European Film Bonds A/S & other v Lotus Holdings LLC & others 
The High Court has given judgment in favour of film completion guarantors (represented by Edmund Cullen QC) who have successfully avoided a potential liability of over €18 million in what is said to have been one of the largest film completion guarantee claims to have been submitted.
The Claimants provided a film completion guarantee in favour of the defendant film distributors and production company (a member of the Ingenious Media group) whereby the claimants undertook to pay the production company the costs of production (in excess of €18 million) of a film entitled “Starbright” if it was not completed and delivered to a satisfactory standard. The completion guarantee included a procedure whereby, after the initial delivery of the film, the guarantors would have two opportunities, governed by a strict timetable, to cure any alleged defects or shortcomings in the film.
At the same time, an umbrella agreement relating to the film’s production was entered into. This agreement contained a different procedure for the delivery of the film.
The production of the film was beset by difficulties. The film that was delivered was said by the defendants to be inadequate for a number of different reasons and they issued a notice that the film was not of acceptable quality, thereby triggering the procedure for ‘curing’ any alleged defects (to the extent possible).
As part of that procedure, on 12 September 2018, the guarantors made a request (as they were entitled to do) for the return of the original film materials so that they could remedy the alleged defects. The agreement provided that the film distributors were required to “return” the film materials to the guarantors within 3 days of the request. If they failed to do so, they would be deemed to have accepted the film (with the result that the guarantors would have no liability under the completion guarantee).
The distributors consigned the film materials to a courier in Los Angeles on 14 September 2018 but they were received on behalf of the guarantors in London in two parcels on 17 and 18 September 2018.
The guarantors contended that the film materials had not been returned within 3 days of their request and that, as a result, the film was deemed to have been accepted. They commenced an action for declaratory relief to that effect.
The defendants opposed the claim on three grounds:
First, they argued that the film materials were “returned” when they were consigned to the courier so it did not matter if they were not delivered until after the end of the three day period. The judge rejected that, holding that the natural meaning of “return”, and its meaning in the context of the relevant agreement, was that it required the actual delivery of the materials to the guarantors.
Second, they argued that the relevant provisions of the procedure were inconsistent with the equivalent provisions in the umbrella agreement and the latter took precedence. The judge held that there was no inconsistency.
Third, they argued that the effect of the provision for deemed acceptance (and the resulting loss of the benefit of the guarantee) was unenforceable as a penalty. The judge held that the provisions did not fall within the penalty doctrine and in any event they were not penal.
The decision emphasises the importance of ensuring that procedural deadlines in contracts are strictly observed and the serious – and irreversible - consequences that can flow if mistakes are made.
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