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When will an auditor be required to provide pre-action disclosure?

  • Legal Development 12 June 2020 12 June 2020
  • UK & Europe

  • Professional Practices

A recent judgment has provided welcome confirmation of the position that pre-action disclosure orders are not the norm in the Commercial Court and pre-action disclosure applications should only succeed if there are grounds for distinguishing a case from the "usual run".

When will an auditor be required to provide pre-action disclosure?

In Carillion Plc (in liquidation) v KPMG LLP & Anor [2020] EWHC 1416 (Comm), the court dismissed an application for pre-action disclosure under CPR 31.16. Carillion sought the production of documents in certain categories contained on KPMG's electronic audit files for three year end audits, which KPMG had declined to disclose voluntarily.

The legal principles

CPR 31.16 sets out that the court can only make an order for pre-action disclosure where:

  • the respondent and applicant are both likely to be parties to subsequent proceedings (CPR 31.16 (a) and (b)), although it is not necessary to show in addition that the initiation of such proceedings is likely1;
  • the respondent's duty by way of standard disclosure would (on the balance of probabilities) extend to the documents or classes of documents sought if proceedings had been started (CPR 31.16 (c))2; and
  • disclosure before proceedings have started is desirable in order to: dispose of the anticipated proceedings fairly, assist the dispute to be resolved without proceedings, or save costs (CPR 31.16 (d)). According to the authorities, the requirement is to show a "real prospect" of one of these factors being satisfied, which is a relatively low threshold.

If these jurisdictional thresholds are met, the court will then consider whether it would be appropriate to exercise its discretion to make an order. If a request is too broad, the court has discretion to modify the order appropriately, rather than dismiss the application.     

In the present case, the Judge noted that applications for pre-action disclosure in the Commercial Court are relatively rare and that the authorities he was referred to contained no recent examples of successful applications. Moreover, following Hutchinson 3G UK Ltd v O2 (UK) Ltd [2008] EWHC 55 (Comm), in order for a pre-action disclosure application to succeed, the circumstances must be outside the "usual run"; and following Assetco plc v Grant Thornton UK LLP [2013] EWHC 1215, in the commercial context, a pre-action disclosure order is, if not exceptional, unusual.

The decision

The issues for the court were: whether the requirements of CPR 31.16(c) and (d) were satisfied and if so, whether it should exercise its discretion to grant the order sought.

CPR 31.16(c) – were the documents sought within the scope of standard disclosure?

The Judge considered that it was more likely than not that the documents sought by Carillion's "focused" request were within the scope of standard disclosure in relation to the issues that were likely to arise (leaving aside a paragraph requesting general documents on the audit file). He held that the Court of Appeal decision in Bermuda International Securities Ltd v KPMG [2001] Lloyd's Rep PN 392 (where an appeal against an order for pre-action disclosure was dismissed) shows that a focused application for specific audit working papers, in the context of a potential audit negligence claim, will likely fall within the scope of standard disclosure, although this will depend on the nature of each case and the wording of the order sought.

CPR 31.16(d) –was pre-action disclosure desirable to: dispose of the anticipated proceedings fairly, assist the dispute to be resolved without proceedings, or save costs?

Turning to CPR 31.16(d), the Judge identified that the courts have often held that this requirement is satisfied because pre-action disclosure will enable the pleadings to be more focused, thus avoiding the costs and complexities caused by later amendments. The Judge concluded, "with some hesitation" that the threshold was crossed in the present case, because if the documents were provided, Carillion would be able to prepare a more focused pleading, at least in relation to the contracts in respect of which it did not presently have access to any relevant audit working papers.

The exercise of the court's discretion

However, overall, the Judge held that it would not be appropriate for the court to exercise its discretion in favour of ordering pre-action disclosure, for the following reasons:

  1. Carillion could satisfactorily plead its case from its own documents and the expert evidence that it had obtained, without the audit working papers sought, particularly given the 25 page limit for pleadings in the Commercial Court. It was clear from the pre-action correspondence and the witness statement in support of the application that a considerable amount of work had already been carried out. Whilst not determinative, this factor was relevant when considering the big picture.
  2. In seeking the disclosure with the aim of reaching a "concluded" and "fully informed" view of the alleged negligence, Carillion was trying to obtain an "inappropriate" level of assurance and certainty. The Judge stated that it would be possible to say that in every professional negligence case, pre-action disclosure would assist the claimant's expert in reaching a fully informed or concluded view, but pre-action disclosure is not the norm.
  3. If the application was granted, KPMG would be required to review a large number of documents (estimated to be in the region of between 6,000 and 8,500 documents). The Judge stated that, whilst this was not an overwhelming exercise for a large audit firm inevitably facing litigation on a fairly regular basis, it would nevertheless be burdensome (an important factor to be considered in the exercise of the court's discretion), even though the costs will ordinarily be borne by the applicant.

    The Judge held that if, as in the present case, a large piece of litigation would be commenced in any event, leading to a significant disclosure exercise likely to stretch well beyond the documents sought, a court may conclude that disclosure should be given after pleadings, in the ordinary manner. It was also considered to be relevant that the Commercial Court has taken steps (reflected in the Disclosure Pilot) to provide for a more focused approach to disclosure and that the Commercial Court Guide discourages extensive pre-action procedures.
  4. The Judge identified a potential dilemma that may face claimants, which he considered was engaged in the present case: in order to seek to make the application align with case law, which emphasises the importance of a focused approach, Carillion had limited its requests to nine specific contracts and the topic of goodwill and to documents on the electronic audit file. However, it was clear that the scope of its case and disclosure in the normal course would be broader than that.

    Consequently, the Judge considered that there was no real prospect of amendments to the pleadings after disclosure being avoided and that Carillion's expert would not be able to form a concluded view in relation to the potential areas of the claim falling outside the scope of the request in any event. In addition, KPMG would have to re-review the documents as part of the disclosure exercise and there was also the unsatisfactory possibility of further applications for additional pre-action disclosure.
  5. Finally, the Judge was not persuaded that the case should fall outside the "usual run" of cases because KPMG had failed to act in accordance with the Pre-Action Protocol for Professional Negligence ("Protocol"). Rather he did not consider that there had been any breach of the Protocol by KPMG.

The Protocol

The Judge also made some welcome comments about the Protocol. He emphasised that, as set out in the Protocol itself, the court should be concerned with compliance with the spirit of the Protocol, rather than the exact letter. However, he considered that the approach taken by the Claimant, of purportedly sending multiple 'partial' Letters of Claim and reserving its rights in relation to claims not described therein, was not consistent with the overriding objective or the spirit of the Protocol, which envisages one Letter of Claim, setting out the "full scope" of the intended allegations.

The Judge also expressed the view that it would be surprising if, in most cases, the key documents required to be provided by the Protocol (which may well include specific working papers) could not fit very comfortably within one lever-arch file. The Judge stated that, whilst the Protocol does contemplate that a reasonable request for documents can be made "at any time", the usual course is that the request will be made when the claimant has formulated a Protocol-compliant Letter of Claim. He did not, therefore, consider that KPMG had breached the Protocol by failing to engage with the Claimant's request for extensive documents before such a letter had been provided.

Comment

This judgment provides a helpful indication that, although audit working papers will often be key documents for disclosure after proceedings have been commenced, claimants should not assume that they will be entitled to obtain them at a pre-action stage. The key documents to be provided with a Letter of Response will not usually be extensive and no party is obliged under the Protocol to disclose a document that the court could not order them to disclose under CPR 31.16. However, pre-action disclosure orders should continue to be viewed as unusual and reserved for unique circumstances by the Commercial Court. Whilst each case will turn on its own facts, if a claimant has sufficient documentation to plead their claim and a large disclosure exercise is likely to take place in due course in any event, they should be wary of expecting the court to exercise its decision in their favour, particularly if extensive pre-action disclosure is being sought.   

[1] Black v Sumitomo Corp [2002] 1 WLR 1562

[2] The Judge in the present case noted that it follows that, at the time of the application, the issues must be sufficiently clear to enable this requirement to be properly addressed.

End

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