Court provides new weapon in the audit arsenal: Carlton Film Distributors v VCI and VDC

As a result of a High Court decision last month companies pursuing royalty audit claims have acquired a new procedural weapon. It has now been established that in appropriate cases the court will order pressing plants to disclose their manufacturing records to an audit claimant prior to the commencement of any court proceedings.

One of the most contentious areas in royalty audits is access to manufacturing records so that audit claimants can compare numbers of units accounted with numbers of units actually manufactured. Companies being audited often will not, and sometimes cannot, provide manufacturing records.

This leaves audit claimants in a difficult position. Should they pursue claims where they have reasonable suspicions but no hard evidence that all units manufactured have not been properly accounted?

It is possible to obtain disclosure of documents from the potential defendant prior to commencing court action. But what if that company says it has no manufacturing records?

This was the dilemma facing the claimant in Carlton Film Distributors v VCI and VDC. Carlton had entered into a licence agreement with VCI for the manufacture by VCI of videos.

The licence agreement contained restrictions as to the units to be manufactured. In particular the number of units to be manufactured in the final six months of the licence was subject to a cap.

Carlton believed that there had been manufacturing in excess of the licence restrictions. When Carlton undertook an audit VCI said that it did not have records of when manufacturing took place.

The pressing plant, VDC, took the position that manufacturing records were confidential. It would not disclose any information to Carlton.

Mr Justice Jacob in the High Court made an order compelling the pressing plant to disclose its manufacturing records to Carlton. This would put Carlton in the position to make an informed decision as to whether to pursue VCI in court.

He was prepared to extend the scope of orders requiring those who are not parties in a dispute to disclose documents prior to the commencement of court proceedings so as to include “cases where there is a good indication of wrongdoing, but not every piece of what the claimant needs to plead a case is fully in position.”

The judge was influenced by the modern court rules which discourage the pursuit of dubious claims and encourage parties to conduct litigation in a sensible way keeping costs proportionate to what is at stake. In particular there is a requirement that all claimants must sign statements certifying their belief that the facts set out in support of their claims are true.

This would have presented a real problem for a claimant in Carlton’s position. It had no way of knowing the true position without seeing VDC’s manufacturing records. The judge said “This information goes straight to the heart of the potential claim against VCI. It is the fastest, clearest and shortest way of getting there.”

This pragmatic approach may lead to similar applications by other audit claimants. The knowledge that audit claimants may be able to obtain disclosure of manufacturing details direct from pressing plants without the need for full-scale legal action should also prompt more early settlements of these claims.

Bulletins are for general guidance only. Legal advice should be sought before taking action in relation to specific matters. Where reference is made to Court decisions facts referred to are those reported as found by the Court. Please note that past bulletins included in the Archive have not been updated by any subsequent changes in statute or case law.