E-DISCLOSURE & BREACH OF ORDERS: CASE STRUCK OUT: NO QUESTION: AND NO QUARTER GIVEN

In Smailes -v-McNally [2014] EWCA Civ 1296 the Court of Appeal made it clear that breach of a peremptory order in relation to disclosure will lead to grave consequences for the defaulting litigant.

THE CASE

This case was looked at briefly when first decided, however the transcript has only recently become available.  Liquidators were bringing an action against former officers of the company. The claim related to an underpayment of tax of £45 million.

KEY POINTS

  • Whether a party has complied with an order for disclosure is a matter of fact and not discretion.
  • Non-compliance with a peremptory order leads to an action being struck out without further order.

DISCLOSURE BY THE LIQUIDATORS

The defendants served their list of documents.  The claimants however did not give adequate disclosure.

  1. Although the liquidators also served a purported disclosure list on that date, they had made no attempt to select what documents might be relevant to the action but had, in the judge’s words, listed “every conceivable document” offered simply by reference to the boxes in which they were stored.
  2. It is common ground that exercise failed to comply with the CPR. As Jacob LJ said in Nochia Corporation v Argos Ltd [2007] EWCA Civ 741,[2007] Bus LR 1753, massive over disclosure carries a substantial risk that the important documents will be overlooked. Mischon de Reya, the former officers’ solicitors, raised concerns about the way in which the disclosure process had been carried out.
  3. In June 2012 the former officers applied for an Unless Order requiring the joint liquidators to carry out a reasonable search in accordance with CPR Part 31.7 and to serve a list of documents complying with CPR Part 31.10. They also asked for an affidavit from the liquidators explaining what search had been carried out and giving details of the chain of custody of documents.
  4. In response to that application Mr Smailes, one of the joint liquidators, made a witness statement dated 21st November 2012. He said in that statement it was his position that full disclosure of all relevant documents had been given.
  5. Despite that evidence the liquidators’ solicitors conducted an extensive further search about which Mischon de Reya had not been informed. That search had begun in August 2012 but had not completed by the time the application came before Henderson J on 28th November.
  6. The parties had by then managed to agree a new order, which required the liquidators to conduct a search for documents and to provide the former officers with a list by 2nd April 2013. The order was not in the “Unless” form. The trial date was vacated and a direction given for a trial to take place on the first available date after 4th October 2013.
  7. In giving judgment on the question of costs Henderson J said:

“In my view this is a case where actions speak louder than words and the actions of the liquidator since August do appear to me to evince a recognition of wholesale inadequacy in the way in which schedules C and D have previously been dealt with.”

  1. He did not therefore accept the liquidators’ stated position that all relevant documents had been disclosed.
  2. The 2nd April was looming and on 28th March 2013 the liquidators applied for a further extension of time and by way of cross application the former officers applied for an Unless Order. Those applications came before Henderson J on 22nd May leading to a judgment on 7th June 2013.
  3. On that occasion Henderson J made the Unless Order under appeal. It is not suggested that he was wrong to make the Unless Order. In view of what he described “the lamentable history” of disclosure and his judgment that even after November 2012, when there had been a change of solicitors the liquidators’ new solicitors, Isadore Goldman & Co, had shown insufficient urgency in “getting a grip on the situation”. He said:

“The main factors which have weighed with me in coming to this conclusion are: (a) the long and unsatisfactory history of disclosure in the Atrium proceedings before November 2012; (b) the deficiencies to which I have drawn attention in the Liquidators’ attempts, through Isadore Goldman, to comply with the November order; and (c) the increased emphasis which the court is now obliged to accord to compliance with court orders under the amended overriding objective.”

  1. The relevant parts of the order that he made were as follows:

“(1) Unless the Liquidators comply with paragraph (2) below, the Liquidators’ claims against the claims the Respondent in proceedings No 3878 of 2011 and No 3879 of 2011 (‘the Atrium Proceedings’) shall be struck out without further order of this Court and the Respondents shall be at liberty to enter judgment for their costs such costs to be the subject of a detailed assessment if not agreed.

(2) In the Atrium Proceedings, the Liquidators shall by 4.00 pm on 28 June 2013.

i) conduct a search for documents falling within CPR 31.6, in compliance with the requirements set out in CPR 31.7; and.

ii) provide Mr McNally and Maclean and Mr Dick with a list of documents, identifying the documents located as a result of the search described above, in compliance with the requirements set out in CPR 31.10.

(3) Requests for inspection (or copies) of documents shall be made by 4.00 pm on 5 July 2013 and complied with by 4.00 pm on 12 July 2013.”

  1. This was the sixth disclosure deadline that had been set.

CPR 31.6

  1. CPR 31.6 describes standard disclosure in the following terms:

“31.6 Standard disclosure requires a party to disclose only–

(a) the documents on which he relies; and

(b) the documents which –

(i) adversely affect his own case;

(ii) adversely affect another party’s case; or

(iii) support another party’s case; and

(c) the documents which he is required to disclose by a relevant practice direction.”

INADEQUATE DISCLOSURE

The claimant arranged for an external provider to give e-disclosure.  However they failed to send some of the crucial documents (known as “scripts”) to that external provider. Consequently the scripts were not disclosed on the date set for compliance.

THE CLAIMANT’S POSITION IN A NUTSHELL: FAILURE TO ENSURE THAT KEY DOCUMENTS WERE SENT TO EXTERNAL PROVIDER

  1. In addition to the absence of the scripts the liquidators served a supplemental disclosure list on 10th September 2013 which revealed the existence of a further 7,000 documents including a large number of bank statements. The former officers rely on this too as showing that a reasonable search had not been carried out before the service of the disclosure list on 8th June 2013.
  2. In deciding whether the search is a reasonable search CPR Part 31.7(2) provides:

“(2) The factors relevant in deciding the reasonableness of a search include the following –

(a) the number of documents involved;

(b) the nature and complexity of the proceedings;

(c) the ease and expense of retrieval of any particular document; and

(d) the significance of any document which is likely to be located during the search.”

  1. Taking these factors in turn:

(a) There are 152 scripts. That is not a large number particularly in the context of some 22,000 pages of documents uploaded to the database.

(b) The claim is one for £50 million or thereabouts, based on allegations of dishonesty and fraud arising out of events that are a decade old. The liquidators had already been criticised for the previous failings and disclosure. There had been a number of slippages in the timetable and they were under the shadow of an Unless Order, so it was obviously important to make sure that the disclosure list was accurate.

(c) The scripts were in fact in hard copy form in the liquidators’ own offices. Once Mr Gibbs realised that they had not been provided to Unified, it was the work a matter of a few phone calls and a few days to recover them.

(d) This is not a case of finding a significant document, even a smoking gun, on the off chance. Mr Gibbs knew that the documents existed because that was the very reason why he did not deliver the time sheets and so forth to Unified. He also knew that the scripts were the very documents on which the liquidators relied in advancing their case. They were and are central to the litigation. He also promised Mischon de Reya that they would be disclosed.

  1. In short, in my judgment, what it comes to is this. Mr Gibbs knew about the importance of the scripts and knew that their disclosure had been promised to Mischon de Reya, yet he failed to check that they had been delivered to Unified. That they had not been uploaded was apparent on checking the database; and that should have alerted him to the need to find them. In my judgment he made no search for these critical documents let alone a reasonable search.
  2. Mr Davenport stressed the duty of the parties in co-operate in making disclosure. But I do not see that co-operation is relevant to the conduct of a search which necessarily is carried out by each party, on his own, amongst his own documents. Nor can I see what relevant co-operation is required for the documents to have been removed from the liquidators’ offices and delivered to Unified for uploading.
  3. I agree with the liquidators that the question whether the Unless Order was complied with is a case management decision in the sense that it is a procedural decision. But I do not agree that it is discretionary: either the order was complied with or it was not. That is a question of interpretation of the order and the rules and their application to the facts. In my judgment the omission to list the scripts is a clear case of failure to comply with the Unless Order.

WHERE THE JUDGE AT FIRST INSTANCE ERRED

  1. How then did the judge reach the contrary conclusion? The judge began by correctly listing the factors in CPR 31.72. He said at 37:

“A search not carried out in good faith would not be a reasonable search. However a search which was conducted in good faith and was fair and proportionate to the case in hand, given the number of documents involved, the nature and complexity of the case, the ease and expense of retrieval and the significance of any document likely to be located, would be a reasonable search and would be one which complied with the order.”

  1. Thus far I agree. He then referred to observation of Morgan J in Digicel (St Lucia) Ltd v Cable & Wireless [2008] EWHC 2522 Ch [2009] 2 All ER 1094, at 46, that the rules do not require that “no stone be left unturned”. I agree with that too. But that observation was made in the context of vast electronic disclosure where there was no identified target document. Where, as here, the existence of the documents and their relevance has already been identified, I do not think this observation applies.
  2. It is in this point in my judgment that the judge began to go wrong. He went on to say that an allegation that a reasonable search had not been carried out could be established by inference. In so doing he referred to the decision of this court in Realkredit Denmark AS v York Montague Ltd[1999] CPLR 272. However, that was a very different case. It was a case in which the disclosing party had put in evidence on affidavit to the effect that it had no relevant documents other than those that it had discovered by list. That was disputed by the other party which pointed to documents that it would have expected the disclosing party to have had. The disclosing party accepted that the evidence of the other party gave good grounds for an application for specific discovery but did not concede that any further documents in fact existed. It was in that context, and in particular in the context that there might be disputes about relevance and necessity, that the court referred to a list served in good faith. They distinguished the case before them from one in which it had been admitted that the list was deficient.

44. Realkredit was decided under the rules of the Supreme Court but it was approved in the post CPR era in Morgans v Needham (28th October 1999). Stuart-Smith LJ held in that case that the Unless Order in that case was “hopelessly clear and imprecise” because it left it up to the defendant to decide what documents he needed to disclose in order to prove his counterclaim. He held that the order ought not to have been made in that form and ought not to be enforced by striking out. He summarised the duty cast upon the disclosing party as follows:

“What a party has to do is to decide what documents are relevant to the matters in issue and disclose them.”

  1. The judge rejected the argument that the copies held at the liquidators’ offices should have been disclosed as copies in themselves. He said at 42:

“I agree that the disclosure obligation applies distinctly to all copies of documents in a party’s control, which I will call ‘original’ copies, but it does not apply to copies made for the purposes of the dispute. As I understand the evidence before me, the copies held by Mr Meadows were not what I have called original copies, they were simply copies which had been created in the course of the proceedings or for the purposes of them.”

  1. I cannot see Mr Meadows in fact did say that. But even if they were copies made for the purposes of litigation, they are the only surviving copies. CPR Part 31.9 says that a party need not disclose more than one copy of a document, the copies held at the liquidators’ offices are the only copies that have ever been disclosed. The judge recounted at 43:

“This is a substantial case involving very serious allegations. It justifies an extensive disclosure exercise from the point of view of proportionality. However even looking at the exercise with the benefit of hindsight, I can see no justification for saying that it was not a reasonable search. It was very extensive. It was plainly carried out in good faith. It was explained in detail in advance to Mishcon de Reya and indeed was based on a methodology which had been ventilated in court before Henderson J when the unless order was made. It was completed within the time specified by the order. It is true that two classes of relevant documents were missed but there is no suggestion that this was the result of bad faith and I am satisfied that the fact these two classes were missed does not support an inference that the exercise itself was not a reasonable search. In my judgment the liquidators are not in breach of the order of 7th June 2013 on that ground.”

  1. I do not understand why the judge thought that any inference is necessary. We know that the list did not list the scripts even though their existence was known and their relevance was also known. This is not therefore a case in which there is any dispute about the existence of documents or the relevance of documents known to exist. We also know that other underlying material was excluded from the database precisely because Mr Gibbs intended to disclose the scripts. We also know from Mr Gibbs’ evidence that following the order of 7th June he carried out no further search for the scripts. In so far as the judge relied on Mr Gibbs’ conversation with Mr Meadows many months earlier, it seems to me to be irrelevant in the steps that were required to be taken by the Unless Order. But even if that conversation were relevant, the fact remains that Mr Gibbs did not check to see whether Mr Meadows was correct.
  2. This is also a case in which Mr Gibbs had already decided what documents were relevant to the matters in issue. They included the scripts. Thus, as Stuart-Smith LJ said, he had a duty to disclose them but he did not do so. This, then, is quite unlike the usual case in which one party alleges that the other party has more relevant documents to disclose but the other denies that. Here it is admitted that relevant and indeed very important documents existed; were in the possession of liquidators; had been promised, and yet were not disclosed. In those respects this case is almost unique.
  3. In coming to his conclusion the judge did not go through the factors listed in CPR 31.7(2). In addition some of the factors that he mentioned are, in my judgment, irrelevant. For example, the fact that the methodology has been ventilated in court and explained in detail could only be of any relevance if the database had in fact contained what it was supposed to contain. If the database was defective, no method of interrogating it would have produced the relevant results. Second, the absence of bad faith does not necessarily mean that the order was complied with. A party may conduct a search in good faith but nevertheless fail to comply with his obligation under Part 31.7. As the judge recognised, what is or is not a reasonable search is something that the court must decide. It is not simply left to the discretion of the party concerned.
  4. Whether the party has acted in good faith may be highly relevant to the question whether he has made the right decision about what ought to be disclosed. He has what in another context might be called a margin of appreciation. That is the sort of consideration that Morgan J had mind inDigicel. But that is not this case. Mr Gibbs had decided that the scripts ought to be disclosed.
  5. Whether the party has acted in good faith may also be relevant to the question whether relief against sanctions should be granted but the judge never got to that stage. I think also that the judge ought to have considered the scripts separately from the remaining documents that were disclosed by the supplemental lists in relation to which different considerations may apply.
  6. An alternative view might be that the liquidators had already located the scripts as a result of a previous search which had enabled them to refer to them in their evidence adduced in support of a freezing order. Mr Meadows appears to have known that copies of them were located at the liquidators’ offices. But in that event the liquidators would have failed to comply with the second part of the unless order, namely to provide the former officers with a list of documents located as a result of the search. Either way I see no escape from the conclusion that there was a breach of the Unless Order.
  7. The liquidators’ skeleton argument suggested that the disclosure statement was conclusive. That stated that all relevant documents had been disclosed and the argument is that the only way of challenging that is by way of an application for specific disclosure, rather than the allegation that the Unless Order had not been complied with. They referred to Frankenstein and Gavin’s House-to-House Cycling Cleaning and Insurance Company [1897] 2 QB 62. But that submission was not pressed in oral argument and, in my judgment, rightly so. Although the court cannot go behind the contents of an affidavit or a disclosure statement simply on the bases of a clash of affidavits, where, as here, it is clear from all the surrounding circumstances and indeed from the admission of the disclosing party itself that documents whose existence was known and whose relevance was conceded have not been disclosed, the disclosure statement cannot be treated as conclusive. There is here no conflict of affidavits or evidence. It is clear from Mr Gibbs’ own evidence that the scripts were accepted to be relevant documents and were not disclosed.
  8. When the scripts were ultimately disclosed, the list in which they were disclosed also disclosed a large number of other documents which had come to light. Mr Crow relied on the late disclosure of those documents as itself showing there had been a breach of the Unless Order. I find that submission less persuasive. As Stuart-Smith LJ said in Morgans v Needham, it does not follow simply because there was a further order for discovery made there was non-compliance with the first order. We know very little about the provenance or status of the original documents that were disclosed in the supplemental list. I do not rest my decision on that ground.
  9. Mr Davenport drew our attention to the recent decision of this court in Denton and TH White Ltd [2014] EWCA Civ 906 and in particular to what the court said about satellite litigation and non co-operation in paragraphs 39 to 45. One of the things that the court said was that:

“… it is wholly inappropriate for litigants or their lawyers to take advantage of mistakes made by opposing parties in the hope that relief from sanctions will be denied and that they will obtain a windfall strike out or other litigation advantage.”

  1. I entirely accept that, but that was said in the context of twin objectives of compliance with orders and co-operation.
  2. In the present case six dates for disclosure had been set. None had been complied with. The trial date had already been vacated twice. A freezing order or its equivalent has been in place against these defendants for over 3 years. I do not think that it is possible to characterise what the former officers had done as sheer opportunism.
  3. For the reasons I have given I would allow the appeal.

THE RESULT: THE ACTION STRUCK OUT

There was an interesting discussion afterwards in relation to the effect of the order; the failure to file a schedule of costs in relation to the appeal; interlocutory cost and the claimants’ intention to apply for relief from sanctions.

  1. LORD JUSTICE RIMMER: We have earlier given our judgments allowing the appellants’ appeal. The consequence of that is that the Unless Order made by Henderson J on 7th June 2013 takes effect according to its terms, which is that under paragraph 1(1) of that order the proceedings brought by the liquidators stand struck out without further order of the court and the respondents are at liberty to enter judgment for their costs, such costs being subject to detailed assessment if not agreed. That is the ordinary effect of the order and the consequence of our allowing the appeal is that the order takes such effect.
  2. That means, in my judgment, that the proceedings in consequence of our order have reached a final determination within the meaning of the undertakings given by the appellants to the court as recorded in an order dated 10th October 2011, with the consequence that their undertakings have either already lapsed or if not must be regarded as lapsing or being impliedly released as from today.
  3. The further matters that we have to deal with are costs. The first matter is the appellants’ costs of the appeal. It is not in dispute that they should be entitled to those costs and we so order; that is we order the respondents to pay the appellants’ costs on the standard basis to be assessed if not agreed.
  4. The point has arisen in the course of argument as to whether we should having regard to paragraph 9.6 of Practice Direction 44 in the CPR, impose some sanction as regards those costs on the successful appellants by reason of the fact that they have not, even though this appeal has been disposed of within a day, produced a schedule of their costs so as to enable a summary assessment to be made. That paragraph, paragraph 9.46 confers a wide jurisdiction on the court but I would not exercise any of the powers that it confers.
  5. Mr Crow has persuasively argued that his clients and their advisers reasonably foresaw that this appeal would probably take a full day to argue and that it was likely that judgement would be reserved, the appellants having three separate points they wish to advance. In the event the court decided the appeal on the basis that the appellants were entitled to succeed on just one ground and so the appeal was in the event disposed of comfortably within the day. But I would accept Mr Crow’s submission that it was reasonable for counsel and solicitors and clients to foresee that that is not what was going to happen and that it in the ordinary course be open to the appellants, if they won, to produce a costs schedule following the delivery of a reserved judgment.
  6. As it seems to me in the particular circumstances I have described it would be unfair upon the appellants to deprive them of any part of their costs of the appeal or to impose any sanction in respect of the costs of the assessment because of their failure to submit the schedule. I would not therefore do that and would simply award the appellants the costs of their appeal to be assessed if not agreed on the standard basis.
  7. As for the costs awarded by Birss J by his order of 16th October, the relevant provisions are in paragraphs 9 and 10. He ordered the appellants to pay the respondent’s costs of the application or applications before him and ordered them to make an interim payment of £95,000 which has been paid.
  8. I would set aside those orders and order the respondents to pay the appellants’ costs of the applications before Birss J. Mr Davenport submitted that we should not disturb Birss J’s order because although the appellants advanced some 18 grounds in their evidence as to why the sanction imposed by the Unless Order had bitten, in the event counsel then arguing the case confined himself to just two submissions, including the one which has succeeded before this court today. Mr Davenport’s submission was that because a large number of grounds had been flagged up but only two in the event were argued we should leave this order by Birss J undisturbed. I would not accept that submission. We do not know precisely what happened at the hearing before the judge but we do know that the argument was tailored down to the advancing of two main points, one of which we have considered well founded. The appellants were therefore entitled to succeed before Birss J but in the event did not. In my judgment it would be appropriate for the respondents to pay the appellants’ costs of the applications before the judge.
  9. As regards the £95,000, I would order that that is repaid to the appellants by 4.00 pm 14 days from today, together with interests from the date of payment to the date of repayment at 1% above base rate.
  10. The next matter to which I should refer is that Mr Crow has asked that we should make an order on payment of account of the appellants’ costs of the proceedings in the sum of £1 million. The estimated costs of the appellants of the proceedings being we are told something in the order of £2.5 million. We have before us no schedule supporting the figures said as to justify and interim payment. Mr Davenport opposes it and, in my judgment, rightly so. Given the complete absence of any supporting information, it would not be right for this court to make an interim payment of that order. It would in principle be open to the appellants to apply for an interim certificate in the course of the assessment of their costs before the costs judge.
  11. The only remaining matter with which I think need to deal is that Mr Davenport has offered an undertaking to the court that the liquidators will issue an application for relief from sanctions or alternatively and/or will restore the application for relief from sanctions which they have issued on 15th August 2013, within 28 days of today’s date. He invites us to accept that undertaking and on that basis to stay various of our orders.
  12. I would not accept the undertaking and as follows I would not impose any stay on the orders which I would make. It seems to me that if the liquidators wish now to make or restore an application for relief from sanctions. They may or may not be entitled to do that. But that is a matter for them but as the proceedings have come to an end in the way I have described, I would not consider it appropriate to impose stays on the orders which in my judgment ought properly to be made.

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