Summary

Mr Justice Calver has dismissed a claim in the Commercial Court worth over US$3 million relating to financing of an animated film. The case raised interesting issues relating to election, waiver and estoppel, and the inferences to be drawn from a party’s deliberate destruction and concealment of evidence.

Edmund Cullen QC and Ted Loveday, instructed by Stephen Joelson, Kami Naghdi and Sebastian Jones of Clintons, acted for the successful First and Second Defendants.

The judgment is available online here.

Facts

The dispute concerned the production of the animated Christmas film entitled “Elliot: The Littlest Reindeer”. The film was originally planned for release around November 2017, in time for the 2017 holiday season. However, it was not released until 2018.

Active Media Services Inc, an investor in the film, had entered into a completion guarantee to protect against certain risks during the production process. This guaranteed that the film would be “completed and delivered” to the sales agent (Double Dutch International Inc, the Fourth Defendant) for the purposes of commercial exploitation. If it was not “completed and delivered” for the purposes of the guarantee, the guarantors (including the First and Second Defendants) could be liable to pay US$2.4 million plus interest in exchange for the assignment of certain rights to the Claimant.

There were two main areas of dispute:

(1) Completion and delivery. Did the production company “complete and deliver” the film to the sales agent in accordance with the completion guarantee?

(2) Election/waiver/estoppel. Did Active know about the delays in the film’s production, consent to the delayed release, and choose to exploit the film in such a way as to prevent it from claiming under the completion guarantee?

Held

Completion and delivery

On a proper construction of the completion guarantee, the guarantors would be liable if the specified delivery materials were not tendered to the sales agent, accompanied by a notice of delivery, by 28 August 2017. The Judge concluded that the film was not “completed and delivered” in this way by 28 August 2017.

Facts relevant to election/waiver/estoppel

The “real issue in this case” was whether Active knew that the film had not been completed and delivered by 28 August 2017 and whether by its conduct Active became estopped from claiming under the completion guarantee, or waived its right to do so. The Judge accepted the Defendants' submissions that representatives of a company named M3 LLC acted as Active’s agents during the production of the film. Both M3 LLC on Active’s behalf, and Active itself, knew about delays to the Film’s production, consented to those delays, and encouraged the producer to finish the film so that it could be commercially exploited in 2018 rather than claiming under the Completion Guarantee.

This was supported by adverse inferences relating to (a) the deliberate destruction of a number of emails by Active’s witness in the week before the trial; (b) a number of “critical gaps” in Active’s disclosure of documents; and (c) Active’s decision not to call a number of important witnesses who might have filled in the gaps. Applying The Ophelia [1916] 2 AC 206 and Wisniewski v Central Manchester Health Authority [1998] P.I.Q.R P324, the Judge inferred that Active had not produced this evidence because it was likely to damage Active’s case. He inferred that these documents and witnesses would have confirmed that Active authorised M3 LLC to act as its agent, that Active was provided with all material information relating to the Film’s production in 2017 and 2018, that it knew about problems with the film’s delivery in 2017, and that Active was nevertheless content with the film being accepted by the sales agent for exploitation in 2018. The basis for such inferences was “extremely strong” and the inferences were supported by the totality of the non-destroyed evidence.

Election

The Judge held that election applies where (i) there are two mutually exclusive courses of action i.e. where a party elects choice A under a contract meaning that alternative choice B is forever lost; and (ii) there is a clear and unequivocal communication of the choice to pursue one inconsistent right over another: Delta Petroleum (Caribbean) Ltd v British Virgin Islands Electricity Corpn [2020] UKPC 23. This does not require a formal document stating “we choose X instead of Y”. More often, the election is communicated by a course of conduct which can only be consistent with one course of action, or by allowing something to happen in circumstances where an effluxion of time indicates an election.

The Judge accepted the First and Second Defendants’ submissions that Active had a choice “either to demand payment of the payment sum under the completion guarantee because the film had not been completed and delivered by 28 August 2017 or not to demand payment and instead to deem completion and delivery as having taken place and to continue to exploit the completion of the Film into 2018”. He held that Active had unequivocally communicated its election by participating in efforts to finish and exploit the film in 2018. Consequently Active was barred by the doctrine of election from claiming under the completion guarantee.

Estoppel, waiver and acquiescence

The ingredients of each of the doctrines of estoppel, waiver and acquiescence were all made out. Active’s involvement in the film’s exploitation in 2017 and 2018 prevented it from claiming under the completion guarantee. The Judge rejected a number of arguments raised by Active, including that these defences were prevented by clause 11.2 of the completion guarantee which provided that modifications to it would be “invalid unless executed in writing and duly signed by all parties”. On the facts, Active engaged in an “extensive course of conduct” which met the requirements set out by Lord Sumption in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2018] UKSC 24 at [16] for estoppel to overcome a “no informal modification” clause.