Alice in e-disclosure land

To many practitioners, e-disclosure can be as scary and unpredictable as Alice falling down the rabbit hole. However, in this day and age where even my mother has an iPhone, our reliance on electronic methods of communication is ever increasing, and 90 per cent of business documentation is stored electronically, every practitioner, particularly in the practice of fraud litigation, must have a ready grasp of the range of electronically stored information (ESI), how it can be used forensically and how it can be obtained from the opponent.

It is clear from recent decisions such as Earles v Barclays Bank [2009] EWHC 2500 (Mercantile) and Gavin Goodale & Ors v The Ministry of Justice (Opiate Dependants Prisoners Group Litigation) [2010] EWHC B4 (QB) that judges expect practitioners to be ESI and e-disclosure conversant and consider an understanding of the range, use and retrieval of ESI to be a fundamental tool in a litigators skill set.

This is reinforced by the fact that, in chapter 37 of his final report on costs, Lord Justice Jackson addressed the importance of e-disclosure issues in future litigation, recommended that practitioners and judges alike should be trained in e-disclosure issues and proposed an e-disclosure practice direction (to which an e-disclosure questionnaire will be annexed) which was due to brought into effect in April 2010 but has been now been delayed. Any reader who is not already aware of these developments should go straight to chapter 37 and then to Goodale, where Senior Master Whitaker, who led the e-disclosure working party, annexed a copy of the questionnaire to his judgment and ordered the defendant to comply with it.

Several issues follow from this decision. First, the use of the e-disclosure questionnaire will become much more prevalent even before the new practice direction comes into force. Second, practitioners will be expected to be familiar with the questionnaire, understand how the questionnaire should be complied with in order to advise their clients properly on their obligations under it, and most importantly have a practical understanding of the ESI issues which arise from it. Accordingly, the requirement to be ESI and e-disclosure conversant applies right across the board to both solicitors and counsel, regardless of the size of firm or indeed case. The days of hiding behind the myth that ESI issues can only be understood by an IT specialist are fast expiring. In fact, the better informed practitioners are about ESI, the better they will be at devising a focused, cost-effective and tactical approach to its identification, preservation, retrieval, disclosure and use.

Identifying, preserving and obtaining evidence

One of the first considerations in a fraud case will inevitably be identifying the evidence supporting the allegations, preserving that evidence and obtaining it from the opposing party. In some instances, a search and seize order may need to be obtained as a first step in order to preserve such evidence. In cases where search and seize orders are not applicable, and even in cases where UK companies dealing in America have preservation and disclosure obligations under federal law pursuant to the Sarbanes-Oxley Act 2002, I recommend that in light of Earles and most recently Fiddes v Channel 4 Television Corporation & Ors CA (Civ Div) 24 March 2010 (unreported) the opposing party should be requested at the earliest opportunity to preserve: (i) all ESI which may be relevant to the issues in the action (in as far as such issues can be identified at an early stage), wherever it is located '“ be it in one or multiple jurisdictions; and (ii) any device on which the ESI is stored '“ be it laptop, computer, PDA, server, back-up tape, iPhone, Blackberry or memory stick used by any particular party or category of person considered relevant.

In Earles, the bank's in-house legal counsel failed to preserve contemporaneous phone and email records '“ which would either be supportive of or adverse to their case '“ despite being sent a letter before action. While the successful defendant bank was severely penalised in costs for its wholesale disregard of its disclosure obligations, HHJ Simon Brown did not find that the defendant's conduct was deliberate or constituted 'spoliation in order to gain tactical advantage at the trial', and did not make any adverse inferences against the bank and apply the presumption used in Infabrics Ltd v Jaytex Ltd [1985] FSR 75. While such a finding '“ although perhaps surprising given HHJ Simon Brown's criticisms of the defendant and its legal team at paragraphs 32 and 41 '“ was no doubt justified on the facts. More worrying is the distinction at paragraphs 28 and 29 between pre-commencement and post-commencement document/evidence preservation obligations.

Under the current CPR regime where pre-action letters are expected to be used as a matter of common practice, and where litigation is clearly anticipated at that stage, it is surprising to find such an artificial distinction still being drawn.

Even more surprising was the recent decision of the Court of Appeal in Fiddes, where the court refused to allow an appeal in a libel action against a judge's refusal of an application for specific disclosure sought against the defendant television channel with considerable resources. In that case, the laptop of the third defendant journalist, who had produced and narrated the programme which was the subject of the libel action, had been stolen the night before inspection of some of its ESI. The claimant sought an order that the first defendant search the back-up tapes of its computer system for deleted emails sent by or to the journalist relating to the making of the programme, which emails could reveal evidence of the state of mind and therefore malice of the journalist. Despite the fact that the first defendant accepted that the emails would have been searched had they not been deleted, and the costs of retrieval was estimated at £10,000 where the costs had already escalated to £1m, the judge refused the application on the grounds of relevance and significance under CPR r.31.7(2). The Court of Appeal, applying the 'case-by-case' approach set out by Morgan J in Digicel (St Lucia) Ltd v Cable & Wireless Plc [2008] EWHC 2522 Ch, refused the appeal.

At first blush this is a frustrating and striking decision '“ both at first instance and appeal. Where the resisting party has very substantial resources and appears to have accepted the relevance of the disclosure sought from it (for search purposes at least) but failed to take any steps to preserve the information on the journalist's laptop, one would have expected it to be compelled to bear the additional costs of retrieval of the information from its back-up tapes. It appears that this decision is symptomatic of cases where parties are able to successfully resist e-disclosure applications on the grounds of cost and relevance, and where too little weight is being placed on the obligations of parties to preserve evidence once litigation is anticipated or indeed initiated.

In both cases cited above, had the parties been requested to preserve any relevant ESI from the outset, perhaps: (i) the adverse inference of spoliation may have been more readily drawn; or (ii) the information on the laptop preserved, or the order sought been made against the defendant, despite the costs and relevance arguments deployed by it to defeat such application.

Proportionality v the smoking gun

In fraud actions, where by their very nature the tendency of the fraudster or conspirator is to 'conceal rather than reveal' (per Morgan J in Digicell), and disclosure is all the more critical to the success of the claim, preservation and identification of ESI at the earliest stage, in order to facilitate such e-disclosure, is vital. The ever increasing number of devices on which ESI is created, exchanged and retained (computer, Blackberry, PDA, iPhone, server, laptop, back-up tape) coupled with both the sheer volume and different forms of ESI (e.g. telephone records, emails, transaction records, electronic diaries, finalised and draft agreements, internet searches, text messages, etc.) not to mention the metadata about the ESI itself (from which one can ascertain when the data was first created, altered and even deleted), provide very fertile ground for arguments on the extent, relevance, cost and proportionality of e-disclosure sought from the opposing party, particularly in fraud and commercial actions.

The mountain of ESI now available and the search for the smoking gun hidden within it create an inevitable tension between casting the e-disclosure net as wide as possible, and issues about the relevance and disproportionately high costs of retrieval and review of the ESI sought. Too few practitioners or judges have the necessary grasp of such e-disclosure and ESI issues to properly test and challenge the relevance, costs and proportionality arguments deployed.

This lack of knowledge and understanding too often enables these arguments to succeed under the aegis that the standard disclosure obligations set out in CPR 31.7 which replaced the requirement to disclose any document relating to any matter in question under the principles set out by Brett LJ in Cie Financiere et Commerciale du Pacifique v Peruvian Guano Co (1882) 11 QB 55 to CPR must be applied and observed at all costs.

However, this could soon change in fraud actions. Jackson LJ proposes that in substantial cases (which include cases involving sums or assets exceeding £1m, or agreed to be substantial by the parties themselves) a disclosure 'menu option' approach should be adopted, which is set out in a draft rule 31.5A. This proposed rule will provide a broad spectrum of disclosure options, ranging from disposing with disclosure altogether to disclosure under Peruvian Guano principles. In paragraph 3.13 of chapter 37, Jackson LJ concluded: 'In my view, it is important that the full scale Peruvian Guano disclosure be included as one of the options in the menu. This level of disclosure is sometimes appropriate in fraud cases.'

However, even when draft rule 31.5A comes into force, and there will much more flexibility than the current default position under standard disclosure, Peruvian Guano disclosure will in all probability still be the exception.

Therefore, for both current and future purposes, practitioners should be able to meet the arguments deployed to resist e-disclosure applications by becoming ESI and e-disclosure conversant.

This will enable practitioners to identify, preserve, and ultimately obtain critical e-disclosure for use in fraud actions, obtain better e-disclosure orders from a court by being able to deal with arguments on costs and proportionality and meet the standards now already expected of practitioners by judges.