Digital Cinema Network Pty Ltd v Omnilab Media Pty Limited [2011] FCA 89 (7 February 2011)

Last Updated: 16 February 2011

FEDERAL COURT OF AUSTRALIA

Digital Cinema Network Pty Ltd v Omnilab Media Pty Limited [2011] FCA 89

Citation:		Digital Cinema Network Pty Ltd v Omnilab Media Pty Limited [2011] FCA 89
Parties:		DIGITAL CINEMA NETWORK PTY LTD (ACN 132 404 481) v OMNILAB MEDIA PTY LIMITED (ACN 002 585 391) and OMNILAB MEDIA CINEMA SERVICES PTY LTD (ACN 145 363 855); OMNILAB MEDIA PTY LIMITED (ACN 002 585 391) and OMNILAB MEDIA CINEMA SERVICES PTY LTD (ACN 145 363 855); MICHAEL GEOFFREY SMITH
File number:		VID 813 of 2010
Judge:		GORDON J
Date of judgment:		7 February 2011
Date of hearing:	7 February 2011
Date of last submissions:	7 February 2011
Place:	Melbourne
Division:	GENERAL DIVISION
Category:	No catchwords
Number of paragraphs:	26
Counsel for the Applicant:	SR Senathirajah
Solicitor for the Applicant:	Corrs Chambers Westgarth
Counsel for the First and Second Respondents:	J Peters SC with J Slattery
Solicitor for the First and Second Respondents:	Holding Redlich
Counsel for the Third Respondent and the Cross-Respondent:	D Crennan
Solicitor for the Third Respondent and the Cross-Respondent:	Garland Hawthorn Brahe

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION	VID 813 of 2010

BETWEEN:	DIGITAL CINEMA NETWROK PTY LTD (ACN 132 404 481) Applicant OMNILAB MEDIA PTY LIMITED (ACN 002 585 391) First Cross-Claimant OMNILAB MEDIA CINEMA SERVICES PTY LTD (ACN 145 363 855) Second Cross-Claimant
AND:	OMNILAB MEDIA PTY LIMITED (ACN 002 585 391) First Respondent OMNILAB MEDIA CINEMA SERVICES PTY LTD (ACN 145 363 855) Second Respondent MICHAEL GEOFFREY SMITH Third Respondent / Cross Respondent

JUDGE:	GORDON J
DATE OF ORDER:	7 FEBRUARY 2011
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1. The hearing of the trial be adjourned to 10:15 am on 15 March 2011.
2. The Applicant pay the Respondents’ costs of and incidental to the application for adjournment (including the costs of this day) together with costs thrown away by reason of the adjournment.
3. Unless and until otherwise agreed by the First and Second Respondents, the documents produced by the First and Second Respondents in answer to the Applicant’s notice to produce dated 4 February 2011 be treated as confidential and, subject to any further order of this Court and the relevant Rules of this Court, disclosure of the those documents be limited to the Applicant’s solicitors and Counsel.
4. Subject to Order 3, upon the usual undertaking of the Applicant’s solicitors, the Applicant’s solicitors be permitted to up-lift the documents produced to the Court by:

4.1 the First and Second Respondents in response to the notices to produce dated 4 and 6 February 2011; and

4.2 the Third Respondent in response to the two notices to produce each dated 6 February 2011.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION	VID 813 of 2010

BETWEEN:	DIGITAL CINEMA NETWROK PTY LTD (ACN 132 404 481) Applicant OMNILAB MEDIA PTY LIMITED (ACN 002 585 391) First Cross-Claimant OMNILAB MEDIA CINEMA SERVICES PTY LTD (ACN 145 363 855) Second Cross-Claimant
AND:	OMNILAB MEDIA PTY LIMITED (ACN 002 585 391) First Respondent OMNILAB MEDIA CINEMA SERVICES PTY LTD (ACN 145 363 855) Second Respondent MICHAEL GEOFFREY SMITH Third Respondent / Cross Respondent

JUDGE:	GORDON J
DATE:	7 FEBRUARY 2011
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

1. In the mid 2000’s, US film studios (the Studios) began providing financial assistance to cinemas to upgrade their projection equipment from analogue to digital. The financial assistance, in the form of a subsidy, was called the “Virtual Print Fee” or “VPF”. The Studios were not willing to negotiate with individual cinema owners. Instead, the Studios would negotiate the VPF agreements with an entity known as a “digital integrator” – an entity able to achieve a minimum number of digital cinema installations.
2. In June 2008, the Applicant (DCN) was established with the alleged objective of becoming a digital integrator for the purpose of becoming a party to VPF agreements with the Studios in relation to independent cinemas in Australia.
3. DCN alleges that:
   1. DCN was formed by Martin Gardiner, James Gardiner and Michael Smith (Smith), now the third respondent, to secure VPF agreements for the ultimate benefit of independent Australian commercial cinema owners and that Smith’s role was to negotiate the VPF agreements with the Studios for DCN;
   2. while DCN was in the process of seeking to satisfy requirements of the Studios, the Independent Cinemas Association of Australia (ICAA) approached DCN (through Smith) and told Smith that they would recommend to its members that they support DCN’s VPF agreement negotiations;
   3. over the last couple of years, DCN has installed 85 digital cinema projection systems in Australia. At the same time, DCN (through Smith) had been working to secure formal VPF agreements with the Studios;
   4. from about November 2008 and without the knowledge or consent of the other directors of DCN, Smith appears to have decided that the benefits of the VPF agreement negotiations belonged to him or his company (MGS) and not DCN, including negotiating a payment from ICAA to MGS in return for granting to ICAA the power to decide who should be allowed to sign the VPF agreements with the Studios negotiated by Smith (which DCN alleges were negotiations on its behalf);
   5. ICAA subsequently nominated the first respondent (Omnilab) to enter into the VPF agreements and instructed Smith to bring about that result;
   6. earlier in 2010, Omnilab expressed to Smith an interest in purchasing DCN and, to that end, in March 2010, DCN entered into a Non-Disclosure Agreement with Omnilab so that it could be provided with information to enable it to assess whether to acquire DCN. Those negotiations failed;
   7. after the failure of the negotiations, on 22 July 2010, Omnilab established the second respondent (OmniDCN). OmniDCN has made representations to DCN’s suppliers that it purchased DCN or DCN’s business; and
   8. at about the same time and without the knowledge or consent of the other directors of DCN, Smith at the request of ICAA and Omnilab and further or alternatively OmniDCN, physically substituted DCN’s name on the VPF contracts with the new and similar name – OmniDCN.
4. As a result, DCN submits it suffered loss and damage on the grounds that Smith contravened ss 180 – 184 of the Corporations Act 2001 (Cth) (the Corporations Act) and each of Omnilab and OmniDCN (the Omnilab Parties) aided and abetted, counselled or procured Smith or was knowingly concerned or a party to the contravention by Smith of ss 180 – 184 of the Corporations Act and knowingly received property belonging to DCN obtained by Smith in breach of his fiduciary duties to DCN. In addition, DCN also alleges against Omnilab and OmniDCN a breach of express and implied contractual obligations of confidence and makes a claim of misleading and deceptive conduct concerning the relationship between DCN and the Omnilab Parties.
5. All respondents deny the allegations. Omnilab and OmniDCN contend, inter alia, that from in or around January 2009, ICAA sought and obtained member approval to engage MGS to conduct the negotiations with the Studios on its behalf, that an arrangement was entered into whereby MGS would be paid a commission on the successful negotiation of the VPF agreement between ICAA members and a US film studio and that from January 2009, Smith conducted all VPF negotiations as a representative of MGS and not DCN.
6. In short, one of the core issues to be determined at trial is who is entitled to enter into, and receive the benefits flowing out of, the VPF Agreements with the Studios which grant or will grant financial subsidies to independent Australian commercial cinema owners to upgrade their analogue projection equipment to digital projection equipment.
7. The trial of this proceeding was set to commence this morning at 10:15am. On Thursday afternoon, 3 February 2011, DCN informed the Court and the parties that it sought an adjournment of the trial. DCN principally relied upon two matters as the basis for that adjournment:
   1. the fact that the relevant Minister had not provided his consent under s 5(3) of the Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)) to permit DCN to rely upon conduct outside Australia; and
   2. a number of Studio executives who DCN intended to call to give evidence were located overseas and despite an order being made on 2 February 2011 under the Foreign Evidence Act 1994 (Cth) and the Federal Court Rules, the Studio executives had informed DCN’s solicitors that they would not attend unless legally compelled to do so.

This morning DCN still had not obtained the Minister’s consent and had not yet sought orders seeking to compel the Studio executives to attend to give evidence.

8. The adjournment was opposed by the respondents.

ANALYSIS

9. DCN submitted that it should be granted the adjournment that it sought because a refusal to grant the adjournment would, or was likely, to shut it out of an opportunity to advance a sustainable proposition that would affect the outcome of the proceeding: Opeka Pty Ltd v Mackie Group Pty Ltd [2003] VSC 183 at [35]. DCN submitted that the sustainable proposition was that there was allegedly misleading and deceptive conduct on the part of the respondents concerning the relationship between DCN and the Omnilab Parties. It should be noted that a critical fact in dispute is whether the third respondent (Smith) had been conducting negotiations with the Studios for DCN to be a party to the VPF Agreements. The respondents each deny that fact. The ability to lead evidence relevant to that proposition was therefore dependent on the Ministerial consent and the evidence of the Studio executives. Without the Ministerial consent, DCN was not entitled to rely upon it. Without the evidence of the Studio executives, the evidence was not able to be adduced. As will become readily apparent, the Minister’s consent and the proposed evidence of the Studio executives were therefore interrelated.
10. The first and second respondents accepted that they could not shut DCN out from calling the Studio executives. Simply stated, if the Studio executives gave evidence consistent with their outlines of evidence, the first and second respondents accepted that the facts set out in those outlines may be relevant to the case pleaded by DCN, namely that there was allegedly misleading and deceptive conduct on the part of the respondents concerning the relationship between DCN and the Omnilab Parties.
11. As Senior Counsel for the first and second respondents properly conceded, one way, and a critical issue to be determined in deciding whether to grant DCN the adjournment is whether or not DCN has had a “sufficient opportunity” to present its case: AON Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175 at [112]. Put another way, the respondents contended that DCN should not be granted the adjournment because DCN had already had a sufficient opportunity to present its case, the need for an adjournment was caused by DCN’s own actions and the first and second respondents would suffer prejudice.
12. For the reasons that follow, I would grant DCN an adjournment of the trial.
13. First, the procedural history. The proceeding was filed in the fast track list on 22 September 2010. The scheduling conference was held on 11 November 2010. At that time, the third respondent, Smith, was not a party to the proceeding. Orders were made for the filing of affidavits and outlines of evidence and any application for joinder of Smith.
14. DCN filed and served outlines of evidence on 15 and 24 December 2010. The first and second respondents filed and served affidavits of witnesses they proposed to call on 13, 19 and 21 January 2011 together with an outline of submissions on 21 January 2011.
15. Despite the exchange of witness outlines and affidavits, DCN disputed the first and second respondents’ claim that a substantial number of documents produced by them were of a confidential nature or contained confidential information. That dispute was heard by Registrar Pringle on 14 January 2011. Evidence was received and, the next day, the parties said that they were seeking to reach an agreement to resolve the confidentially issues. It was not until 20 January 2011 that the parties submitted consent orders and sought to be excused from the further hearing.
16. I turn to Smith, the third respondent. He was joined as a cross respondent on 15 December 2010. He was ultimately joined as a respondent on 2 February 2011 when DCN applied to amend its application and fast track statement. Despite his earlier joinder, Smith did not serve any sworn affidavit material or provide relevant documents by way of production of documents under the discovery orders until 4, 5 and 6 February 2011. That material has still not been filed with the Court.
17. DCN has also provided security for the costs of the first and second respondents on two occasions – $65,000 on 12 November 2010 for costs up to and including mediation and $60,000 on 3 February 2011 for costs up to and including the first day of trial. The proceeding went to mediation on 25 January but did not resolve.
18. As is apparent, the procedural history of the matters has not been straightforward. But that does not provide a complete answer to whether or not DCN has had a “sufficient opportunity” to present its case: see [11] above.
19. DCN’s solicitor, Mr Ben Davidson, has filed and served an affidavit in which he deposes to the following facts:
    1. Orders on 11 November 2010 required DCN to file and serve its evidence (in the form of either affidavits or outlines of evidence) by 3 December 2010.
    2. He had been informed by Martin Gardiner (a director of DCN) (Gardiner) and believed that from late November 2010 and into early December 2010:

2.1 he communicated with various studio executives from five studios – Sony, Fox, Disney, Warner Brothers and Paramount regarding ongoing VPF negotiations;

2.2 the purpose of these communications was to attempt to have Gardiner (on behalf of DCN) re-engage the negotiations with the Studios for VPF agreements (since Smith was refusing to continue on with negotiations for DCN); and

2.3 to seek an explanation in person from the Studio executives as to what had taken place in the VPF negotiations and in particular how it was that the second respondent had become the named party on the VPF contracts in place of DCN.

3. The information obtained from these discussions (and correspondence discovered in this matter) was subsequently used to prepare the Outlines of Evidence that were filed in December 2010.
4. Outlines of evidence were prepared for the Studio representatives because of the combined difficulty of contacting the Studios in the United Kingdom and United States (in the short time available) and because he was instructed by Gardiner and believed that DCN considered that it would harm the ongoing negotiations and discussions if during this period DCN tried to effectively interrogate the Studio executives for the purposes of obtaining sworn statements.
5. DCN filed Outlines of Evidence for the following Studio executives:

5.1 Nicolas Zylberstein (Zylberstein) of the Walt Disney Company (Disney) (USA) on 24/12/2010;

5.2 Richard Aseme (Aseme) of Paramount Pictures (Paramount) (UK) on 15/12/2010;

5.3 Scott Sherr (Sherr) of Sony Pictures Inc. (Sony) (USA) on 24/12/2010; and

5.4 Julian Levin (Levin) of 20th Century Fox Film Corporation (Fox) (USA) on 24/12/2010.

6. In about mid December 2010, Gardiner informed him and he believed that Gardiner travelled to the United States to meet and speak with the relevant Studio executives for the purposes of:

6.1 continuing with DCN’s negotiations regarding the VPF contracts; and

6.2 determining whether the relevant Studio executives would object to giving evidence for DCN regarding how the negotiations moved from being with DCN to the first and second respondents.

7. Upon his return to Australia, Gardiner advised him that:

7.1 the Studio executives agreed with the issues that were now set out in their outlines – in particular that they believed that they were originally negotiating with DCN and then there was a change that had resulted in the first and second respondents taking over the negotiations;

7.2 the Studio executives, while expressing annoyance that these basic facts may be in dispute and articulating reservations about being ‘dragged into’ the Australian situation, nonetheless did not advise Gardiner that they would not give evidence; and

7.3 Gardiner had formed the view that there appeared to be a significant level of surprise from the Studio executives he spoke to when they were told that DCN had not been sold to the first and second respondents nor had it agreed to allow the first and second respondents to takeover, transfer or otherwise assign the negotiations/draft VPF contracts.

8. Based upon the above matters and Gardiner’s meetings, Gardiner was of the view that the Studio executives were unlikely to object to giving evidence.

Mr Davidson was not cross examined. As is apparent, Gardiner’s summary of the position in relation to the willingness of the Studio executives was wrong.

20. Counsel for the first and second respondents submitted that despite Gardiner speaking to the Studio executives in December 2010, it is apparent that at no stage prior to 20 January 2011, did DCN’s solicitors (or even DCN) actually ask any of the Studio executives whether they were willing to voluntarily give evidence in this proceeding. In my view, it is unnecessary to resolve whether DCN’s solicitors should have taken that step earlier. There is no doubt that any potential witness should be spoken to as soon as practicable about their availability for a trial (especially where the trial date is set) and their willingness to give evidence voluntarily. If the solicitors did not take that step at the earliest possible time, then that is unfortunate.
21. However, that is not the only delay. As I said earlier, the issue of the evidence of the Studio executives and the ministerial consent is interrelated. It is common ground that the ministerial consent was not sought until 23 or 24 December. With the intervention of the Christmas and the New Year period, it was inevitable that the matter was not dealt with by the Minister’s office immediately. The Minister responded on 20 January 2011 seeking further information. That letter was not in evidence. DCN did not respond until 28 January 2011. Further material was provided on 28 January 2011. On 4 February 2011 the Minister sought the respondents’ views for the first time and provided the respondents with 28 days to respond notwithstanding that the Minister knew that the proceeding was listed for trial today. At that time, the respondents did not provide their consent. During the course of the hearing of the adjournment application this morning, the respondents informed the Court that they now had instructions not to oppose DCN’s application. Those instructions were provided to the Minister after the hearing and before I delivered judgment.
22. In my view, DCN did delay in seeking the Minister’s approval. DCN knew by no later than 15 December 2010 (when it filed an outline of evidence from one of the Studio executives) that it would require consent under s 5(3) of the Competition and Consumer Act 2010 (Cth). However, given what then transpired in relation to the consent, I am unable to conclude that a delay of some 8 or 9 days (or 6 business days) in seeking the consent was so great a delay to justify refusing DCN’s application for an adjournment. Put another way, even if the consent had been filed by say Friday, 17 December 2010, it is not possible to conclude that the consent would have been provided by the Minister in sufficient time to permit the trial to proceed.
23. That brings me then to the related question of the prejudice or injustice to the respondents if the adjournment is granted. Smith submitted that he wished to have the proceeding heard as soon as possible. He did not separately point to any prejudice or injustice to him personally.
24. The first and second respondents relied upon two affidavits in support of the proposition that there is a real and significant prospect that any further delay in resolution of the proceeding will jeopardise the prospect of a VPF scheme being established for independent cinemas in Australia. In particular, the first and second respondents submitted that, without such a scheme, independent cinemas in Australia will be at a significant competitive disadvantage to the major cinema chains.
25. As Heydon J said in AON at [137], “commercial life depends on the timely and just payment of money”. This case is no different – it requires the timely and just resolution of the disputes that are currently before the Court. Here, the negotiations in issue have been on foot since at least October 2008. And despite the existence of the litigation, a major US studio signed a VPF agreement with the third respondent on 31 January 2011. Only one of a number of other studios has indicated (through its Australian representative) that that studio was no longer prepared to discuss VPF’s whilst the litigation was on foot. Even if that email accurately reflects the views of the US studio (a matter I do not need to resolve), I do not accept the submission that “independent cinemas cannot complete a VPF scheme until [this litigation] is over”. The objective facts do not support such a contention. Moreover, given the short period of the adjournment (of say 28 days), I do not accept that the continuing period of uncertainty is so great as to justify shutting DCN out from having an opportunity to advance the case it now seeks to advance.
26. In the circumstances, I would grant DCN the adjournment of the trial for a period in the vicinity of 28 days. I will discuss the further orders with the parties.
    

I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.

Associate:

Dated: 7 February 2011