Electronic disclosure – the perils of ignoring disclosure requirements
In Smailes and another v McNally and another[i] the High Court refused the claimant's application for relief from sanctions, finding the claimant's failure in respect of its disclosure obligations under the relevant provisions of the Civil Procedure Rules (CPR 31) amounted to a significant and serious breach of an "unless order".
This case provides a warning of the potential pitfalls associated with electronic disclosure processes as well as of the importance of an express agreement between the parties as to the applicability of PD31B (which relates to the disclosure of electronic documents) where such a process is to be used.
Proceedings were commenced in May 2011 by liquidators, who claimed approximately £50 million from the former director and company secretary of two companies as a result of the failure by the companies to meet their tax obligations.
In June 2013, following multiple extensions of the deadline for disclosure, a judge directed that the claim be struck out unless the liquidators, within a final deadline, conducted a search for relevant documents and provided a list of documents in compliance with the requirements set out in the Civil Procedure Rules.
The disclosure exercise was completed and a disclosure list was served on the defendants' solicitors in purported compliance with the court's order. The defendants contended that the disclosure list provided by the liquidators failed to comply with the requirements of CPR 31 and the order on the basis that (a) two main categories of documents, which it was acknowledged by both parties were in possession of the liquidators, had not been disclosed; and (b) the list served by the liquidators failed to comply with CPR 31.10 in a number of respects. In particular they suggested that the list did not meet the requirements of CPR31.10 (3) which states that the list must identify the documents in a convenient order and manner and as concisely as possible. They argued that the list failed to sufficiently describe the documents within it meaning that the list was of no practical utility as it did not enable them to select appropriate documents for inspection. The defendants applied for judgment on the footing that the liquidators had failed to comply with the order. The liquidators resisted this and issued a cross application for relief from sanctions.
A judge heard these applications in September 2013. He concluded that the liquidators had sufficiently complied with the order and dismissed the defendants' application and concluded there was no need to hear the liquidators' relief from sanctions application. The defendants appealed to the Court of Appeal on three main grounds, namely that:
- the judge had erred in concluding that the liquidators had conducted a reasonable search as required by CPR 31.7;
- he had been in error in holding that the liquidators had disclosed all the documents located as a result of the search; and
- he was wrong to conclude that the disclosure list provided complied with the Civil Procedure Rules.
The defendants also made an application to the Court of Appeal to raise evidence in relation to another failure by the liquidators to carry out a reasonable search and comply with the order. The search process which had been adopted was to scan hard copy documents into a system and convert them into searchable documents. A key word search of these was then conducted and the responsive documents were reviewed to determine which were disclosable. The conversion was done using OCR to image hard copy documents and convert them into word searchable documents. It became apparent, after the initial hearing, that problems associated with this imaging process had meant that a potentially large number of disclosable documents had been missed by the searches. In these circumstances, the defendants contended that the liquidators could not have been said to have made a reasonable search.
On ground one of the appeal, the Court of Appeal considered whether a reasonable search had been carried out, in particular in the light of the omission from the disclosure list of documents known to be in the parties' control. The liquidators' solicitor had known of the importance of these documents but had failed to check that they had been uploaded to the electronic dataset. In these circumstances, no search, let alone a reasonable search, had been made for these critical documents. The Court of Appeal allowed the appeal on ground one, and struck out the liquidators' claim on the basis of their non-compliance with the unless order. Consequently, the Court of Appeal did not consider the other grounds of appeal.
Following the decision of the Court of Appeal, the liquidators renewed their application to the High Court for relief from sanctions for non-compliance with the unless order.
The first question to be decided by the judge was whether the application for relief should be confined to the ground on which the Court of Appeal had concluded that the liquidators had been in breach of the order, or whether the judge could consider all the original grounds of alleged default, plus the OCR issue (that had not been raised at the first hearing). The judge found that once a first instance judgement had been set aside for any reason it became void ab initio and therefore he could consider all the grounds on which the defendants contended that the order had been breached.
He therefore considered each individual alleged breach of the order against the criteria for relief from sanctions set out in CPR3.9, clarified by the Court of Appeal in Denton v TH White Limited[ii]. The liquidators contended that the application ought to succeed at each of the three stages set out in Denton, whilst the defendants said that on proper analysis the breach by the liquidators was serious and significant, that there was no excuse for the breaches and that relief ought to be refused as a result of the long history of delay.
The judge first considered the failure to disclose relevant documents that had led the Court of Appeal to find the liquidators had not carried out a reasonable search. He concluded that the omission of these documents from the disclosure list was a serious breach but that it was not in itself significant. This was because it was not a case of highly material documents being concealed; the breach had resulted from human error; the parties were aware of the documents' existence; and once identified, this error was easily rectifiable. The judge concluded that had this been the only breach he would have granted relief from sanction.
The defendants' further complaint was that the disclosure list had failed to meet the requirements of CPR 31.10 by failing sufficiently to describe the documents contained within it. They contended that this breach was significant as the list served was 'so vague as to be of no practical utility'. The liquidators argued that they were entitled to rely on PD31B because the exercise being undertaken was e-disclosure as a result of both the methodology employed and the tactit agreement of the Respondents' solicitors, or was so close to such an exercise that it should be considered in analogy with PD31B. They suggested this as PD31B expands on the requirements and form of the disclosure list in CPR31.10 (3) when it applies. It provides that "in order to comply with rule 31.10(3) it will normally be necessary to list the doucments in date order, to number them consecutively and to give each a concise description (e.g. letter, claimant to defendant). Where there is a large number of documents all falling into a particular category the disclosing party may list those documents as a category rather than individually". In addition, the liquidators said that in any event the significance of this breach had been grossly overstated as access to all the documents could be obtained by the defendants by the click of a button.
The judge at the earlier hearing had initially rejected the submission that PD31B applied to these documents on the basis that what was being undertaken was an analysis of hard copy documents, albeit by electronic means, rather than electronic documents. However, he had found that the position was altered by the defendants' solicitors' agreement with the methodology used. The judge at this hearing found that PD31B did not apply and disagreed with the earlier finding that the defendants' solicitors' agreement with the methodology changed this. He held that all that had been agreed was the applied methodology, not the application of PD31B. Consequently, the liquidators had committed a serious and significant breach of the terms of the order in failing to provide a list that met the requirements imposed by PD31A. However, the fact that inspection was to be carried out by access to an electronic database served to mitigate the seriousness of this breach. This, coupled with the fact that the default could be corrected relatively easily, led the judge to conclude that he would have granted relief from sanctions on this breach.
In relation to the OCR issue, the judge found that this was 'the most serious and significant breach of the Order'. Having regard to the problems that had been illustrated with the methodology of the OCR search and the number of potentially relevant documents missed as a result, he could not conclude that a reasonable search for disclosable documents had been carried out. This failure was both serious and significant. There was no satisfactory explanation as to why this problem had occurred and further, after this problem had been identified there was no explanation as to why there was no attempt to rectify it. Given this and the series of other failures in the case, he felt it would be inappropriate to grant relief from the sanctions imposed by the unless order.
This case is a useful reminder of the potential pitfalls associated with a large disclosure exercises. It highlights the fact that PD31B will only apply to documents of electronic origin and not hard copy documents scanned in and searched by computer. It may still be open to parties in these circumstances to agree that PD31B will apply, but such an agreement should be express, as it is unlikely to be implied by the court. In addition, it illustrates the need to ensure that any methodology employed to filter large volumes of documents scanned to an electronic database will need to work effectively to limit the risk of a party being accused of failing to make a reasonable search for documents.
[i]  EWHC 1755 (Ch).
[ii]  EWCA Civ 906