COURT OF APPEAL OVERTURN REFUSAL TO GRANT RELIEF FROM SANCTIONS: RE-TRIAL NECESSARY

In McTear -v- Engelhard [2016] EWCA Civ 487 today the Court of Appeal overturned a refusal to grant relief from sanctions.  Consequently there will have to be a re-trial. (The judgment at first instance in this Case was considered in an earlier post)

In these circumstances, had the judge undertaken the process of considering the application for relief from sanctions in respect of the service of witness statements properly, he could, in my judgment, only have concluded that relief was appropriate.”

The second point that needs to be underlined in this case is that one cannot see every aspect of every case in terms only of relief from sanctions.”

KEY POINTS

  • A judge had been wrong not to grant relief from sanctions to defendants whose witness statements had been served 50 minutes late.
  • The consideration of the effect of previous breaches must be considered at the third stage of the Denton test and never at the third.
  • It may not be appropriate to view late disclosure of documents newly disclosed as a matter that requires relief from sanctions.

THE CASE

The claimants were assignees bringing an action against former employees  alleging that moneys had wrongfully been taken from a company.

  • Witness statements were due at 4.00 pm. The claimants served in time.
  • The defendants served  their statements  by hand at 4.50 pm, also sending numerous new documents obtained as a result of a new search.
  • The defendants then made an application for relief from sanctions both in relation to the late witness statements and late disclosure of documents.
  • The judge (who was deciding the matter after Mitchell but prior to Denton) held that prior failures in failing to provide documentation were relevant and refused to grant  relief from sanctions.
  • The trial thereafter took place, without the defendants giving evidence, and the claimants were successful.

THE JUDGMENT ON APPEAL

Lord Justice Vos:
The applicable principles
  1. The principles applicable to applications for relief from sanctions are now too well known to require repeating. They have been definitively set out in Denton, in clarification of what had already been explained in Mitchell.
  2. Mr Davenport submitted that paragraph 27 of the majority judgment in Denton should be construed as meaning that other breaches of rules or orders should be taken into account at the first stage of the three stage test for the grant of relief from sanctions. That was not what was intended by the words: “[t]he assessment of the seriousness or significance of the breach should not, initially at least, involve a consideration of other unrelated failures that may have occurred in the past”. Paragraphs 75-79 of the majority judgment in Denton, which dealt with the facts of Utilise TDS Ltd v. Davies & others, made this clear. That case concerned a 45-minute delay in filing a costs budget, which was obviously neither serious nor significant, and did not disrupt the course of that or any other litigation. The court made it clear that, in those circumstances, the judge should only have considered the effect of an additional breach at the third stage: “they were wrong to think that this later breach … which was itself neither serious nor significant, turned what was neither a serious or significant breach into something worse“. Of course, at the third stage the court will consider “all the circumstances of the case, so as to enable it to deal justly with the application” giving particular weight to factor (a) (the need for litigation to be conducted efficiently and at proportionate cost) and factor (b) (the need to enforce compliance with rules, practice directions and orders). But that is the correct and only stage for the consideration of other alleged breaches to be undertaken.
  3. The second point that needs to be underlined in this case is that one cannot see every aspect of every case in terms only of relief from sanctions. Disclosure of documents is a case in point. CPR Part 32.11 provides that “(1) [a]ny duty of disclosure continues until the proceedings are concluded” and “(2) [i]f documents to which that duty extends come to a party’s notice at any time during the proceedings, he must immediately notify every other party”. These obligations do not excuse the breach of an order for disclosure that is limited in time, but in considering the extent of any permitted usage of documents that are found after such an order has expired, the court does have to take these duties into account.
The first main issue: did the judge properly exclude the defendants’ oral evidence?
  1. The judge’s approach in both his 1st and 2nd judgments was to consider the late service of witness statements and the late disclosure together. He concluded, as I have said, that the defendants had deliberately followed their own rules and, as he put it in the 1st judgment, decided “to deploy the new material as part of the exhibits to [Michael’s] witness statement” without separating out the new material. He then considered the question of whether to allow the defendants’ witnesses to give evidence in terms of CPR Part 32.10, alongside the 2nd application to extend time for further disclosure and for relief from sanctions in that regard. Part 32.10, of course, simply provides that a witness whose statement is served late cannot be called without the court’s permission.
  2. The problem here was that the documents that had been disclosed late were, in fact, of limited, if any, relevance to the pleaded issues in the case. There was no dispute in the pleadings about how the management charge had been utilised by EHL. None of the documents, therefore, seem to have been of particular importance. The judge said that he was not actually asked to read any of them, but had he been, he would have been able to ascertain their relevance to the issues in the case. They included BWL’s management accounts for June 2004 to March 2005, which ought to have been available to the claimants as administrators and supervisors of BWL in any event. It was not disputed that BWL had paid EHL the monthly management charge for those periods. The emails that were included simply finished off a sequence of disclosed communications with the claimants’ staff in 2006, most of which must have already been in the claimants’ possession. There was then a series of EHL bank statements showing the receipt of the monies paid by BWL to EHL that the claimants complained that BWL had paid. The pleadings disclosed no dispute about the existence of such payments. A large number of pages of EHL’s cash books, receipts and ledger entries showed how EHL had used the monies it claimed, but there was seemingly no dispute about that. What was disputed was only whether EHL had a legally enforceable right to the management charge for the relevant period.
  3. It may be assumed that the documents in question were actually sufficiently relevant to require disclosure under CPR Part 32. But even on that assumption, if they were either largely confirmative of other documents that were already disclosed or already in the possession of the claimants, it is hard to see how the judge was justified in inferring a deliberate plan by the defendants to subvert the litigation process.
  4. All that said, it is quite clear in my judgment that the defendants ought, immediately after the documents were found, to have notified the claimant’s solicitors in accordance with CPR Part 31.11. The most sensible and pragmatic solution so close to trial would have been for the defendants’ solicitors to have sent the claimants’ solicitors copies of the documents themselves on Monday 17th February 2014, the first working day after they were found, saying that they would provide a list so soon thereafter as possible. I somehow doubt that the case would have got to this unfortunate stage, had they done so.
  5. Instead, the solicitors on both sides engaged in an aggressive and uncooperative correspondence that served only to heighten their mutual suspicion to newly raised levels. Paragraph 41 of the majority judgment in Denton makes clear the undesirability of both a lack of cooperation between litigating parties and of seeking to take inappropriate advantage of the other party’s mistakes.
  6. In my judgment, therefore, the judge was not justified in inferring that the method chosen to disclose the new documents was intended to disrupt the litigation process. It was obviously inappropriate and wrong, but a proper reading of the correspondence demonstrates that it was done in a misguided attempt to fit the new disclosure into the old and to give explanations of those documents in the witness statements. There was in fact no need for any exhibits to the witness statements. The disclosed documents could have been referred to without being exhibited, and the new documents should have been disclosed before they were referred to in witness statements.
  7. It would be wrong to say that there was no proper connection between the 1st and 2nd application, but that connection ought to have been limited to the stage at which all the circumstances were being considered. As both the judge and Mr Davenport implicitly recognised, the 50-minute delay in serving the statements was trivial (in the old language) and neither serious nor significant (in the new language). The judge should then have gone on to consider the excuse for the delay that was offered. That excuse was poor, but not non-existent. Mr Eagle, the solicitor concerned, had lost his father and attended his funeral the day before that fixed for exchange. That was indeed an excuse for some delay, even if it was not really the reason for the 50-minute delay. The 50-minute delay was apparently caused by the inappropriate decision to exhibit hundreds of pages to Michael’s statement, and by the tetchy email correspondence that had started even before 4pm on Friday 21st February 2014.
  8. It was appropriate then to consider the third stage, particularly including factors (a) and (b). But there was no evidence that the delay had been part of a deliberate plan to subvert the litigation process for these or other litigants. And the other defaults were not in themselves as serious as the judge thought them to be. They did not disrupt the course of the litigation, and, had the judge properly analysed the new documents, he would have realised that an adjournment of the trial could not possibly have been required to allow the claimants a fair opportunity to deal with them.
  9. The judge seems to have ignored the most important factor at the third stage in this particular case, which was the question of whether it was proportionate and just to exclude the defendants from giving their evidence as a result of their 50-minute delay in serving witness statements. In my judgment, it was not. This was a case in which the allegations of breach of fiduciary duty and voidable preference, whilst not actually requiring proof of dishonesty, did impugn the Directors’ integrity and good conduct. In those circumstances, it is hard to see how a fair trial could have been undertaken without hearing their explanations for what had occurred. I do not think the claimants were right to submit that the evidence of the Directors could have made no difference to the outcome of the trial. Since there will need to be a re-trial of the substantive issues, it is better that I say no more about that at this stage.
  10. In these circumstances, had the judge undertaken the process of considering the application for relief from sanctions in respect of the service of witness statements properly, he could, in my judgment, only have concluded that relief was appropriate. In short, the defendants’ 1st application ought to have succeeded, and the defendants ought to have been permitted to call the witnesses, whose statements they served. In my judgment, the defendants ought also have been permitted to call Mr Needham insofar as he did not give expert evidence, which seems to me to make up the greater part of his statement. But I understand there is no appeal from that part of the judge’s decision, so I need say no more about it.
Was the judge right to dismiss the 2nd application concerning the new documents?
  1. I turn now to consider the 2nd application concerning the new documents. The defendants ought, as I have said, to have made the new documents available to the claimants as soon as they were found. It is, I think, rather less clear that they needed to seek an extension of time for the service of the new list, since the documents concerned were not disclosed in response to Master Bowles’s order of 24th January 2014 requiring disclosure relating to the original amendments. The documents did not specifically relate to the amendments that had already been made, though they might on one analysis have been disclosable in response to them. This was not the subject of argument before us, so I shall say no more about it. The documents ought anyway to have been disclosed in the original list, but it is not as if the defendants failed to serve any list in response to the original order. All they failed to do was to include some documents in their possession which they had not then found.
  2. Undoubtedly, the safest course would have been to apply for an extension of time for compliance with both disclosure orders, if necessary for relief from sanctions, and for permission to rely on the new documents. That application ought, as the judge said, to have been supported by an explanation of why the documents had not been disclosed in the first place.
  3. The judge relied on CPR Part 31.21 which only provides that a “party may not rely on any document which he fails to disclose … unless the court gives permission”, but by the time of the hearing the defendants had not failed to disclose the new documents; they had served a list in respect of them.
  4. The question, therefore, is whether the judge was right to treat the application in relation to the new documents as purely one for relief from sanctions. I do not think that he was. The important question was whether, in all the circumstances, the defendants were to be permitted to rely upon them at the forthcoming trial. That depended, amongst other things, on considerations including whether the claimants would have wished to rely on them, the circumstances in which they had not been disclosed before, and their relevance to the issues.
  5. I accept also that the failure to produce the documents at the initial disclosure stage was a significant breach. Parties must take seriously the need to conduct proper searches for documents in response to an order for standard disclosure by a fixed date. But here there was an excuse, albeit one that was not very well explained in the 2nd application. The documents had been thought to have been destroyed, but were discovered when new counsel emphasised the need to look for them. In these circumstances, the most important question was whether the claimants could properly deal with them at the forthcoming trial. In my judgment, they could have done so. They were not very important, had probably already been for the most part in the possession of the claimants, and did not require any significant work for accountants to digest. In my judgment, the documents ought to have been admitted. I emphasise, however, that if the judge had been justified in thinking that the defendants had been trying to “bury” or disguise significant documents by exhibiting them to a witness statement rather than openly disclosing them, he might have been justified in excluding them. In my judgment, however, the judge was not right to infer impropriety from the defendants’ conduct. They did not behave correctly as I have explained, but that is a different matter.
  6. The judge’s error was to regard the applications concerning the statements and the disclosure as inextricably linked. They were connected but the issues ought to have been considered separately. I have no doubt that the appropriate course was to consider the statements first. Had the judge concluded that the defendants’ witnesses should have given evidence, as I think he ought, he would also have concluded that the new documents should be admitted for the reasons I have given.
Ought the judge to have allowed the defendants permission to re-amend?
  1. The parties wisely addressed almost no oral argument to this issue. That was, I think, because if there is going to have to be a re-trial, the question of whether the defendants ought to be permitted to re-amend their pleadings should be decided by the first instance court well in advance of that re-trial.
  2. The arguments addressed by the parties to this aspect of the appeal concerned the substantive merits of the 3rd judgment, including the judge’s treatment of the alleged set-off. I would only say two things about set off; first, it is generally a matter of law, albeit a notoriously difficult one; and secondly that I was somewhat surprised by the view that set off had not already been pleaded when the amended defence alleged that, as a necessary consequence of the Credit, the cash balance in the amount of the Sum was “extinguished”. I accept that the formulation is inelegant, but it is hard to see how a debt (the “cash balance” in the amount of the Sum) could be extinguished except by payment or an effective set off.
  3. When the matter comes to be tried again, all the issues should be considered afresh without regard to the findings or determinations of the judge who had proceeded on the inappropriate basis that he could decide the matter without hearing the evidence that the defendants sought to call.
The other grounds of appeal
  1. In the circumstances, there is no need for me to deal with the remaining grounds of appeal. I would, however, comment that I found it very hard to see how the claimants could submit that the evidence of the defendants could have made no difference to the estoppel defence. But the relevance and importance of that evidence is a matter that can be left to the judge hearing the new trial.
Conclusions
  1. For the reasons I have sought to explain, I would allow the appeal so as to permit the defendants to call the evidence of Michael, Sylvia and Mr Scarlett, and to rely on the new documents. I would order a re-trial of all the substantive issues before a new judge, and leave the matter of whether the defendants should be permitted to re-amend their defence to be decided as a case management issue when directions are given for the new trial.”

 

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