The recent judgment of HHJ Pelling in the case of Smailes v McNally, in which he dismissed an application for relief from sanction, is the final chapter in a long running saga of a case which has, since June 2012, been solely about compliance with orders for disclosure. This judgment has brought into sharp focus the problems of conducting large hard copy disclosure exercises and, in particular, the characteristics of compliance with CPR 31 in the context of the “new” disclosure tools, which have become mainstays in the litigation world.
The applicants were liquidators of a series of companies which were, prior to 2006, part of a large national recruitment business. The liquidations were followed (between 2006 and 2011) by comprehensive and expensive investigations by the liquidators surrounding an alleged shortfall of tax. Ultimately, the liquidators issued proceedings in May 2011 against three former officers of the companies for fraudulent and wrongful trading, misfeasance, transactions defrauding creditors and transactions at undervalue. The claims were valued at in excess of £50 million. The main respondents, our clients, Mr McNally and Mr MacLean, provided a full defence to the liquidators’ claim.
During the investigation phase, the liquidators amassed a significant number of hard copy records of the companies. However, the liquidators had failed to secure the companies’ servers (or an image of the servers) which were sold with the business shortly after the companies went into administration, and also failed to obtain an image of the relevant laptop of the finance director, Mr English. The liquidators’ search for relevant documents was therefore focussed on the hard copy records.
Failure to search
When the liquidators produced their first list of documents in June 2012, it was immediately clear that no search had been carried out. In fact, a substantial part of the listing had been undertaken by the liquidators’ storage agents long before proceedings were issued. In response to challenge, the liquidators’ explanation was that the exercise they had undertaken was proportionate in the circumstances. Ultimately, the liquidators accepted that there had been no search within the meaning of CPR 31.7 and, in August 2012, they instructed their solicitors to commence a manual search of the documents to prepare a second list of documents. This exercise was never completed as, by November 2012, the liquidators changed solicitors and abandoned the manual review of the hard copy documents and embarked on their third attempt at disclosure.
A third way?
In an apparent attempt to mitigate the costs of a further manual review of the documents, the liquidators’ new solicitors proposed a disclosure methodology using an e-disclosure provider. The documents were scanned and uploaded to a review platform. The documents were then subjected to Optical Character Recognition software (OCR) to convert the scanned “picture” into a “readable” form. Search terms were applied and the results reviewed for relevance and privilege and listed, resulting in the third list of documents.
The third list was served in purported compliance with an unless order on 27 June 2013. However, it was clear that the process had failed in a number of fundamental respects. In particular, key documents in the liquidators’ possession (the importance of which were not in dispute) were not included in the list. The OCR issue loomed in the background but, until inspection in November 2013, it was not possible to assess the damage that had been done and the disclosure battle continued elsewhere. However, after inspection, access to the review platform showed that the OCR had caused significant and profound mistransliteration (or just the simple wholesale deletion) of large swathes of text. By way of example, “REPORT TO THE ADMINISTRATOR OF ATRIUM TRAINING SERVICES LTD (in administration)” became “ATEIUIV[ TRAINT-NG SERVICES LTD ([= a~r~n[~tratton)”.
It was obvious that the documents were simply not suitable to the OCR process. Many of the documents were old, handwritten, forms, copies of copies, faded or simply in printed text which was not readable by the software. Worse still, the documents we were looking at were the “best of the rest” as they had, by definition, included at least one searchable word.
In July 2014, the liquidators’ claims were struck out by the Court of Appeal for a further failure to conduct a reasonable search in breach of the unless order (the failure to search for the key documents not included in the list). The Court of Appeal did not, however, examine the OCR issue.
In considering the liquidators’ application for relief from sanction under the test set out in Denton, HHJ Pelling found that the most serious and significant failing was the failure of the OCR methodology and, even more profound in the context of an application for relief from sanction, was the failure of the liquidators to provide any satisfactory explanation or proposal as to the extent of the problem or how to deal with the defects.
It may be considered that this type of case is a dying breed, as we move away from a hard copy paper world, and therefore any warnings arising from this case may have a relatively short “shelf life”.
Certainly, the length of time between the events in question and the start of the disclosure process in January 2013, some 10 years, is unusual. Also, there is no doubt that the court was particularly troubled by the gravity of the allegations against the respondents, and the fact that the respondents had long since retired at the time the proceedings were commenced and had little or no knowledge of the relevant documents which had been under the control of the finance director. Also, again unusually, there were no electronic documents.
But what we consider to be the gravest of the court’s criticisms, in the context of an application for relief from sanction under the new post-Jackson regime, was the liquidators’ failure to respond with urgency to, or indeed to even acknowledge, the obvious failings of their chosen methodology, which is something which is not specific to a large hard copy disclosure exercise, or even to the use of OCR in that context. It is clear that it was the issue of the liquidators’ lack of response that made a significant impression on the court, particularly in circumstances where the liquidators had the benefit of experienced and well-resourced representation.
HHJ Pelling’s conclusion on the point is summarised at paragraph 96 of his judgment:
“Once it became apparent to the Liquidators’ solicitors that the OCR scan was defective (as must have been the case at the latest once physical examination of the documents that had not been identified by keyword search started to reveal documents that contained keywords which were disclosable) then that was the time to increase the resources being made available to complete a physical examination of the documents that have so far not been physically examined and/or approach the respondents’ solicitors and/or the court for a variation to the terms of the Default Order relying on the principle that I refer to earlier in this judgment. That was not done. There is thus no satisfactory explanation for the failure that has occurred.”