Smailes v McNally: eDisclosure consequences of failure to comply with a clear Unless Order

My original plan was to include this case in a summary of recent eDisclosure cases. Once the long-delayed appeal judgment was published, it warranted more detail than the compendium would bear, so I publish it separately.

The eDisclosure case of 2014 was Smailes & Anor v McNally & Ors [2013] EWHC 2882 (Ch) (27 September 2013). Birss J decided that the claimant liquidators had conducted a reasonable search sufficient to comply with the terms of an Unless Order relating to disclosure. The Court of Appeal disagreed. Its judgment Smailes & Anor v McNally & Anor [2014] EWCA Civ 1296 (30 July 2014) only became available in December.

Precise reading of procedural rules

I suggest you read both judgments, the original one for its analysis of almost every point which can arise in an argument about electronic disclosure, and the appeal judgment for the point which actually mattered. I use Birss J’s judgment as a training aid, because it amply illustrates my continuing theme of RTFR (Read the F* Rules). The appeal judgment reminds us that reading the rules is only a start. Specifically (and to give away the ending) rules relating to the scope of “reasonable search” for documents don’t apply when the damn things are sitting in your office, already identified and agreed to be important.  Between them, the two judgments will leave you in no doubt that the procedural rules relating to disclosure are something which matter; you can win or lose the opportunity to fight a substantive (and in this case, substantial) case because of procedural failures relating to disclosure, with no consideration of the merits.

The judgment of Birss J and a “reasonable search” for documents

Birss J’s judgment is not short. Reduced to essential points it involves the following:

  • a party throwing every document it had at the other side;
  • the judge (Henderson J on an earlier hearing) struggling to find whether parties had reached agreement about the method of disclosure;
  • an argument about whether missing documents and inadequate descriptions could form the basis for a claim that there had been no disclosure;
  • doubt as to whether PD31B applied;
  • arguments about the form of the list;
  • certain specific omissions – the main point as it turned out;
  • on the other side, the applicant’s failure to bring adequate examples of alleged defects to the court’s attention whilst claiming to strike out the case.

Had the claimant made a reasonable search? We know from rules and cases which pre-date Jackson that we don’t have to look under every stone, and that the duty of search is qualified by reasonableness. We know from Rule 3.9 and from Mitchell, even as Mitchell has now been qualified by Denton, that compliance and court timetables are there to be obeyed and that a history of non-compliance over the life of the case will count against you if you have to seek the court’s forgiveness.

The defaulting claimant fell on a much simpler ground: if the terms of an Unless Order are clear and you fail to comply with it, then the matter is not a discretionary one. You are out.

This is not to deprive a party of the usual arguments about reasonableness and good faith in a normal case. As Lewison LJ said in the appeal judgment, this was not a normal case:

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.

Nevertheless, Smailes will be a killer for a party whose failure (at least in the context of an Unless Order) depends on oversight, or for one who commits to delivering something which does in fact exist and fails to do so. It did not help that this was the sixth order for disclosure and that the trial had been vacated twice, but the implications of Smailes do not depend on such circumstances.

The Appeal

As its opening paragraph makes clear, the Court of Appeal was concerned only with the question whether the claimant liquidators of Atrium had complied with an Unless Order in connection with disclosure. Birss J had decided that they had complied. The Court of Appeal concluded that they had not. That brought the proceedings to an end, subject to any further application made by the liquidators for relief from sanctions.

Let’s repeat that to make sure that you get the point: proceedings by a liquidator for very substantial sums against former officers of the company were brought to an end because of the claimants’ failure to comply with an Unless Order relating to disclosure.

Picking up points in the appeal judgment in the order in which they occur, we have the following:

A reminder that “massive over-disclosure carries a substantial risk that the important documents will be overlooked”. [Paragraph 5] (by the way, the case referred to there is Nichia Corporation v Argos not Nochia as the transcript has it).

There had been a long history of inadequate disclosure; as Henderson J had put it when making the Unless Order “the actions of the liquidator since August do appear to me to evince a recognition of wholesale inadequacy…” [Paragraph 10] (this serves as a reminder that procedural deficiencies are now considered in an overall context of compliance or otherwise, and not just for themselves alone).

The Unless Order was the sixth disclosure deadline that had been set [Paragraph 15]

It was common ground that the liquidators had in their possession highly relevant documents known as “scripts” [Paragraph 21]

The solicitor giving disclosure “knew the scripts were vitally important documents” [Paragraph 27] (by agreement, on proportionality grounds, they stood substitute for a large quantity of underlying detailed expense records etc).

In a passage about the reasonableness of the search [paragraphs 35 to 42] the court considered factors which weighed the ease with which the small number of scripts could have been found, their indisputable importance, a supplemental disclosure list of 7,000 documents (which implied that the original search had not been a reasonable one), and the high value of the claim. The court observed that “This is not a case of finding a significant document, even a smoking gun, on the off-chance”. Despite knowing that the documents existed and that they were important the solicitor “made no search for these critical documents let alone a reasonable search”.

The question whether the Unless Order had been complied with was not a matter of discretion and the judge was wrong to say that it was :

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. [Paragraph 40; the emphasis is mine].

Morgan J had made it clear in Digicel (St. Lucia) Ltd & Ors v Cable & Wireless Plc & Ors [2008] EWHC 2522 (Ch) (23 October 2008) that the rules do not require that “no stone be left unturned”. This does not apply in circumstances where “the existence of the documents and their relevance has already been identified”. [Paragraph 42]

The present case was also different from Realkredit Denmark AS v York Montague Ltd [1999] CPLR 272 which involved disputes about relevance and the good faith of those who prepared the list. It differed also from Morgans v Needham where the Unless Order was unclear and imprecise. [Paragraph 44] (The Smailes appeal judgment says the Morgans Unless Order was “hopelessly clear and imprecise”; I can’t find Morgans v Needham, but I assume that “hopelessly clear” is a typing error).

The judge’s conclusion that the liquidators had made a reasonable search misses the point; there was no dispute about the existence of the scripts or their relevance (or, indeed, their location) but they had not been disclosed. [Paragraph 48]

The court considered the interrelation between the search obligation and the good or bad faith of the person conducting it. It is tempting to assume that “good faith” and “a reasonable search” are equivalent expressions. Whilst this might generally the true (for example in a case like Digicel where there were thousands of documents and judgments to be made about scope), there will also be cases where non-compliance with a clear order cannot be justified by reference to good faith.

“..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”. [Paragraphs 49 to 50]

Arguments about whether a disclosure statement should be treated as conclusive, and the usual rule that defects are to be dealt with by applications for specific disclosure, are not relevant to a case in which six dates for disclosure had been set and the trial date had already been vacated twice. [Paragraphs 53 to 57].

The implications for the parties

It is important to be clear what the implications are of this successful appeal. Rimer LJ put it like this:

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. [Paragraph 59]

Interim costs of £95,000 paid following the original hearing were to be repaid. The costs of the appeal were to fall on the liquidators. The sum of £2.5 million was claimed in costs but this figure was not supported by any details and were to be assessed by a costs judge. These are not trivial sums for a procedural application – but the case turned on its outcome.

The case was over, subject to the right, such as it may be, of the liquidators to apply for relief from sanctions in respect of the original order. The liquidators had lost the opportunity to press a very large claim against the former officers of the company because of a defect in disclosure involving a relatively small number of documents whose existence was known of and of which copies existed in the hands of the giving party. Although the court had made reference to the long history of non-compliance, that does not appear to have been the deciding factor or, to put it another way, it would be possible to be struck out simply because the terms of an order had not been complied with. That was so even where there was no suggestion of bad faith on the part of the giving party.

The implications for the rest of us

This is why we have a Court of Appeal. When I read the original judgment, I thought the judge had been kind to the claimants but could not fault his analysis. Once Lewison LJ had juxtaposed the duty of reasonable search and the bare fact that there was no searching to be done because the documents were already right there, it became clear that no amount of reasonableness could qualify the clear terms of the order.

Lewison LJ described the case as “almost unique”. Don’t conclude from this that Smailes is unimportant. It illustrates (I’ll say this yet again, though you will have got the point by now)  that procedural defects can trump merits. Between them, the two judgments serve as an illustration of the importance of a precise reading of the rules and their application to the facts (which in this case showed that the hotly-contested “reasonable search” point did not apply at all). The terms of any order, particularly one with case-ending potential, need great care – however “almost unique” the case, there will certainly be other cases where a precise reading of an order establishes its own regime, effectively by-passing the general application of a rule. Lastly, time spent in checking is seldom wasted, particularly when the word “Unless” is being used.

What we should get from the case owes little to the actual outcome. All the arguments about the scope of a reasonable search of Rule 31.7 did not precisely apply here, but they are vital both to those who wish properly to reduce the scope of disclosure on proportionality grounds and to those who would challenge the scope of another. Don’t let this judgment, with its “almost unique” facts, put you off using the rules, and Rule 31.7 in particular, to narrow the ambit of disclosure.



About Chris Dale

I have been an English solicitor since 1980. I run the e-Disclosure Information Project which collects and comments on information about electronic disclosure / eDiscovery and related subjects in the UK, the US, AsiaPac and elsewhere
This entry was posted in CPR, Discovery, eDisclosure, eDiscovery, Electronic disclosure, Litigation. Bookmark the permalink.

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