The disclosure pilot and adverse documents: Castle Water Limited v Thames Utilities Limited [2020] EWHC 1374 (TCC)

June 16, 2020

By Steven Fennell

Castle Water Limited v Thames Utilities Limited [2020] EWHC 1374 (TCC) is the first reported case under the Business and Property Courts Disclosure Pilot (PD51U) to deal specifically with the steps which must be taken in relation to adverse documents. It introduces a distinction between “checks” for adverse documents and “searches” for adverse documents.

Background

In the three main earlier authorities, the courts have consistently stated that the disclosure pilot is to be applied so that disclosure is “reasonable and proportionate”.  The parties must co-operate.  Extended disclosure must be justified.  The issues for disclosure are unlikely to be the same as the issues for the trial (UTB LLC v Sheffield United Ltd [2019] EWHC 914 (Ch); McParland and Partners Ltd v Whitehead [2020] EWHC 298 (Ch); Brearley v Higgs & Sons [2020] EWHC 376 (Ch)).  In the first of those cases, Sir Geoffrey Vos C commented that: “The court expects the parties to co-operate to allow it to achieve a just, expeditious and proportionate resolution of the real commercial issues that separate them.  Court proceedings are not a stage for a grudge match.”

Each of the five models of extended disclosure require a party to disclose “known adverse documents”.

A document is “adverse” if it or any information it contains contradicts or materially damages the disclosing party’s contention or version of events on an issue in dispute, or supports the contention or version of events of an opposing party on an issue in dispute.

PD51U goes on to define known adverse documents as documents that a party is “actually aware (without undertaking any further search for documents than it has already undertaken or caused to be undertaken) both (a) are or were previously within its control and (b) are adverse.” For this purpose “a company or organisation is “aware” if any person with accountability or responsibility within the company or organisation for the events or the circumstances which are the subject of the case, or for the conduct of the proceedings, is aware.”

The judgment in Castle Water

Castle Water concerned a very large claim involving potentially huge numbers of documents, most of them likely to be electronic and generated by multiple individuals.  The issue for the court was the meaning of “known adverse documents” in this context.

Stuart-Smith J held that a party is obliged to take reasonable steps to check whether it has any known adverse documents.  PD51U offers no guidance on what this will involve. It will depend on the facts of the case. The judgment suggests that:

• In a case of any complexity or an organisation of any size, reasonable steps will involve more than asking a generalised question; and
• It will not be enough to ask questions only of the leaders or controlling minds of an organisation unless the issue in question is irrelevant to others in the organisation.

Having made reasonable and proportionate checks to see if it has known adverse documents, the party must then make reasonable and proportionate checks to locate them.

Finally, parties are not obliged to renew their checks on a continuing basis, but if something in the litigation changes, the checks may need to be revisited.  The duty to disclose known adverse documents is a continuing duty and so if an adverse document becomes known during the litigation, it must be disclosed.

The rationale for this decision is clear and straightforward.  Stuart Smith J commented that any other approach would turn the Disclosure Pilot into a “rogue’s charter”.

Comment

At paragraph 11 of the judgment, Stuart-Smith J says: “There is a clear distinction between carrying out checks and carrying out searches.”  It is respectfully suggested that the distinction between searches and checks is perhaps not very clear at all.  Searches must involve more than checks, but the difference between the two concepts will have to be clarified by the CPR or further authorities.  The suggestions below are only preliminary observations.

The role of the solicitor

The main distinction in practice probably concerns the role of the solicitor in the disclosure process. In disclosure under CPR 31, the solicitor has responsibility for careful inspection and supervision in the disclosure process and that responsibility cannot simply be left to the client.  This means that:

• The best way to proceed is for the solicitor to take possession of all the original documents as early as possible. The client should not be allowed to decide relevance or even potential relevance.  It is for the solicitor to decide what documents are relevant and disclosable.
• If the solicitor believes that there are reasonable grounds for suspecting that the client has other documents which are not disclosed, he must investigate the matter further.
• If the solicitor becomes aware that disclosure is not complete, he must put the matter right at the earliest opportunity. The client must be asked to authorise the solicitor to inform the other side of the omitted documents and if that authority is not given and full disclosure is not provided, the solicitor must withdraw from the case.

In contrast to this, “checks” appear to be steps which the client can take without the overall supervision of the solicitor, with the aim of flushing out adverse documents known to individuals within the organisation who would otherwise not necessarily know to draw them to the attention of the team instructing the solicitors.

Documenting the checking process

Solicitors are likely to need to advise clients at the outset of the need to undertake checks for adverse documents.  The checking process will need to be considered against the facts of the particular case and the possible location of relevant adverse documents so that it is reasonable and proportionate.  It would be prudent for the solicitor to record the advice given and the action agreed with the client in response to it, and for the client to ensure that all internal communications are carefully preserved, so that evidence can be given on the checking process if necessary.

Insolvency litigation

The disclosure pilot can cause particular difficulties in insolvency litigation where the office holder bringing the claim is dependent on the company’s documentation.  A director might have a good idea of what is in the books and records, but an outsider (such as a respondent to a transaction at undervalue or section 127 claim) will not.

In Hellard v Graiseley Investments Limited [2018] EWHC 2664 (Ch) at [116], ICC Judge Barber addressed this point:

“A liquidator conducting an investigation into a contentious issue arising in a company’s affairs should strive to gather and review all readily available evidence on that issue on an impartial basis. He should be alive to the possibility of conjecture and unsubstantiated opinion. He should re-evaluate evidence as the investigation progresses.”

The decision in Castle Water is consistent with this. Office-holders involved in litigation should be able to explain exactly what checks they have done to identify adverse documents in the company’s books and records and to show that their investigation has been impartial and even-handed.