended and/or not used in the game between 2011 and 2016”;
(c) “Details of any expenses incurred that affected the amount payable to our client pursuant to the royalties agreements (for example, we refer to the email dated 17 April 2008 from Mr Elliott from the email address [email protected] to our client at 1.27pm (a copy of which is enclosed with this letter for convenience”);
(d) “All royalty statements provided to our client in respect of the game”;
(e) “Details of sales figures for the game from 2004 to date.”
29 As there was no response within the 21 days specified in the letter, Mills Oakley sent a follow-up letter on 9 September 2016.
30 On 12 September 2016, K & L Gates emailed Mills Oakley to advise that they no longer acted for Elliott.
31 By letter dated 7 October 2016, Mills Oakley wrote to Elliott essentially in the same terms as the letter of 29 August 2016. Mills Oakley sought copies of the three documents referred to in the K & L Gates’ letter of 28 June 2016, together with copies of documents in categories (a) – (e) referred to in their earlier letter (at paragraph 28 above).
32 By letter dated 11 October 2016, Elliott forwarded to Mills Oakley copies of two of the three documents requested. He said that the agreement between WWG and University Games was subject to confidentiality and that Mills Oakley should contact the proper officer of WWG in Hong Kong.
33 As to the categories of documents (a)-(e) referred to, Elliott responded as follows:
(a) He had no copies of correspondence fitting the description;
(b) He no longer had Young’s questions;
(c) All expenses had previously been provided to Young and should be in his possession;
(d) All royalty statements with royalties paid had been provided to Young and should be in his possession;
(e) All sales figures between 2004 and 2011 were included in the royalty statements previously provided by Young to Elliott and should be in his possession. Elliott said he was unaware of any sales figures of University Games or otherwise after September 2011.
34 By letter dated 14 November 2016, Mills Oakley acknowledged receipt of the documents forwarded and asked Elliott to explain what had happened to all the questions provided by Young. The letter observed that Elliott should be in possession of the royalty statements, details of expenses and detailed sales figures. The letter sought a fuller and better explanation from Elliott by 28 November 2016.
35 In his response dated 28 November 2016, Elliott said that Young had the royalty statements and other documents sought. This was evidenced by the use of those documents in an affidavit which Mills Oakley prepared for Young in support of an application in the Family Court of Australia in respect of Elliott’s former wife. Elliott also included a number of comments in regard to the possibly inappropriate conduct of Mills Oakley through a conflict of interest and several other matters.
36 By letter dated 30 January 2017, Mills Oakley repeated to Elliott the request for discovery of documents previously identified and denied any inappropriate behaviour by the firm. It advised that whatever documents might have been available to members of the firm acting in the Family Court proceedings, those documents were not available to those acting in the commercial disputes and insolvency part of the firm.
37 In his response dated 7 March 2017, Elliott took issue with a number of the comments made by Mills Oakley about the firm’s conduct. He charged that Young was harassing him and undertaking a “fishing expedition”.
38 On 23 June 2017, Young issued the present application for pre-trial discovery.
Consideration of Rule 32.05
39 Rule 32.0 of the County Court Civil Procedure Rules 2008 (Vic) (‘the Rules’) is in the following terms:
“32.05 Discovery from prospective defendant
Where—
(a)there is reasonable cause to believe that the applicant has or may have the right to obtain relief in the Court from a person whose description the applicant has ascertained;
(b)after making all reasonable inquiries, the applicant has not sufficient information to enable the applicant to decide whether to commence a proceeding in the Court to obtain that relief; and
(c)there is reasonable cause to believe that that person has or is likely to have or has had or is likely to have had in that person's possession any document relating to the question whether the applicant has the right to obtain the relief and that inspection of the document by the applicant would assist the applicant to make the decision—
the Court may order that that person shall make discovery to the applicant of any document of the kind described in paragraph (c).”
40 The general principles applicable to applications under Rule 32.05 are well established and include the following:
(a) The Rules should be construed benevolently or beneficially, because it is intended both to assist an applicant who does not have sufficient precise information to commence a proceeding and to prevent the bringing of speculative actions. This is also consistent with modern case management principles in the Civil Procedure Act 2010 (Vic);
(b) The primary object of the Rule is to advance the administration of justice by enabling a prospective plaintiff to make an informed decision on proper material about whether or not to bring an action to obtain relief against an ascertained person. The extent of the breach or wrong, and the likely damages, could be important in determining whether or not to sue. A trivial claim may not be worth pursuing – it could be a waste of time and resources, both for the party and the court. Even where a person has a reasonable cause to believe that he or she may have a right to relief, nevertheless the person may still require information to determine whether the cost and risk of litigation is worthwhile having regard to the likely damages;
(c) The test for determining whether the applicant has reasonable cause to believe is an objective one;
(d) An applicant does not have to establish a prima facie case that it has the right to obtain relief. The test is satisfied if the applicant “may have” the right to obtain relief;
(e) It is no answer to an application for pre-trial discovery to say that it is in the nature of a “fishing expedition”. If the conditions specified in the Rule are satisfied, the law permits such an expedition.
41 I adopt the views of Gillard J in United Energy Ltd v Energy Risk Management Pty Ltd,[1] where his Honour explained in some detail the rationale of the Rule and its intended operation.
[1][1998] VSC 133 at [28]-[43].
42 The first requirement under the Rule is for the applicant to show reasonable cause to believe he or she has or may have right to relief in court against Elliott and Red Media.
43 Young contends, on the basis of the second royalty agreement with Elliott, that he is entitled to 20% of the sale proceeds received from University Games. He also has information that Elliott, or companies associated with him, received US$ 5 million and that 1.5 million units of the game have been sold. While ultimately these facts may or not be established, I consider that they show a reasonable basis, judged objectively, for Young to contend that he may have the right to obtain relief in the court against Red Media for breach of contract. Also, to the extent that the prospective defendants misled Young about the number of units sold or the consideration received from University Games, there is a possible claim for misleading and deceptive conduct.
44 Elliott submitted that the application was flawed because the foreshadowed claim was not to be against Elliott personally but against Red Media for breach of the second royalty agreement. I am not persuaded by this submission. In my view, if there were to be the foreshadowed claim for misleading and deceptive conduct, then it is almost inevitable that there would be a claim against Elliott personally, given that he was the officer of the company involved in the dealings with Young. To the extent that there was any conduct which contravened the statute, the conduct would have been that of Elliott.
45 The second requirement under Rule 32.05 is that the applicant for preliminary discovery, after making all reasonable enquires, lacks sufficient information to decide whether to commence a proceeding against the person from whom discovery is sought. In this context, one must distinguish between on the one hand, having sufficient information to decide if the applicant has a right to relief against the prospective defendant, and on the other, from having sufficient information to decide whether to actually commence proceedings against that respondent. The Rule is designed to give effect to the latter purpose, not the former. Accordingly, even if an applicant believes that he or she has enough information to decide there is a right to relief available, the applicant is still entitled to apply for discovery, because it seeks more information regarding matters such as potential defences and quantum.
46 In this context, I note that Elliott pointed to some correspondence from the applicant’s solicitor to Elliott and contended to the effect that because Young had decided to commence proceedings against Elliott, the application was fatally compromised. Elliott referred, in particular, to the letter from Mills Oakley dated 8 June 2016 with its reference to misleading and deceptive conduct, the issue of Elliott’s authority to execute an agreement on behalf of WWG and the threat to commence proceedings without further notice if Elliott did not respond appropriately within the time specified by the solicitors.
47 In Glezer v Deals.com.au,[2] Vickery J dealt with a similar submission by a respondent in circumstances where the applicant stated its case in fairly strong terms in a letter to the prospective defendant. The letter included a number of allegations against the respondent. His Honour noted that the applicant’s letter was written in robust and definitive terms and contained serious allegations, the factual basis for which was summarised. He said that the letter adopted a posture designed to put the applicant’s case in the strongest possible way as it was then known to the applicant and his legal advisors. However, His Honour then went on to say that adopting such a posture did not necessarily point to a decision having already been made to commence proceedings. He said that –
“… The writing of pre-action letters of this kind in an adversarial process can serve a number of purposes, including bringing the parties together for settlement discussions prior to a decision being made to commence proceedings.”[3]
[2][2014] VSC 2002.
[3]At [45].
48 In the case before him, His Honour concluded that no final decision had been taken as at the date of making the application for preliminary discovery.
49 In this case, I am of the same view with respect to the applicant, namely, that at the time the application for discovery was made, no final decision had been taken with respect to the issuing of proceedings. Given Elliott’s responses to requests for information from the applicant, I am satisfied that the applicant did not have sufficient information to decide whether to commence a proceeding because, in the absence of financial information, no sound conclusion could be reached as to whether the likely quantum of damages recoverable justified the initiation of court proceedings.
50 The final requirement of the Rules is that there be reasonable cause to believe that Elliott has, or has had, or is likely to have had in his possession, documents relating to the question of whether Young has a right to obtain relief, and that inspection of such documents would assist Young’s decision about whether or not to initiate proceedings.
51 In my view, this requirement is satisfied. In his own affidavit material, Elliott confirms that he previously had documents relating to expenses, sales figures and royalty statements. I consider that these documents are self-evidently relevant to Young’s assessment of the potential damages he might receive. Documents containing this information could well assist Young to work out:
a) how much profit Red Media derived from sales of the game between 2004 and 2011;
b) how much University Games paid for the game in 2011.
52 Elliott contends that no order for discovery should be made because, in Elliott’s affidavit sworn 4 August 2017, he explains on oath his position with respect to the documents sought. Thus, it is said that he previously provided documents to Young or his lawyers and that these documents should be in the possession of Young. With respect to the expenses request, the royalty statements request and the sales figures request, Elliott says that other than the documents which he has already provided to Young, he no longer has any of those documents in his power, possession or control (save and except for documents he has seen exhibited to an affidavit sworn by Young in proceedings in the Family Court of Australia). In substance, Elliott contends that no order should be made because no useful purpose would be served by it. Elliott submitted that, in all likelihood, he would simply swear an affidavit in effectively identical terms.
53 The court retains an overriding discretion about whether or not to make a discovery order. If Elliott makes an affidavit consistent with the one he swore for the application, then I accept there might be limited utility in the exercise. On 4 August 2017 Elliott swore an affidavit which was served only the Friday before the hearing of the application on the following Monday. In the affidavit, Elliott says that (save for the documents he has seen in connection with an affidavit sworn by Young in Federal Court proceedings between Elliott and his former wife), he no longer has in his possession, power or control documents relating to expenses affecting the amount of royalties paid to Young, royalties statements and sales figures for the game. Notwithstanding the detailed correspondence which passed between the parties or their representatives between June 2016 and February 2017, Elliott had not previously revealed that he no longer had these documents. His earlier position was that he had supplied all such documents to Young in and after 2004. One wonders why it was only in the face of the impending hearing that Elliott revealed his new position.
54 Elliott contended that the court should refuse Young’s application because Young did not explicitly disclose what information he already had relevant to making the decision regarding the initiation of proceedings. It is not uncommon for an applicant to deal with this issue in the affidavit material supporting the application. Often, it assists the court in its understanding of the application and provides a context for understanding the knowledge gap which exists between what the applicant already has and what further information the applicant allegedly requires in order to make an informed decision with respect to the initiation of proceedings.
55 Young’s counsel accepted that the affidavit material did not explicitly address this issue. However, he submitted that having regard to the matters raised over a lengthy period of time in the correspondence and the fact that Young had finally initiated the application for pre-trial discovery, the court should infer that whatever information Young had, he still required the categories of documents referred to in the application in order to decide whether it was appropriate for him to pursue Elliott and his company for damages.
56 In my opinion, the failure by Young to explicitly disclose the details of the information already held is not sufficiently material to justify without more, the dismissal of the application. Although Young’s material could appropriately have addressed the point, I am satisfied that Young has consistently sought the information with respect to sales of the game from Elliott. This is the fundamental information required in order to calculate the potential damages recoverable if proceedings were issued. While it would have been helpful for Young to directly say in his affidavit material that he no longer had some or all of the documents which Elliott sent to him in and after 2004, in the circumstances, I am prepared to infer, on the balance of probabilities, that Young has not retained all those records.
57 I am fortified in this view by Young’s evidence to the effect that while he signed the deed of assignment regarding his copyright in the literary works to the game in December 2011, it has only more recently come to his attention that University Games provided more than US$ 5 million in sale proceeds from sales of Smart Ass and sold more than 1.5 million units of the game. Having received that information, it caused Young to question the accuracy of the amount that he had received in royalties. I assume that had Young retained all the documents sent to him by Elliott since 2004, he would have been aware of this information.
Conclusion
58 In the circumstances, I consider it is appropriate to grant the application. Unless the parties can agree upon the form of order and costs, I shall hear them further on these matters.
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