European Film Bonds AS & Ors v Lotus Holdings LLC & Ors

This is a Part 8 claim which seeks declaratory relief in relation to the determination of an issue as to whether a film entitled “Starbright” (the “Film”) is conclusively presumed to have been completed and delivered for the purposes of a Completion

The factual background is substantially agreed and the issue to be decided is a narrow one, turning essentially on when certain materials (the “Lotus Delivery Materials”) were “returned” by the First and Second and Third Defendants to the Claimants within the meaning of paragraphs 5.2 and 9 of Schedule 2 to the CGA.

The First to Third Defendants allege that the Claimants and their agent, Burmester, Duncker & Joly GmbH & Co. KG, trading as DFG Deutsche Filmversicherungs Gemeinschaft (“DFG”), having taken over the obligations to effect completion and delivery of the Film, have failed to do so. The Claimants deny this. The dispute is a subject of an arbitration in Los Angeles, California. Those arbitration proceedings are presently stayed.

By two application notices, one dated 21 November 2018 from the Third Defendant, the other dated 29 November 2018 from the First and Second Defendants, a stay of these proceedings was sought under Section 9 of the Arbitration Act 1996 and/or the

There has been no appeal from his consequential Order dated 17 September 2019. The Stay Applications and the Stay Judgment are relevant to one of the defences raised by the First to Third Defendants. I will address that in due course. If the Claimants are right about deemed acceptance, there is no longer any issue to be arbitrated and the First to Third Defendants have agreed that the pending arbitration proceedings will be dismissed.

The evidence before me consisted of the following:

At the hearing the Claimants were represented by Mr Edmund Cullen QC and the First to Third Defendants were represented by Ms Laura John and Ms Alexandra Whelan. I am grateful to them for their helpful written and oral submissions.

The First Claimant (“EFB”) is a company involved in the provision of completion guarantees in relation to film and TV projects. The remaining Claimants (the

“Underwriters”) are insurance companies which underwrite those guarantees. The Claimants are all parties to the CGA either originally or by virtue of a Deed of Amendment dated 31 January 2017, whereby the composition of the underwriting group was amended. They are represented by DFG, which entered into the CGA (and the Deed of Amendment thereto) expressly as their agent. The Underwriters are referred in the CGA as the “Guarantor”. This is in contrast to the Interparty Agreement, where simply DFG, together with EFB, are referred to as the “Guarantor”. The Underwriters were not parties to the Interparty Agreement.

The First and Second Defendants (together “Lotus”) are sales agents who are responsible for marketing and selling films to distributors around the globe. They were also parties to the CGA but, significantly, clause 1.15 provided that this was “solely for the purpose of agreeing to the provisions of Schedule 2 and 3 … and it shall have no other right or benefit pursuant to this Agreement or any obligation hereunder.”

The Third Defendant (“Larkhark”) is an investment company which is managed by one of the companies within the Ingenious Group, which among other things, promotes tax-driven film investment schemes. Larkhark was the financial producer and the main financier of the Film. It was a beneficiary under the CGA.

The Fourth Defendant (“Lip Sync”) is the other beneficiary under the CGA. It has not acknowledged service of the proceedings and has taken no part in them. On 21 November 2019, solicitors for Lip Sync wrote to the parties and to the Court saying that “in accordance with the Overriding Objective, in order to expedite matters and to

This case falls to be determined on the correct contractual interpretation of the CGA, taken together with the Interparty Agreement.

The Claimants submit it is clear from the undisputed evidence that the Lotus Delivery Materials were not returned to EFB within the time specified in paragraph 5.2 of Schedule 2 to the CGA and that, as a consequence, there has been a deemed acceptance of the Film. They seek a declaration to that effect.

The Defendants contend there has been no presumed “completion and delivery” of the Film for the following three reasons:

I have taken the summary of the relevant factual background from the Stay Judgment and the parties’ skeleton arguments. It is set out in detail in the witness statements and exhibits thereto.

The CGA and the Interparty Agreement are two of several agreements which were entered into in relation to the funding and making of the Film. The contractual framework for the Film’s production was broadly as follows.

By a Commissioning and Distribution Agreement dated 17 July 2015 (“CDA”), Starbright, Srl (“Starbright srl”) (an Italian company, that was the vehicle of the individual creators, Francesco Lucente, Olimpia Lucente and Enrico Fadani) commissioned Larkhark as “Producer” to produce, complete and deliver the Film in return for payment of a Purchase Price of approximately €18.9 million.

On the same day, under a Production Services Agreement (“PSA”), Larkhark engaged an American entity, Starbright Corporation (“Starbright Corp”), to provide the production services necessary to enable Larkhark to produce, complete and deliver the Film in accordance with the CDA. Starbright Corp was a wholly owned subsidiary of Larkhark and, at the outset, two of its four directors were representatives of Ingenious

On 22 December 2015, Starbright srl entered into the SAA with the First Defendant, Lotus Holdings LLC, whereby it agreed to become the worldwide distributor for the Film. Clause 8 of the SAA provided: “Long Form Sales Agency Agreement and

On 25 April 2016, three agreements were entered into, namely the Interparty Agreement, the CGA and the PCA. I shall consider each in turn.

This agreement was entered into by Starbright srl, Larkhark, Starbright Corp, Ingenious Broadcasting LLP, Lotus, Lip Sync, EFB and DFG. It is common ground that the Interparty Agreement is referred to at clause 1.5 of the CGA as “the SAA Side Letter”, perhaps misleadingly, given its length. It contains no express provision that DFG was entering into it as agent for any of the Underwriters, although the effect of clause 9.2 of the CGA, to which the Underwriters were parties by the agency of DFG, provided that the provisions of the CGA were subject to the provisions of the Interparty Agreement.

Clause 15.1 provides: “Notwithstanding anything to the contrary contained in the [SAA] or any other Relevant Agreement, the Parties hereby agree with each other that if the Sales Agent disputes whether Completion and Delivery under the [SAA] has taken place, the dispute shall be resolved in accordance with the procedure set out in Exhibit 1 to this Agreement…”. [emphasis added]

Exhibit 1 to the Interparty Agreement sets down a Dispute Resolution Procedure in respect of certain materials. Those materials are referred to in the Interparty Agreement as the “Sales Agent Bonded Delivery Materials”, defined in Schedule 1 and attached at Exhibit 2. They are the same materials as those identified in the CGA at

The procedure under the Interparty Agreement provides for various notices and objections to be provided between certain parties, and for the Lotus Delivery Materials to be sent back and forth. That procedure is summarised at paragraphs 27-33 of Owens 5. I shall not set it out in full here. Suffice it to say, it is a similar, but not identical, procedure to the procedure contained in Schedule 2 of the CGA, to which I shall later refer.

Clause 23.6.2 provides that, “except as otherwise stated in this Clause 15”, its provisions take precedence over the CGA in the event of conflict. The provisions in clause 15 stating otherwise, do not impact on the Substantive Issue.

EFB and DFG (expressly in its capacity as agent for the Underwriters) entered into the

The central obligations of the CGA (subject to the various exclusions and conditions set out in the CGA) are contained in clause 2.1, whereby the guarantee is provided for the benefit of the “Beneficiaries”, which are defined to include Larkhark, Lip Sync and, despite the provisions of clause 1.15 referred to in paragraph 9 above, Lotus. The inclusion of Lotus within that definition must be an error because clause 2.1(c) of the CGA makes clear that the Payment Sum (as defined in clause 2.1(c)) is payable only to Larkhark and Lip Sync.

In particular, clause 2.1(c) provides that “if the Guarantor [i.e. the Underwriters] fails to effect Sales Agent Delivery or discontinues production of the Film the Guarantor shall reimburse to Lip Sync the Lip Sync Funding [(i.e. £575,000) as set out in sub-clause 1.1A], to the Producer [Larkhark] the WIP Price (as defined in the [CDA])” plus certain costs and less certain receipts. In broad terms, the “WIP Price” is the difference between (i) the total amount of the Budget Contribution advanced by

“Sales Agent Delivery” is defined in clause 1.12, where it is a component of “completion and delivery of the Film”. By sub-clause (a), it required “tender of delivery to Sales Agent [i.e. Lotus] by 31 December 2017 subject to an extension to those dates equal to the duration of any delays caused by the occurrence of Events of Force Majeure and/or Events of Essential Element Force Majeure (up to ninety 90 days) (the “Delivery Date”) of the materials specified in the delivery schedule attached hereto as Schedule 3 and marked with an asterisk (“Sales Agent Delivery Materials”) and thereafter such action, such notices and such remedies as the Guarantor is required to take, provide and/or effect in accordance with the delivery procedure attached hereto as Schedule 2 (such delivery being defined herein as “Sales Agent Delivery”)”. In addition, sub-clause (c) sets out various other specifications for the Film.

Thus, in broad terms (and subject to the exclusions and conditions of the CGA), the

By clause 3.1 of the CGA, in consideration for the obligations undertaken by the Guarantor, EFB, on behalf of the Guarantor, is paid a guarantee fee in the amount of USD 575,000.

EFB, DFG (for itself and as agent for the Underwriters), Larkhark, Starbright srl and Starbright Corp entered into the PCA under which Larkhark, Starbright Srl and Starbright Corp each undertook various obligations and provided various warranties about the production of the Film. By clause 8.1, the Guarantor was given the right, in the event of a “Completion Bond Event”, to “take over and complete the production of the Film”.

The Film went into production. For reasons which are not material to the determination of the Substantive Issue, there were problems with the production which led to its going into ‘takeover’ under clause 8 of the PCA.

The Delivery Date under clause 1.12(a) of the CGA was extended to 31 May 2018.

On 30 May 2018, EFB delivered to Lotus in Los Angeles the Lotus Delivery Materials and sent Lotus (and others) by email a “Delivery Notice” (as defined in paragraph 1.1 of Schedule 2 to the CGA).

This had the effect that the Delivery Procedure under Schedule 2 to the CGA was triggered. There is a helpful annex attached to the Claimants’ skeleton which I append to this judgment, which summarises the required dates and the various steps taken under the Delivery Procedure (and under the similar procedure at Exhibit 1 to the

Each of these steps was subject to a time limit. As a general proposition, the second

A tight timetable was maintained in Schedule 2 to the CGA from the giving of the original Delivery Notice through to the end of any arbitral process. For example, paragraph 11 of Schedule 2 to the CGA provides that any arbitration was to be

“expedited”; two arbitrators were to be appointed within five Business Days of any Arbitration Notice, with a third to be appointed three Business Days later; the arbitration was to commence within seven Business Days thereafter; the arbitrator was to issue an award not later than one day after the conclusion of the arbitration.

Schedule 2 to the CGA also spelt out the consequences of any failure to complete a step within the specified time:

Following EFB’s delivery of the Lotus Delivery Materials and giving of the Delivery Notice on 30 May 2018, the subsequent steps of the Delivery Procedure were followed.

Pursuant to paragraph 3.1 of Schedule 2 to the CGA, the cured Lotus Delivery

That led to ‘round’ two. Lotus had “15 Business Days from and after receipt of [the Cure Notice] and the relevant Lotus Delivery Materials” in which to give an Additional Objection Notice or an Acceptance Notice: paragraph 5 of Schedule 2 to the CGA (i.e. by 6 September 2018).

On 24 September 2018 EFB gave notice to Lotus that completion and delivery of the Film had been conclusively presumed to have been effected and Lotus conclusively presumed to have issued an Acceptance Notice in accordance with paragraph 9 of Schedule 2 of the CGA. That states:

“If (i) the Sales Agent fails to give any of the notices described in paragraphs 5.1, 5.2, 8.1 or 8.2 above or (ii) the Sales Agent fails to return to EFB… the Lotus Delivery Materials within the time period specified in paragraph 5.2 above, then completion and delivery of the Film shall be conclusively presumed to have been effected and the Sales Agent shall be conclusively presumed to have issued an Acceptance Notice. EFB … shall thereupon give notice to the Beneficiaries that completion and delivery of the Film shall be conclusively presumed to have been effected and that the Sales Agent shall be conclusively presumed to have issued an Acceptance

Notice but failure to give such notice by EFB … to the Beneficiaries shall not affect the fact that completion and delivery of the Film shall be conclusively presumed to have been effected and that the Sales Agent shall be conclusively presumed to have issued an Acceptance Notice.”[emphasis added]

By a letter dated 28 September 2018 (Footnote: ⁶), Lotus disputed that there had been deemed acceptance. It contended that its obligation “to return” the Lotus Delivery Materials was met when those materials were placed in the FedEx’s International Priority Delivery service on Friday 14 September 2018. It said that “return” in the sense used in paragraph 5.2 meant “send”, and that EFB were confusing “return” with “receipt”. Also, at that time, one of the grounds of that dispute was that, properly interpreted the reference to “3 days” in paragraph 5.2 of Schedule 2 meant “3 Business Days”. But in any event, if “return” meant “receipt”, three Business Days would have meant a deadline of 17 September 2018 and the second package was not delivered until 18 September 2018, which was too late. That interpretation was not relied upon by the First to Third Defendants before me. The other points raised in that letter will be considered below.

In the light of Lotus’s position, out of an abundance of caution and without prejudice to its position that there had been deemed acceptance, EFB proceeded to redeliver the Lotus Delivery Materials. The cured Lotus Delivery Materials had to be delivered to

If, contrary to the Claimants’ case, there had not already been deemed acceptance, pursuant to paragraph 8 of the Schedule 2 to the CGA, Lotus then had “15 Business Days from and after its receipt of [the Additional Cure Notice]” in which to give an Acceptance Notice or an Arbitration Notice (i.e. by 29 October 2018). On 19 October

On the same day, this action was commenced by the Claimants, seeking declaratory relief to the effect that, by reason of the failure to return the Lotus Delivery Materials within the time specified under paragraph 5.2 of the Schedule to the CGA, completion and delivery of the Film is conclusively presumed to have been effected and Lotus is conclusively presumed to have given an Acceptance Notice.

As stated in paragraph 4 above, there was an unsuccessful attempt by the First to Third Defendants to stay these proceedings, pending the conclusion of the pending arbitration. Since then as evidenced by Order No 7 dated 30 October 2019 in the IFTA arbitration, the parties have agreed that (i) the issue of deemed acceptance should be determined in these proceedings and (ii) if it is determined in favour of the Claimants, that arbitration will be dismissed.

The Claimants’ claim is simple. They submit that it is clear that the Lotus Delivery Materials were not returned to EFB within the time specified under paragraph 5.2 of Schedule 2 to the CGA and that, as a consequence, there has been deemed acceptance of the Film. They seek a declaration to that effect.

As indicated at paragraph 14 above, three Defences are raised by the First to Third Defendants, I shall consider each in turn.

There was no dispute as to the relevant principles of contractual construction. The Supreme Court has set out the key principles in a series of cases, Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900, Arnold v Britton [2015] UKSC 36l; [2015] AC 1619 at [15], and Wood v Capita Insurance Services Ltd [2017] UKSC 24; [2017] AC 1173.

Those principles can be summarised as follows:

The material part of paragraph 5.2 of Schedule to the CGA is as follows:

“If [ ] gives an Additional Objection Notice and in such notice the Sales Agent contends that some or all of the Lotus Delivery Materials are not suitable for the making of commercially acceptable release prints or broadcast materials, to the extent that the Lotus Delivery Materials which the Sales Agent contends are not of technical quality suitable for the making of commercially acceptable release prints or broadcast material (as appropriate) have been physically delivered to the Sales Agent within three

(3)

days after the Sales Agent’s receipt of … EFB’s … written request (which request … EFB … shall make (if at all) within five (5) Business Days after receiving the Additional Objection Notice), the Sales Agent shall return those Lotus Delivery Materials requested by … EFB at the

Guarantor’s expense, in order to allow EFB… to cure the defects in “such

Lotus Delivery Materials as appropriate.” [emphasis added]

As Ms John correctly submitted, the provision is not easy to read, not least because it does not separate out the steps required in chronological order.

The proper construction of paragraph 5.2 of Schedule 2 to the CGA is that the requirement to “return” the Materials within three days meant that the Materials had to be sent by Lotus to EFB within three days (the consignment interpretation) and not received by EFB within three days (the delivery interpretation). On that basis, Lotus had to send the Lotus Delivery Materials by Saturday 15 September 2018, rather than EFB having physically to receive them by that date.

Such a construction reflects the ordinary meaning of the word “return”. When “return” is used in the context of returning an object, it means the process of sending something back to somewhere or someone. It does not connote physical receipt. The Claimants have used the expression “to be returned”, in support of their delivery interpretation, but the word is “return” in the active, rather than the passive, voice. Their reliance by analogy with CPR r 29.6 is not apt. It is being used there in a different context.

Further the consignment interpretation is consistent with the language used throughout the delivery procedure under Schedule 2 of the CGA. It is about the act of sending unless specifically stated otherwise. Ms John pointed to the following by way of illustration:

The selection of the word “return” was not accidental. It was used rather than “receipt” or “deliver” or “physically deliver” (terms which appear frequently elsewhere). If the parties had intended to require that EFB actually receive the Lotus Delivery Materials within three days, or that the Materials be delivered to EFB within three days, they could, and would, have said so. Instead the parties stipulated for “return” – the sending back of the Lotus Delivery Materials.

Ms John submitted that the construction contended for by the First to Third Defendants gives effect to the practical and commercial reality and what must have been the parties’ objective intention at the time of contracting. The exercise entailed a number of steps which would be difficult to perform in three days if “return” meant physical receipt rather than consignment. Upon receiving a notice from EFB:

In relation to the timing of the Cure Period or the Additional Cure Period, there are problems presented whichever interpretation applies. If the delivery interpretation applied, Lotus would not be aware when it was actually received and it was important for Lotus to know when that had happened, in relation to the remainder of the timetable. Ms John accepted, however, that the consignment interpretation meant that

Despite the fact that there was no prescribed method of delivery of the Lotus Delivery Materials to EFB, Ms John submitted that it was obvious, given the short timetable imposed, that the mode of delivery had to be consistent with and cognisant of that timetable. In oral argument, Ms John therefore submitted that there should be an implied term to this effect. There were various formulations advanced by her, that delivery should be “by a reasonable method consistent with and cognisant of the timetable”, “very short”, “reasonably short”, and in this regard she pointed to and relied upon the provision contained in clause 10.9(c) of the CGA, which deems a notice sent by first class post to be given 5 days after being put in the post, as indicative of a reasonable period. If Lotus used an unreasonable method of delivery, which substantially eroded EFB’s ability to cure, that would amount to a breach of such an implied term. She indicated that such an approach would be consistent with and counter-balanced by the fact that in certain scenaria on the delivery interpretation, the Sales Agent might return the Lotus Delivery Materials on a weekend to nominated premises where there was no access available, and a term could be implied permitting delivery on the next working day.

In oral argument Ms John also suggested that a possible solution would be to imply a further term of mutual notification into paragraph 5.2. This was on the ground of necessity or that it was so obvious that it did not have to be expressed. It “cut both ways” in that Lotus would have to notify EFB of despatch in the event that the consignment interpretation applied, and EFB would have to notify Lotus of receipt in the event of that the delivery notification applied. This would remove any disadvantage of a party being unaware that an important step in the process had occurred.

Finally, Ms John submitted that taken together, paragraphs 5.2 and 9 of Schedule 2 to the CGA are, in effect an exclusion clause. This is because they purport to restrict or exclude the liability of the Guarantor which would otherwise attach to its breaches of contract (such as the liability to be sued in respect of the guarantee, i.e. here in the arbitration) in circumstances where one party (Lotus) is in breach of certain technical requirements under the delivery procedure. She relies upon the second category of exclusion clause in the three categories identified in [15-003] of Chitty on Contract (33rd ed), namely “clauses which purport to exclude or restrict the liability which would otherwise attach to a breach of contract, such as the liability to be sued for breach or to be liable in damages, or which take away from the other party the right to treat as repudiated or rescind the agreement”. See e.g. Nobahar-Cookson v Hut Group Ltd [2016] EWCA Civ 128, [2016] 1 CLC 573 where the Court of Appeal considered an exclusion clause that imposed a time-bar on claims made by the injured party for breach of contract.

In such circumstances, the court should apply the principles of contractual construction applicable to exclusion clauses, which includes, as a final measure, the “contra proferentem” principle, namely that in cases of ambiguity such clauses be construed against the party seeking to rely on the exemption, on the basis that “parties do not normally give up valuable rights without making it clear that they intend to do so” [per Briggs LJ (as he then was) in Nobahar-Cookson v Hut Group Ltd [2016] at [18]].

On the basis of the consignment interpretation contended for above, there has been no breach of the timetable within paragraph 5.2 on the part of Lotus and paragraph 9 is not engaged.

The consignment interpretation is contrary to the natural and ordinary meaning of the words used. The key phrase is obviously “return to EFB”. The consignment interpretation requires one to accept that the Lotus Delivery Materials had been

“returned to EFB” when they were put into the hands of the representatives of FedEx. On any view, they had not at that point been returned to EFB. They were not returned to EFB until delivery was made (or tendered) to EFB (or to the place where EFB had directed delivery). “Return” denotes a giving back. As a matter of ordinary language, a thing is not returned until it has reached the place/person to which it was meant to be returned. For an illustration of this ordinary usage, the Court need only look to the CPR r29.6, which provides:

“(1)

The court will send the parties a pre-trial check list (listing questionnaire) for completion and return by the date specified in directions given under rule 29.2(3) unless it considers that the claim can proceed to trial without the need for a pre-trial check list.

(2)

Each party must file the completed pre-trial check list by the date specified by the court.

(3)

If no party files the completed pre-trial check list by the date specified, the court will order that unless a completed pre-trial check list is filed within 7 days from service of that order, the claim, defence and any counterclaim will be struck out without further order of the court.”

[emphasis added]

There the word “return” is being used in its ordinary sense. It is being used in the active voice. The required date of “return” is equated with the date a party must file – i.e. the date on which the relevant document is delivered. It is not the date on which the document is, for example, put in the post, as is permitted by paragraph 5.2 of CPR

PD 5A. The use of “return” in the active voice in paragraph 5.2 of Schedule 2 to the CGA does not assist the construction advanced by the First to Third Defendants.

The tight timetable contained in Schedule 2 to the CGA, from the giving of the original Delivery Notice through to the end of any arbitral process is indicative that the parties plainly intended that speed should be of the essence. The provisions in relation to the timing of the Delivery Procedure reflect the importance that the parties placed upon the Delivery Procedure being completed promptly and in accordance with the strict timetable. Each step was tightly regulated from the giving of the original Delivery Notice through to the end of any arbitral process. A procedure such as the Delivery Procedure needs to have deadlines and to make provision for what happens in the event that deadlines are not met.

In the context of the CGA, “return” is being used to denote a fixed point in time, not a process. This must be so because the date of return has important consequences for the subsequent timetable in the Delivery Procedure. Mr Cullen relied upon the following:

Moreover, all of these points must be seen in the light of the fact that the CGA does not prescribe any method of return of the Lotus Delivery Materials. The parties left it open as to how the Lotus Delivery Materials might be returned. That has important consequences. In particular:

In relation to the reason advanced by the First to Third Defendants in support of the consignment interpretation, namely the alleged difficulty in effecting a transatlantic return of the Lotus Delivery Materials in the space of three days, Mr Cullen made the following submissions:

As to the contention by the First to Third Defendants that the parties cannot have intended that a small delay caused by something outside Lotus’s control (such as a delay at customs) would have the effect of relieving the Guarantor of liability, in the instance case, there was no basis for thinking that Lotus missed the deadline because of some event outside its control. Because Lotus were acting on the instructions of Larkhark and Larkhark was dilatory in providing those instructions, no attempt was made to begin making arrangements for the return of the Lotus Delivery Materials until the evening before the deadline for their return. The evidence of Mr Joelson at paragraph 46.1 of Joelson 1 (which is not contradicted by Mr Owens), shows it would have been obvious to Lotus that return of the materials would be requested. The Lotus

The First to Third Defendants’ interpretation overlooks the balance of the Delivery Procedure. As noted above, there are numerous stages, each of which is contingent upon one or other party ensuring the receipt by the other of a notice or of materials. Thus, most importantly, EFB is required to deliver the cured Lotus Delivery Materials and a Cure Notice or an Additional Cure Notice before the end of the Cure Period or the Additional Cure Period. If it fails to do so within the prescribed time period, it will be deemed to have served an Arbitration Notice under paragraph 7 of Schedule 2 to the CGA. It will then have to go into that arbitration on the basis of the uncured materials. If it had performed cures to the late-delivered materials, it may be assumed therefore that any arbitration based on the uncured materials might conclude that completion and delivery had not been effected and the Guarantor would be liable to pay the Payment Sum. A deemed Arbitration Notice therefore may be effectively conclusive as to its liability.

Thus, EFB runs the risk of ensuring delivery of the Lotus Delivery Materials by the required deadline (including the risk of events of the kind alleged by Mr Owens, namely, delays in transit/customs). On the consignment interpretation, it also runs those risks in relation to the return of the Lotus Delivery Materials (despite this being within the control of Lotus (or its chosen representative)). In fact, the natural assumption would be that Lotus would bear those “risks” when it comes to return of the materials.

Mr Cullen submitted that having to resort to implied terms to make sense of the consignment interpretation was an act of desperation, which was necessary to make sense of the construction advanced.

The Claimants’ justification for this on the basis that “it cuts both ways” was factually incorrect. Mr Cullen submitted that there is no need for such an implication for the delivery interpretation. The party required to make the return by delivering the materials will evidently know when it has made the delivery. Either it will have delivered personally (so it will have direct personal knowledge) or it will have engaged an agent (such as FedEx) to make the delivery in which case it will be able to track the progress of the delivery online using the tracking number and print out the tracking

Once again, it was suggested by Ms John that this was counter-balanced by an alleged problem in relation to the delivery interpretation, namely the inability successfully to deliver over the weekend or a Bank Holiday because of lack of access to the designated premises. There is no equivalence. If Lotus or their agent were physically unable to deliver within the three days stipulated, because the premises were closed, EFB could hardly rely upon a failure of performance which it has rendered impossible.

By contrast, if the consignment interpretation were adopted, the absence of any prescribed mode of delivery would indeed be a “failing” in the CGA (as asserted on behalf of the First to Third Defendants). Again, the fact that an implied term would be needed in order to make the consignment interpretation conform with business common sense is fatal to their argument. This is all the more so in circumstances where the First to Third Defendants were unable clearly to formulate the term to be implied.

In relation to the assertion by the First to Third Defendants that paragraphs 2 and 9 of Schedule 2 to the CGA (in relation to “rounds” 1 and 2 respectively) amounted to an exclusion clause, this raises two issues: (a) who is the “proferens”? and (b) does it amount to an exemption clause? Here the CGA was a contract negotiated between parties of equal bargaining power, and in such circumstances, EFB is not to be regarded as the “proferens”. In any event, properly construed, these paragraphs do not amount to an exemption clause, but part of an integral part of the delivery procedure, creating a “deemed Acceptance Notice”. Paragraph 1.12 of the CGA contains the agreement of the parties as to what “Completion and Delivery of the Film” shall mean, and the Payment Sum is payable upon satisfaction of certain conditions precedent. If an Acceptance Notice is given (deemed or otherwise), there is no liability to pay the Payment Sum. A guarantee is based on risk, if the envisaged risk does not occur, there is no liability to pay.

If, which is denied, paragraphs 2 and 9 of Schedule 2 to the CGA do amount to an exclusion clause, because they ‘exclude liability to make payment’ as Briggs LJ stated

Insofar as it was suggested that the effect of the clause was to prevent Larkhark from suing for any breach, what breach is there to sue on? The relevant obligation under clause 2.1(c) of the CGA is to pay the Payment Sum. The condition for payment of the

Having carefully considered the parties’ detailed submissions, in my judgment the correct construction of the word “return” in paragraph 5 of Schedule 2 to the CGA is that advanced by the Claimants. The obligation on Lotus was to deliver the Lotus Delivery Materials to EFB, rather than commence the process by sending those materials to EFB.

I reach that conclusion for the following reasons:

Clause 9.2 of the CGA provides that “if there is a conflict between this Agreement and any provisions of the [Interparty Agreement] or a Presale NOA, the provisions of the [Interparty Agreement] or applicable Presale NOA shall prevail”. The Disputes Resolution Procedure contained in Exhibit 1 to the Interparty Agreement is included within the expression “the provisions of the [Interparty Agreement]”. The contention to the contrary by the Claimants makes no sense. The effect of clause 9.2 of the CGA is reflected in clause 23.6 of the Interparty Agreement, which states: “… if there is any conflict between this Agreement and any other agreement to which any of the Parties is a party, the provisions of this Agreement shall prevail as between the Parties hereto …” The Interparty Agreement and the CGA conflict in two important respects. These are set out by Mr Owens in paragraph 37 of Owens 5 and in summary are as follows.

First, as to the delivery procedures:

Secondly, as to the consequences of a failure to comply with the time period set down:

The Claimants seek to argue that there is no conflict in either instance set out above. They appear to do so on the basis that because the Interparty Agreement does not provide an express alternative – i.e. it does not provide a different time period (it just provides no time period) and it does not specify that there will be no deemed “completion and delivery” for any failure to comply with time periods (or for any other reason). It therefore does not conflict with the Completion Guarantee. This is a submission of no substance.

In order to see why the Interparty Agreement and the CGA conflict in the two important respects set out above, it is important to recognise the similarities between the two delivery procedures:

It is clear that this difference between the two delivery procedures is in fact a conflict.

As the Interparty Agreement takes precedence, this means that the delivery procedure under the CGA must be construed in light of its provisions. This has two consequences:

Accordingly, based on the correct construction of the CGA:

At paragraph 15 of Joelson 4, Mr Joelson appears to suggest that the above findings on contractual construction are not open to this Court in light of the findings made by Deputy Master Henderson in the Stay Judgment. To the extent that this is being suggested, it is incorrect.

Larkhark and Lotus did rely on the conflict provisions under the Interparty Agreement and CGA in their applications to the Court for a stay and made submissions that these agreements conflicted in important respects. However, those submissions were made to support the argument that the arbitration agreements under the Interparty Agreement and CGA conflicted and, as a consequence, the arbitration agreement under the Interparty Agreement took precedence.

Deputy Master Henderson’s findings related to those two (severable) arbitration agreements. At [88], [96] and [145-146] of the Stay Judgment, he accepted that the Interparty Agreement and CGA provided for the former to take precedence in cases of conflict: Judgment at [88], [96] and [145]-[146]. However, he found at [213]-[220], that there was no conflict between the two arbitration agreements and, accordingly, the arbitration agreement under the Interparty Agreement did not take precedence over that under the CGA. He stated at [220]:

“In my judgment there was no conflict between the two arbitration agreements. They were made between different sets of parties and covered different disputes. The arbitration agreement in the CGA was an agreement between its parties as to the arbitration of disputes between them as to completion and delivery of the Film under the provisions of the CGA, possibly as those provisions might be modified by the provisions of the [Interparty Agreement]. The arbitration agreement in clause 15 of and Exhibit 1 to the [Interparty Agreement] was an agreement between its parties (not being all the parties to the CGA arbitration agreement) that if the Lotus Entities disputed whether Completion and Delivery had taken place under the SAA, that dispute should be resolved by the procedure set out in Exhibit 1, which included the arbitration agreement.”

His reasoning in that paragraph specifically related to the scope of the arbitration agreements, which, he found, were between different parties and concerned disputes under different contracts (albeit about the same subject matter). In fact, at [220] the Deputy Master expressly left open the possibility that the provisions of the Completion

In reaching the conclusion, at [216], he considered the issue of who were the parties to the arbitration agreement under Exhibit 1 to the Interparty Agreement and states as follows:

“216.

On their face the opening words of Exhibit 1 narrow down the parties to the arbitration agreement in the SA IPA to the Sales Agent (i.e. the Lotus Entities), the Commissioning Distributor (i.e. Starbright Srl) and the Guarantor (i.e. DFG). However, the terms of that apparent narrowing down are inconsistent with the opening words of paragraph (f) of Exhibit 1 which provide that in the event that “any party” (and it is unclear whether that refers to all the parties to the [Interparty Agreement] or only the parties mentioned in the opening paragraph of Exhibit 1) elects or is deemed to have elected to submit a dispute concerning completion and delivery to binding arbitration then the Guarantor (i.e. DFG), Producer (i.e. Larkhark) and Sales Agent (i.e. the Lotus Entities) should thereafter initiate an arbitration proceeding. For present purposes nothing turns on this inconsistency and I do not pursue it.

Whilst it is accepted that the Stay Judgment contains a finding as to the relationship between the arbitration agreements under the CGA and the Interparty Agreement and that those dispute resolution procedures in the latter are irrelevant to these proceedings, the issue before the Court is quite different: it is whether the relevant parts of the delivery procedures under the Interparty Agreement and the CGA conflict. The Stay Judgment contains no finding on that matter; to the contrary, it left that open.

The Claimants appear to suggest that the First to Third Defendants are unable to rely on any rights under the Interparty Agreement because it would somehow be unconscionable to do so and/or they are estopped from doing so in circumstances where Lotus failed to assert its rights under the Interparty Agreement during the delivery procedure. (Footnote: ¹²)

That factual assertion is incorrect for the reasons set out by Mr Owens in paragraphs 44 to 49 of Owens 5 (and at Appendix A thereto). In short, Lotus did assert its rights under the Interparty Agreement and it expressly made it clear that it was not waiving any of its rights.

As Ms John accepted, in response to paragraph 63 of the Claimants’ skeleton, the principles applicable to an estoppel by convention were set out by the Court of Appeal in Tinkler v HMRC [2019] EWCA Civ 1392 as follows:

“54.

The parties were agreed that the principles governing estoppel by convention arising out of non-contractual dealings are conveniently

summarised in the judgment of Briggs J in HMRC v Benchdollar Limited and Ors [2009] EWHC 1310 (Ch), [2010] 1 All ER 174 at [52]. This summary was approved by the Court of Appeal in Blindley Heath Investments Ltd & Anor v Bass [2015] EWCA Civ 1023, [2017] Ch 389 at [91], subject to one qualification explained at [92]. If that qualification is made to the first paragraph of the summary, the amended summary is as follows:

(1)

It is not enough that the common assumption upon which the estoppel is based is merely understood by the parties in the same way. The assumption must be shown to have crossed the line in a manner sufficient to manifest an assent to the assumption.

(2)

The expression of the common assumption by the party alleged to be estopped must be such that he may properly be said to have assumed some element of responsibility for it, in the sense of conveying to the other party an understanding that he expected the other party to rely on it.

(3)

The person alleging the estoppel must in fact have relied upon the common assumption, to a sufficient extent, rather than merely upon his own independent view of the matter.

(4)

That reliance must have occurred in connection with some subsequent mutual dealing between the parties.

(5)

Some detriment must thereby have been suffered by the person alleging the estoppel, or benefit thereby have been conferred upon the person alleged to be estopped, sufficient to make it unjust or unconscionable for the latter to assert the true legal (or factual) position.”

In the present case the correspondence and notices from Lotus present a mixed picture (see paragraphs 44-49 of Owens 5), although Ms John accepted that no Objection Notice had ever been served under the Interparty Agreement. There was, therefore, no common assumption. That being the case, none of the other elements were satisfied.

In any event this argument goes nowhere for the purpose of these proceedings.

In paragraph 55 of their skeleton argument, the First to Third Defendants accepted that the Underwriters are not party to the Interparty Agreement and stated “…in relying on the Interparty Agreement, the First to Third Defendants do not submit the contrary. Rather they rely on the fact that the Underwriters were bound by the terms of the CGA, which they agreed could be modified by the Interparty Agreement in cases of conflict.” That reflected the evidence of Mr Owens at paragraph 68 of Owens 1. In oral argument, however, Ms John also relied upon clause 9.5 of the CGA. That provides: “The Agent [i.e. DFG] represents and warrants to the Beneficiaries that it has been appointed as the agent of each of the Underwriters to enter into the Transaction Agreements and to bind the Underwriters to the terms of the Transaction Agreements (as executed)…” Under clause 9.4 of the CGA, “Transaction Agreements” include the Interparty Agreement, and the provisions of Exhibit 1. It was unclear whether she was thereby contending that in fact the Underwriters were, as a result, parties to the Interparty Agreement. That was not the earlier stance taken on behalf of the First to Third Defendants at the hearing of the Stay Applications. In any event, she submitted that if the terms of the CGA were modified by the Interparty Agreement (for the reasons earlier set out above), there can be no suggestion that the Underwriters were not bound by those terms as modified.

The First to Third Defendants’ second argument that the delivery procedures in the Interparty Agreement and the CGA conflict, and that the latter prevails is groundless and is in any event not open to the First to Third Defendants since (i) it was advanced

The First to Third Defendants’ proposition rests on the fact that clause 9.2 of the CGA provides that “if there is a conflict between this Agreement and any provisions of the [Interparty Agreement] or a Presale NOA, the provisions of the [Interparty Agreement] or applicable Presale NOA shall prevail”. Clause 9.1 of the CGA provides that “For the avoidance of doubt, the Parties hereby agree that this Agreement shall include … the Schedules all of which shall be fully enforceable in accordance with their terms.” Thus, the reference to “this Agreement” includes Schedule 2 of the CGA.

There is a similar provision at clause 23.6 of the Interparty Agreement: “… if there is any conflict between this Agreement and any other agreement to which any of the Parties is a party, the provisions of this Agreement shall prevail as between the Parties hereto…..” It is unclear what (if anything) this could add to the First to Third Defendants’ argument but this provision is irrelevant since (i) the Underwriters were not parties to the Interparty Agreement and (ii) the term “Agreement” as used in the

Insofar as the First to Third Defendants now contend that by reason of clause 9.5 of the CGA, the Underwriters were parties to the Interparty Agreement:

Even assuming in the First to Third Defendants’ favour that Exhibit 1 to the Interparty Agreement was capable of giving rise to a “conflict” for the purposes of clause 9.2 of the CGA, the hopelessness of the argument can be seen in the simple fact that there is no conflict in the relevant provisions.

Exhibit 1 to the Interparty Agreement sets out a “Dispute Resolution Procedure” which has some broad similarities to the Delivery Procedure under Schedule 2 to the CGA. It also has a number of differences. It is sufficient to note that Exhibit 1 to the Interparty Agreement does not have any prescribed time for the return of the delivered materials; nor does it have any provision equivalent to paragraphs 2 and 9 of Schedule 2 to the CGA, whereby a failure to comply with a timetable requirement gives rise to a deemed acceptance. Indeed, the Interparty Agreement scarcely deals with the return of the materials at all. It gives no express entitlement to request the return of materials, still less does it stipulate a date by which such request must be made or complied with. The only references to the return of materials are in relation to the timing of the Cure Notice and Additional Cure Notice, each of which is required a specified number of days after the latter of receipt of the Objection Notice (or Additional Objection Notice), the Response (or Second Response) (if applicable) and “return of the defective materials if so required by Guarantor”: see paragraphs 1.b.i and 1.d.i. of Exhibit 1 of the Interparty Agreement.

For that simple reason alone, there is no “conflict”. Schedule 2 of the CGA makes express provision for certain matters in relation to which the Interparty Agreement says nothing. The suggestion that this means that there is a “conflict” such that the Interparty Agreement’s silence must be the prevailing provision is absurd. The Interparty Agreement does not provide that the Guarantor should have to pay the Payment Sum in the event that completion and delivery is not effected. Does that mean that it is in conflict with the CGA such that the absence of any such requirement in the Interparty Agreement should prevail over the express provision of the CGA?

Schedule 2 to the CGA and Exhibit 1 to the Interparty Agreement may make different provisions, but that does not mean that they are in conflict. They will only be in conflict if circumstances arise where a party cannot perform under contract A without being in breach of its obligation under contract B. In those circumstances, if contract B takes precedence, then the obligation under contract A may be modified or discharged accordingly. That is simply not the position in relation to the relevant provisions under Schedule 2 to the CGA.

Aside from this basic point, the First to Third Defendants’ reliance on Exhibit 1 to the Interparty Agreement must fail for a number of other reasons, as follows.

The proposition that Exhibit 1 to the Interparty Agreement took precedence over Schedule 2 to the CGA was a key plank of the Stay Applications. That application was for a stay on the basis that “the proceedings fall within the scope of arbitration agreements” [plural]. As explained in the evidence in support, contained in Owens 1 and the First to Third Defendants’ skeleton argument, their contention was that the dispute fell within Exhibit 1 of the Interparty Agreement and this took precedence over Schedule 2 to the CGA. Thus, the issue put squarely before the Court on the Stay Applications was whether the dispute fell within Exhibit 1 to the Interparty Agreement and whether it took precedence over the CGA.

An applicant for a stay under Section 9 of the Arbitration Act 1996 must prove that (i) it and the claimant in the action are parties to an agreement to arbitrate; and (ii) the dispute in the litigation is a matter which falls within the scope of the arbitration clause. If the applicant is able to discharge that burden, then a stay must be granted. On an application under Section 9 of the Arbitration Act 1996, the Court has a range of options. Under CPR r 62.8(3), “where a question arises [under a Section 9 application] as to whether (a) an arbitration agreement has been concluded; or (b) the dispute which is the subject-matter of the proceedings falls within the terms of such an agreement, the court may decide that question or give directions to enable it to be decided and may order the proceedings to be stayed pending its decision”.

In Albon (t/a NA Carriage Co) v Naza Motor Trading Sdn Bhd [2007] EWHC 665 (Ch); [2007] 2 All E.R. 1075, Lightman J said at paragraph [16]:

“Guidelines were laid down by HHJ Humphrey Lloyd QC in Birse v St David at first instance (1999) BLR 19 and (though the decision of the judge was reversed) his statement of the guidelines was approved on appeal by the Court of Appeal [2000] 1 Lloyds Rep 57 and again by the Court of Appeal in the later case of Al Naimi v Islamic Press Agency [2000] 1 Ll.LR 522 ("Al Naimi"). These guidelines are to the effect that on an application for a stay such as the present where the conclusion of the arbitration agreement is in issue, there are four options open to the court: (1) (where it is possible to do so) to decide the issue on the available evidence presently before the court that the arbitration agreement was made and grant the stay; (2) to give directions for the trial by the court of the issue; (3) to stay the proceedings on the basis that the arbitrator will decide the issue and (4) (where it is possible to do so) to decide the issue on the available evidence that the arbitration agreement was not made and dismiss the application for the stay. The Court of Appeal adopted the second of these options. The guidelines and the decision of the Court of Appeal establish that on an application under Section 9(1) of the 1996 Act the court can try and (subject to one qualification) should decide the issue whether the arbitration agreement was concluded. The minor qualification in respect of which the guidelines are not in accord with the construction which I have adopted is in respect of the third of the guidelines. Where there is an issue which the court cannot resolve on the available evidence on the application as to whether the arbitration agreement was concluded, the court indeed can stay the proceedings so that the arbitrators can decide the issue, but only by exercising its inherent jurisdiction and not by exercising any jurisdiction under Section 9”.

Lightman J’s approach was approved by the Supreme Court in AES Ust-Kamenogorsk Hydropower Plant LLP v Ust-Kamenogorsk Hydropower Plant JSC [2013] UKSC 35 [2013] 1 W.L.R. 1889, where Lord Mance said:

“52.

… Section 9 runs contrary to JSC's general case, since it represents a situation in which the court, rather than the arbitral tribunal, rules in the first instance on arbitral jurisdiction, and does so bindingly. The Court of Appeal in Fiona Trust and Holding Corp v Privalov [2007] Bus LR 684 , para 36 and Lightman J in Albon (trading as NA Carriage Co) v Naza Motor Trading Sdn Bhd (No 3) [2007] 2 All ER 1075 , paras 14–20 correctly so held.

53.

However, JSC relies on Section 9, as supplementing its case on the general scheme of the 1996 Act and on the particular implications of sections such as Sections 30, 32, 67 and 72, in another respect. Given that the court under Section 9 determines the existence or otherwise of arbitral jurisdiction conclusively and at the outset, JSC points out that this is expressly provided by the Act.” [emphasis added]

Thus, in a case where the Court opts to decide the issue, that decision, although made at an interim stage in the proceedings, is binding and conclusive.

In the Stay Judgment, the Court opted (without opposition) to decide the issue as to the scope of the arbitration clauses relied upon by the First to Third Defendants (the “Scope Issue”): see [20.2] and [25]. Much of the Stay Judgment is then concerned with the effect of any prior determination of the arbitrator as to his jurisdiction and with the question of whether the power to determine any issue as to scope rests exclusively with the arbitrator. The Court then made determinations in relation to the specific questions as to whether the dispute fell within the scope of Exhibit 1 to the Interparty Agreement and whether that took precedence over the CGA: see [213] to [222], and in particular [220] of the Stay Judgment (recited at paragraph 92 above).

The Court there reached a conclusive and binding determination that the dispute resolution procedure under Exhibit 1 to the Interparty Agreement and Schedule 2 to the CGA are not in conflict: they are intended to deal with two different situations and disputes. That determination is binding as a matter of res judicata and/or issue estoppel: see Virgin Atlantic Airways Limited v Zodiac Seats UK Limited [2013] UKSC 46 [2014] A.C. 160 at [17].

Quite apart from the estoppel, Mr Cullen submitted the reasoning of the Court is important and is unassailable and, when seen in the context of the other relevant provisions, shows clearly that the parties did not intend that the provisions of Exhibit 1 to the Interparty Agreement would ever “prevail over” Schedule 2 to the CGA.

Agreement only related to disputes about completion and delivery of the

“Sales Agent Bonded Delivery Materials” (i.e., the items marked as bonded at Exhibit 2 to the Interparty Agreement). It does not encompass any dispute in relation to the “Approved Picture Specifications” (as defined in paragraph 1.1.2 of Schedule 2 to the CGA), which include certain specific elements set out at clauses 1.10 and 1.12(c) of the CGA: e.g., the identity of the director and one of the lead actors and the Film being based on an identified screenplay;

This conclusion should hardly be surprising, and it is consistent with the other features of the CGA and the Interparty Agreement. For example, as already indicated at paragraph 104 above, Exhibit 1 to the Interparty Agreement does not even fall within the meaning of “the Agreement”. Thus, when clause 9.2 refers to “the SAA Side Letter” [i.e. the Interparty Agreement] there is no reason to interpret that as including a reference to Exhibit 1 to the Interparty Agreement. There is in fact every reason not to interpret it in such a way (just as clause 23.6.2 of the Interparty Agreement, when referring to “this Agreement” does not refer to Exhibit 1). That is so for the following reasons:

Thus, the provisions of Schedule 2 to the CGA cannot be in conflict with Exhibit 1 to the Interparty Agreement because they will always relate to separate procedures with different parties and different disputes.

As is apparent from paragraph 51 of their skeleton argument, the First to Third Defendants accept that there is a binding finding that the arbitration agreements are separate. However, they appear to argue that somehow the procedures under each may not be. That is impossible. The inevitable consequence of the finding that the arbitration agreements are separate is that the two procedures are separate. The procedures are part and parcel of the agreements to arbitrate (containing provisions relating to, e.g., the giving of arbitration notices, etc.). The arbitration clauses are in paragraph 1 of each of them and everything that follows in each of them flows (separately) from each arbitration clause. The fact remains that clause 15.1 of the Interparty Agreement expressly provides that the dispute procedure at Exhibit 1 to the Interparty Agreement applies (and applies only) to a dispute about completion and delivery under the SAA Agreement and a dispute between only the First Defendant and Starbright srl.

In this context, the First to Third Defendants also relied upon paragraph 216 of the Stay Judgment and the provisions of Exhibit 1 to the Interparty Agreement. It was not clear what the point was but, for the sake of completeness:

As a further point, if and to the extent that it was otherwise possible for the First to

It is clear from the evidence that, from Lotus’s original assertion that its Objection Notice was served under the CGA, the parties proceeded on the basis of the common and agreed assumption that the timetable and procedure of Schedule 2 to the CGA applied and not that of Exhibit 1 to the Interparty Agreement. This can be seen not only from the correspondence referred to above but also from the entirety of their compliance with the timetable of Schedule 2 to the CGA (until Lotus’s failure to return the Lotus Delivery Materials on time in ‘round’ two). Moreover, this went beyond merely acting in accordance with the timetable. For example, Lotus has compelled payment for the cost of return of the materials, an entitlement which only arose under Schedule 2 to the CGA: see Mr Joelson’s evidence at paragraph 67 of Joelson 1 and Lotus’s letter to EFB dated 13 July 2018.

Moreover, on the facts of this case, Lotus only ever invoked the Delivery Procedure under Schedule 2 to the CGA. In particular:

Thus, since only the Delivery Procedure under Schedule 2 of the CGA has ever been invoked, there can be no question of anything in the Interparty Agreement conflicting with it: the provisions of Exhibit 1 to the Interparty Agreement are simply inoperative.

For EFB, acting on the basis of this common assumption meant that it had to comply throughout with the timetable under Schedule 2 of the CGA in circumstances where the equivalents under Exhibit 1 to the Interparty Agreement either did not impose a time limit at all (e.g., for the making of a request for return of materials) or gave a considerably longer period for compliance. Thus, for example, the Cure Period under Exhibit 1 to the Interparty Agreement was 30 Business Days in contrast to the 30 days allowed under Schedule 2 to the CGA. In effect, by complying with Schedule 2 of the CGA, EFB had to return cured materials by 15 August 2018, rather than 28 August 2018 as would have been permitted under the Interparty Agreement. It is not difficult to predict the First to Third Defendants’ reaction if EFB had failed to deliver the cured materials by 15 August 2018.

In the circumstances, Mr Cullen submitted that it is not now open to the First to Third Defendants to assert that in fact the timetable (or rather the absence of a timetable and the absence of a deemed consent provision) of Exhibit 1 to the Interparty Agreement should apply after all.

The net result of the First to Third Defendants’ position in relation to this aspect of the case is that they are suggesting that the parties intended that Schedule 2 to the CGA should be discarded in its entirety in favour of Exhibit 1 of the Interparty Agreement. This is despite the fact that Lotus was only joined to the CGA for the purpose of agreeing Schedule 2 and the related Schedule 3. Moreover in clause 9.1 of the CGA the parties expressly stated that “the Parties hereby agree that this Agreement shall include the Recitals set forth in clause 1 and the Schedules all of which shall be fully enforceable in accordance with their terms”. According to the First to Third Defendants’ case, the parties did not in fact intend this at all.

I shall take the three aspects in turn.

In my judgment, it is important carefully to examine the Deputy Master’s conclusion at [220], which is binding on the parties:

“In my judgment there was no conflict between the two arbitration agreements. They were made between different sets of parties and covered different disputes. The arbitration agreement in the CGA was an agreement between its parties as to the arbitration of disputes between them as to completion and delivery of the Film under the provisions of the CGA, possibly as those provisions might be modified by the provisions of the [Interparty Agreement]. The arbitration agreement in clause 15 of and Exhibit 1 to the [Interparty Agreement] was an agreement between its parties (not being all the parties to the CGA arbitration agreement) that if the Lotus Entities disputed whether Completion and Delivery had taken place under the SAA, that dispute should be resolved by the procedure set out in Exhibit 1, which included the arbitration agreement.”

He found that there was no conflict between the two arbitration agreements because they were made between different sets of parties and covered different disputes. He identified exactly what those different disputes were under each agreement. Those aspects are clearly binding as a matter of res judicata and/or issue estoppel; see Virgin Atlantic Airways Limited v Zodiac Seats UK Limited [2013] UKSC 46 [2014] A.C. 160 at [17].

I would add that in [215] and [222] of the Stay Judgment, he expressly found, in accordance with the case then advanced by the First to Third Defendants that the Underwriters were not parties to the Interparty Agreement. That formed an important part of his judgment. It was on that basis that they sought to persuade the Court to grant a stay under its inherent jurisdiction. In my judgment, in the light of that finding, it is not open to those Defendants to argue the contrary position now. If I am wrong on that, under the provisions of CPR r14.1(5), the First to Third Defendants would still need to seek permission from the Court to resile from their admission that the Underwriters are not parties to the Interparty Agreement. No application was made by the First to Third Defendants, but for the reasons advanced by Mr Cullen, in paragraph 104(5) above, had it been, I would not have granted it.

I can see considerable force in the submission made by Mr Cullen that the inevitable consequence of the finding that the arbitration agreements are separate is that the two procedures are also separate, and it is not possible to argue that somehow the procedures under each may not be. The arbitration clauses are in paragraph 1 of each of them and everything that follows in each of them flows (separately) from each arbitration clause The procedures are part and parcel of the agreements to arbitrate (containing provisions relating to, e.g., the giving of arbitration notices).

However, I note the passage at [220]: “The arbitration agreement in the CGA was an agreement between its parties as to the arbitration of disputes between them as to completion and delivery of the Film under the provisions of the CGA, possibly as those provisions might be modified by the provisions of the [Interparty Agreement].” [emphasis added]. As Ms John contends, correctly in my view, it seems to me that by those words, the Deputy Master was expressly leaving open the possibility for the First to Third Defendants to argue that the provisions in relation to completion and delivery in the CGA, including the provisions in Schedule 2, might be modified by the provisions of the Interparty Agreement.

That conclusion is fortified in my view, by the fact that in his judgment, at [3] he identified what he described as the “Substantive Issue”, namely the issue before me, and nowhere in the Stay Judgment does he suggest that, in the light of his findings at [220], the defences that could be advanced in relation to the Substantive Issue, would, as a result of his judgment, preclude any argument that the procedures contained in Schedule 2 to the CGA, have been modified by Exhibit 1 of the Interparty Agreement. Indeed, the words used in [220], emphasised above, indicate the contrary.

In those circumstances, I reject the argument that the Stay Judgment prevents the First to Third Defendants from advancing their second defence.

The Deputy Master did not appear to regard the First to Third Defendants from being estopped from being able to argue that the arbitration provision in Exhibit 1 to the Interparty Agreement took precedence over that contained in Schedule 2 of the CGA, despite the points raised in paragraph 67 of Joelson 1, which was in evidence before him and which stated:

“I would also point out that the parties have throughout conducted themselves on the common and agreed basis that the provisions of Schedule 2 to the CGA were applicable and governed the procedure with which they engaged … For Lotus now to assert that somehow its provisions are inapplicable is (a) wrong and (b) unconscionable. I consider that Lotus is estopped from so doing.”

Although he did not expressly address the point in the Stay Judgment, if he regarded that as the position, it would have been unnecessary for him to embark on the detailed analysis he conducted at [213]-[220].

Does the fact that the Deputy Master was considering only the rival arbitration agreements in the CGA and the Interparty Agreement, rather than Substantive Issue before me, make a difference? Having found that it remains open to the First to Third Defendants to argue that the provisions in relation to completion and delivery, including the provisions in Schedule 2, might be modified by the provisions of the Interparty Agreement, I take the view I should approach the matter afresh.

It seems to me that the First to Third Defendants have adopted a somewhat inconsistent approach in their communications with EFB in relation to the steps taken and the agreements on which they relied in relation thereto. If one looks at the way Lotus proceeded, it clearly had in mind adhering to the provisions of Schedule 2 to the CGA,

In my judgment, those occasional references to and reliance upon the Interparty Agreement are sufficient to prevent an estoppel by convention arising. The equivocal behaviour by Lotus is insufficient to give rise to the necessary common assumption. On several occasions, Lotus were reserving the right to rely upon the provisions of the Interparty Agreement. In those circumstances, applying the second principle in [54] of Tinkler v HMRC, given the referral to and the reservations of rights by Lotus in relation to the Interparty Agreement, I do not regard Lotus as to have “assumed some element of responsibility for it, in the sense of conveying to the other party an understanding that he expected the other party to rely on it.”

Therefore, despite the points powerfully made by Mr Cullen, summarised at paragraphs 123-128 above, I believe that he fails properly to take account of the several references to and reliance upon the provisions of the Interparty Agreement to which I have

I therefore turn to the second defence. Having carefully considered both parties’ submissions, I have reached the firm conclusion that there is no merit whatsoever in this defence.

I reach that conclusion principally for the following reasons:

I therefore reject the second defence.

The law on penalty clauses was reviewed by the Supreme Court in Cavendish Square Holding BV v Makdessi [2015] UKSC 67, [2016] AC 1172. Both parties referred to and relied upon certain passages in the judgment. It set out the applicable principles as to whether a clause qualifies as a penalty, which can be summarised as follows.

The penalty doctrine applies:

It may apply to provisions that result in a party not receiving (or forfeiting an entitlement to) a payment: see Cavendish at [154]-[156] per Lord Mance and [226]-

On the facts of the Cavendish case, the Supreme Court unanimously held that a clause (“clause 5.1”) in a substantial commercial contract, which withheld payment of a seller’s right to receive certain parts of the purchase price, in the event he was in breach of certain restrictive covenants, was a price adjustment clause and did not amount to a penalty. Lords Neuberger and Sumption (Lord Carnwarth agreeing) found at [73] that the penalty doctrine was not even engaged. Whether it was, depended on the right of which the contract breaker was being deprived and the basis on which he is being deprived of it. They stated:

“It is not a proper function of the penalty rule to empower the courts to review the fairness of the parties’ primary obligations, such as the consideration promised for a given standard of performance … There is no reason in principle why a contract should not provide for a party to earn his remuneration, or part of it, by performing his obligations. If as a result his remuneration is reduced upon his non-performance, there is no reason to regard that outcome as penal.”

After considering the authorities, Lord Mance found that there was no penal presumption and at [181] said:

“… the question still remains whether clause 5.1 can and should be condemned as penal, on the grounds that it is extravagant, exorbitant or unconscionable in its nature and impact. Not without initial hesitation, and despite the powerful points made by Mr Bloch I have come to the conclusion that, in this particular agreement made deliberately and advisedly between informed and sophisticated parties, the court should answer this question in the negative, and hold that clause 5.1 is enforceable.. Its effect was to revise the basic price calculation for the shares which had been agreed to be sold, and, so viewed in the context of a carefully negotiated agreement between informed and legally advised parties at arm’s length, I do not consider it can or should be regarded as extravagant, exorbitant or unconscionable.”

At [270] Lord Hodge said that there was a strong argument that in substance also regarded clause 5.1 as a primary obligation, but “even were it correct to analyse clause 5.1 as a secondary provision operating on breach of the seller’s primary obligation, I am satisfied that it is not an unenforceable penalty clause …” He then gave six reasons for his conclusion at [271]-[277]. Lord Clarke said at [291] that, like Lord Hodge he had an open mind as to whether clause 5.1 was capable of constituting a penalty, but nonetheless allowed the appeal on the basis that, even if the doctrine applied, it was not unenforceable. Lord Toulson agreed with Lord Mance at [181] and Lord Hodge at [270].

Mr Cullen also relied upon [31] per Lords Neuberger and Sumption as follows:

“31.

In our opinion, the law relating to penalties has become the prisoner of artificial categorisation, itself the result of unsatisfactory distinctions: between a penalty and genuine pre-estimate of loss, and between a genuine pre-estimate of loss and a deterrent. These distinctions originate in an overliteral reading of Lord Dunedin's four tests and a tendency to treat them as almost immutable rules of general application which exhaust the field. In Legione v Hateley (1983) 152 CLR 406, 445, Mason and Deane JJ defined a penalty as follows:

“A penalty, as its name suggests, is in the nature of a punishment for nonobservance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation

…”

All definition is treacherous as applied to such a protean concept. This one can fairly be said to be too wide in the sense that it appears to be apt to cover many provisions which would not be penalties (for example most, if not all, forfeiture clauses). However, in so far as it refers to “punishment” and “an additional or different liability” as opposed to “in terrorem” and “genuine pre-estimate of loss”, this definition seems to us to get closer to the concept of a penalty than any other definition we have seen. The real question when a contractual provision is challenged as a penalty is whether it is penal, not whether it is a pre-estimate of loss. These are not natural opposites or mutually exclusive categories. A damages clause may be neither or both. The fact that the clause is not a pre-estimate of loss does not therefore, at any rate without more, mean that it is penal. To describe it as a deterrent (or, to use the Latin equivalent, in terrorem) does not add anything. A deterrent provision in a contract is simply one species of provision designed to influence the conduct of the party potentially affected. It is no different in this respect from a contractual inducement. Neither is it inherently penal or contrary to the policy of the law. The question whether it is enforceable should depend on whether the means by which the contracting party's conduct is to be influenced are “unconscionable” or

(which will usually amount to the same thing) “extravagant” by reference to some norm.”

The test for determining whether a contractual clause amounts to penalty is as follows:

The penalty doctrine applies to paragraph 9 of Schedule 2 to the CGA because:

Paragraph 9 is aimed at ensuring the performance of, inter alia, the requirements imposed by paragraph 5.2 of Schedule 2 to the CGA. It is accepted that:

In contrast, the potential consequences of a breach of paragraph 5.2 are, for Larkhark, Lip Sync, and Lotus, significant. They are the loss of the protection of the guarantee entirely and the withholding of any sum that would otherwise be owed by the Guarantors.

These consequences are out of all proportion to any legitimate interest the Claimants may have in ensuring performance and do not represent a genuine pre-estimate of the loss suffered by the Claimants as a result of any breach of paragraph 5.2 of Schedule 2 to the CGA. It would have been clear at the time of the contract that in all cases in which paragraph 9 is engaged, it has the effect of depriving Larkhark, Lip Sync, and Lotus of the benefit of the guarantee, for which USD 575,000 had been paid. Plainly that sum is in no way referable to EFB’s (or the Guarantor’s) interest in ensuring compliance with the timetabling requirement under paragraph 5.2 and in securing compensation for breach of that requirement. As above, any damages to which the Claimants might be entitled as a result of this breach are likely to be minimal.

It would also have been clear at the time of the contract that the sum liable to be withheld would fluctuate and that this fluctuation would have nothing to do with the breach in question (e.g. of paragraph 5.2 of Schedule 2 to the CGA). That is because the amount of the sum liable to be withheld would depend on Larkhark’s (and Lip Sync’s) entitlement under the Guarantee, which would in turn depend on whether EFB and the Guarantor had complied with myriad other obligations under the agreements between the parties (including various technical requirements for the Film). The fluctuating nature of the sum is, in and of itself, a strong indication that the sum is not a genuine pre-estimate of the loss suffered by the Claimants as a result of the breach of paragraph 5.2 of Schedule 2 to the CGA: see Public Works Commissioner v Hills [1906] AC 368, 376. In Public Works, the House of Lords considered a provision of a railway construction contract which provided that in the event of non-completion of the line within a specified time period, the defendant would be entitled to retain, as ‘liquidated damages’ for breach, certain percentages of moneys otherwise payable to the plaintiff and held as security under the contract and two other contracts. The House of Lords held that the sum in question was not a genuine pre-estimate of loss and therefore it was not liquidated damages. Lord Dunedin explained at 376:

“The determining factor is that the sum is not a definite sum, but is liable to great fluctuation in amount dependent on events not connected with the fulfilment of this contract.”

The decision was followed by the Privy Council in Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573 at 582E (in the context of provision providing for forfeiture of a deposit).

It would have been clear at the time of entering into the contract that paragraph 9 could have the effect of depriving Larkhark and Lip Sync of a potentially significant sum, far in excess of the premium paid. It would have been understood that the production of the Film was both expensive and uncertain. Indeed, that is reflected in the fact that the Guarantee was obtained and a significant sum was paid for it. Ms John accepted that specific sums are not relevant to the question of construction, because the question as to whether a clause is a penalty has to be assessed at the time the contract is made. The potential amount of the sum to be withheld, which would have been know when the agreement was made, however, is a clear indication that it is not a genuine pre-estimate of loss and, indeed, it is not in any way referable to EFB’s (or the Guarantor’s) interest in ensuring compliance with a timetabling requirement for return of the Lotus Delivery Materials and in securing compensation for breach of that requirement. In this regard, it was submitted that if the Claimants were simply entitled to damages for breach of paragraph 5.2 of Schedule 2 to the CGA, the sum to which they would be entitled would likely be minimal and certainly nothing comparable to the amount of the sum liable to be withheld.

Both the loss of the benefit of the guarantee and the specific sums which may be withheld as a result of a failure to comply with paragraph 5.2 of Schedule 2 to the CGA are wholly disproportionate to and/or unconscionable in comparison to any legitimate interest the Claimants may have in performance of that provision. That is particularly so given that the defects in the Film (in respect of which it is alleged that the Guarantor is liable) are not limited to the technical quality of the Lotus Delivery Materials, but also concern substantive failures to comply with the contractual specifications. For these reasons, paragraph 9 of Schedule 2 to the CGA is a penalty.

Finally, it is noted that the party with the relevant obligation (Lotus, which was required to return the Lotus Delivery Materials) and the party who will suffer some of the consequences if that obligation is breached are not the same party. Paragraph 9 of Schedule 2 to the CGA has the effect of depriving Larkhark, Lip Sync, and Lotus of the benefit of the Guarantee, but it is only Larkhark and Lip Sync that are entitled to payment of the Payment Sum under clause 2.1(c) of the Guarantee. However, it is denied, if it be submitted, that this has the effect that paragraph 9 of Schedule 2 to the CGA cannot be a penalty.

First, Lotus does suffer the main consequence of breach of paragraph 5.2 of Schedule 2 to the CGA, namely loss of the benefit of the guarantee. This is not simply loss of a right to arbitrate, it is the loss to receive the Payment Sum.

Second, and in any event, the origins of, and justifications for, the penalty doctrine provide no reason for requiring that the breaching party and the party suffering the penalty be one and the same. The underlying justification for the penalty doctrine is that contract law does not allow an innocent party to impose punishment for breach and thus clauses which do impose a punishment – i.e. penal clauses – are void. As set out above, more recently, the focus has been on whether the provision goes beyond the legitimate interests of the innocent party in performance of the contract. However, this formulation also reflects the fact that the law does not usually permit contracting parties to punish for breach. Thus, in Cavendish, Lords Neuberger and Sumption observed that ‘the real question when a contractual provision is challenged as a penalty is whether it is penal’ and in this sense references to ‘punishment’ are apposite: at [31].

While the case law refers to punishment of the breaching party, in doing so the cases cannot be taken to limit the penalty doctrine to attempts to punish and/or deter the breaching party directly. This is clear from the most recent and authoritative statement on the doctrine of penalties in Cavendish:

The parties are entitled to, and have chosen to, arrange their contractual obligations in this way. All the contracting parties to the relevant suite of agreements were aware that Lotus was acting on behalf of other parties (including Larkhark and Lip Sync). It is also to be noted that Lotus is referred to as a Beneficiary on the opening page of the CGA. In such circumstances, it cannot be the case that a provision which would be a penalty if the parties had provided that the Payment Sum be made to (and thus withheld from) Lotus is incapable of being a penalty just because the parties happened to provide that the Payment Sum be made to (and thus withheld from) Larkhark and Lip Sync. Such an approach would enable parties to circumvent the penalty doctrine entirely simply by providing that a different legal entity be entitled to the payment (or required to make it) from the entity required to perform the obligation. In order to ensure that the purpose/public policy of the doctrine of penalty – i.e. to prevent ‘punishment’ – the substance of the contractual arrangements must be and are more important than the mere form.

Furthermore clause 15.1 of the CGA states “Sales Agent is a party to this Agreement solely for the purpose of agreeing to the provisions of Schedules 2 and 3 (which it hereby agrees to) and it shall have no other right or benefit pursuant to this Agreement or any obligation thereunder.” [emphasis added]. Properly construed, the word “other” should appear before “obligation”, because there are obligations imposed upon the Sales Agent under Schedule 2 of the CGA. Failure to carry out certain steps amounts to breaches of the Delivery Procedure, which forms part of the CGA, rather than noncompliance with options.

Paragraph 9 of Schedule 2 to the CGA is not a penalty for the following reasons:

Having carefully considered the submissions made by the parties, I have reached the conclusion that clause 9 of Schedule 2 to the CGA is valid and is not an unenforceable penalty clause.

I reach that decision for the following reasons:

Having rejected each of the three defences, I therefore find in favour of the Claimants and make the declaration sought in their Part 8 Claim Form. I decline to make the counter-declaration sought by the First to Third Defendants.

I will deal with all consequential matters on the basis of written submissions sent by email, which should be provided to me within 7 days of the handing down of the judgment in accordance with the COVID-19 Protocol. It would also be of assistance to me if Counsel try to agree a draft Order, and in the event of any particular disagreement, set out the respective versions sought.

I end by once again thanking Counsel for their assistance on this matter.