Pre-action disclosure and the new disclosure regime

A key topic for 2018 is likely to be disclosure, following the recent publication of proposals for a new multi-track disclosure regime. The proposals are currently open for consultation, the plan being to test them in a two year pilot in the Business and Property Courts once they have been approved by the Civil Procedure Rules Committee.

The proposed new regime doesn’t deal with pre-action disclosure or make any reference to the existing disclosure duty under the pre-action protocols. There are however many parallels between the pre-action disclosure regime under CPR 31.16 and the new proposals. We look at the Commercial Court decision in ECU Group Plc v HSBC Bank Plc as an illustration of what the disclosure process could look like under the new regime.

Disclosure pilot proposals

The proposals have been made in response to widespread concerns about the excessive cost, scale and complexity of disclosure. Lawyers and judges alike have continued to default to standard disclosure despite the introduction of Jackson LJ’s menu of disclosure options in 2013. Standard disclosure requires the parties to conduct a general search for relevant documents but this produces too much data. The new regime therefore turns its back resolutely on standard search-based disclosure.

Basic and extended disclosure

Search-based disclosure may still be necessary in some cases, but the starting point will be “basic disclosure”. This is similar to existing pre-action requirements under the protocols and related Practice Direction, and does not require the parties to search for documents. 

If “extended disclosure” is requested, the parties will be able to choose from a menu of options (Models A to E ranging from no disclosure to train of enquiry disclosure) on an issue by issue basis.

Model B is described as “limited disclosure”. Like “basic disclosure”, it does not require a party to search beyond any search already conducted for the purpose of obtaining advice on its case or preparing its statement of case.

Model C is likely to apply in many cases. It is described as “request-led search-based disclosure” and should produce fewer documents than Model D which is described as “narrow search-based disclosure, with or without narrative documents”.

Model D looks much like standard disclosure applied on an issue by issue basis, involving a reasonable and proportionate search for documents likely to support or undermine the party’s case or that of another party.

Pre-action disclosure under CPR 31.16

A potential party to proceedings can apply for pre-action disclosure (PAD) against another potential party where the documents requested would fall within the scope of standard disclosure. The disclosure must be desirable in order to dispose fairly of the anticipated proceedings, to assist the dispute to be resolved without proceedings or to save costs. If this jurisdictional threshold is satisfied, the court has a wide discretion. Relevant factors include the nature of the claim, the clarity and identification of the issues, the nature of the documents requested and the opportunity the applicant has to make their case without PAD.

Parallels between PAD and the new regime

The test under CPR 31.16 sheds light on the approach to disclosure endorsed by the new proposals. No longer is search-based disclosure a right or a duty – it must be justified and costed. Under the new regime, if extended disclosure is requested, the parties must complete the new disclosure review document (DRD) by identifying the issues for disclosure and the proposed model for disclosure for each issue. Where a party wants Model C disclosure, it has to set out its requests. 

Whatever the model of extended disclosure, the parties have to complete Section 2 of the DRD before the case management conference. This requires them to provide an estimate of “the total cost to it of the search, review and production process that it would need to undertake in order to comply with an order for extended disclosure in the form sought by each party”. If they can’t agree on the approach to extended disclosure, they “will be expected to be able to provide more detailed information at the CMC as to how their global estimates were arrived at and the impact upon them of particular requests for extended disclosure”. 

ECU v HSBC

The recent decision in ECU V HSBC is of relevance here because of the way in which ECU was able to frame its successful application for PAD. This is what parties are going to have to do under the new regime if they wish to obtain their preferred order for extended disclosure.

The context of the application was the alleged manipulation of foreign exchange markets by HSBC’s traders in London and New York in 2006. HSBC have already been fined by US regulators for FX rigging between 2009 and 2013. The allegations relate to three trades carried out by HSBC for ECU, a currency debt management company, under a long-standing contractual relationship. 

ECU claims that HSBC traders engaged in “front-running”, manipulating the market by their own buying and selling activities so as artificially to push the relevant rates up in the knowledge that ECU had placed “stop-loss” orders which were then triggered. This would have resulted in very large profits per trade for HSBC at the expense of ECU and its clients.

ECU’s application

The judge was satisfied that the jurisdictional threshold had been met by ECU. There was a real prospect that PAD would show whether or not there had been front-running. Either any claim would settle without proceedings or early on, with HSBC’s limitation defence and ECU’s deliberate concealment argument dealt with as a separate issue, or the claim would not be pursued. Alternatively, PAD would narrow the issues. Whichever the outcome, there should be a real saving on costs. 

The judge’s exercise of discretion was highly influenced by the fact that the disclosure sought was focussed and clear: ECU wanted to see HSBC’s documents concerning the short periods between the placing and activation of the trades so as to see whether or not front-running had occurred. The time period for all of the trades was only 4 hours and 1 minute. It also wanted to see documents relating to HSBC’s investigation following ECU’s complaint about the trades on 1 February 2006.

The order for disclosure

ECU was granted disclosure of the following documents, at their expense:

• Bloomberg messages for the relevant period - estimated cost £4,500
• Emails for the period between 1 February and 15 March 2006 to and from those involved in the investigation that led to HSBC’s denial of wrongdoing to ECU on 9 March 2006 – estimated cost £12,500
• Underlying trading data for the trade on 6 January 2016 for a period of 25 minutes – estimated cost £25-35,000 plus compensation for HSBC management time
• Global market and compliance documents relating to the detailed enquiries and findings referred to in HSBC’s letter of 9 March 2006 – keyword search ordered for period around the investigation at unspecified cost

Comparison between ECU and the new regime

Whatever the final form of the proposed new disclosure regime to be tested in the Business and Property Court pilot, general and unfocussed searching for relevant documents is likely to become a thing of the past, or certainly an activity that a party can expect to pay for itself. The discussion about the categories of documents in ECU v HSBC illustrates the process that parties will have to go through if they wish to see more than the key documents available to each party without undertaking a search. Although parties are only asked to give a global figure for their proposal for extended disclosure in the DRD, they will have to be able to provide costs for any proposed model for each issue, much in the same way that parties need to be able to speak to the detail of both sides’ costs budgets at the CMC. 

Timing of disclosure

The timing of disclosure may prove to be less of an issue than its scope and cost effectiveness. Where tightly focussed PAD could lead to settlement or a narrowing of issues, courts are now more likely to consider it as long as the claim is not speculative. Nor will it always be the claimant seeking early disclosure. In The Bullring Limited Partnership v Laing O'Rourke Midlands Ltd the judge ordered the claimant to give early disclosure of two categories of documents before it had provided formal particulars of claim. The documents were easy to identify and should have been disclosed years earlier. Disclosure would narrow the issues and level the playing field so as to ensure that the matter was either capable of being resolved or, if not, the parties were at least operating on the same basic data.

The problem of over-disclosure

The need to limit the scope of disclosure in order to reduce the costs of litigation for both the parties and the courts has become the overriding concern. Under the proposed new regime, parties will have a duty to refrain from providing irrelevant documents to another party. This problem was flagged up by Rix LJ more than ten years ago in Nichia Corporation v Argos Limited: 

“…it is the downstream costs caused by over-disclosure which so often are so substantial and so pointless. It can even be said, in cases of massive over-disclosure, that there is a real risk that the really important documents will get overlooked – where does a wise man hide a leaf?”.

The problem of over-disclosure was graphically demonstrated last year in ICAP Management Services Ltd v Berry where fewer than 100 pages of the 14,000 pages within the court bundles were referred to during a four day hearing. 

Concerns about the proposed regime

The plan ultimately is that CPR 31 and the associated Practice Directions should be rewritten, reordered, and simplified, into a single rule which will apply presumably to all multi-track cases. The two year pilot is limited to the Business and Property Court.

Many are discomforted about the fact that the new disclosure proposals only require parties to disclose adverse documents harmful to their case that are known to them. Nelsonian blindness is clearly a risk here, given that there is no general duty to search for relevant documents. Others may be more concerned about the complexity of extended disclosure on an issue by issue basis and the consequently increased costs in the lead up to the CMC. Nonetheless, if you accept the view that wholesale cultural change is required to deal with over-disclosure, these proposals bravely address the problem head-on.