Introduction

A recent unsuccessful application by Carillion for pre-action disclosure from its former auditors, KPMG, confirms that such orders remain outside the "usual run" of matters in the Commercial Court. Together with commentary on pre-action disclosure, the judgment provides some useful guidance on the Pre-Action Protocol for Professional Negligence, including in relation to the form and content of the Letter of Claim and the exchange of key documents between the parties.

Background

Carillion has previously indicated a “settled intention" to bring a claim against KPMG, in particular in relation to KPMG's consideration of contract revenue and the carrying value of goodwill.

Against that backdrop, Carillion applied for pre-action disclosure from KPMG, requesting (in an application narrowed between its issue and the hearing) documents stored on KPMG’s ‘eAudIT’ electronic files, in relation to: (a) the audits for the years ended 31 December 2014-2016; and (b) 9 of the construction contracts current in those years (a subset of 58 contracts reviewed by Carillion’s management between May and July 2017, prior to the company’s collapse).

Carillion argued that it required pre-action disclosure as: (i) KPMG had refused to provide any of its working papers voluntarily, (ii) such documents would be core documents in any future claim and (iii) the documents were essential to proper pre-action consideration and pleading of a claim against KPMG.

The Pre-Action Protocol for Professional Negligence (the "Protocol")

Mr Justice Jacobs’ judgment provides some useful insight into the Court’s view on pre-action conduct. In reviewing the Court’s commentary on this, it is helpful to note the chronology of the pre-action correspondence: 

Chronology of Correspondence

(1) On 1 October 2019, Carillion’s solicitors wrote to KPMG’s solicitors, requesting a significant number of documents. This letter contained no reference to the Pre-Action Protocol for Professional Negligence. It did, however, set the stage for Carillion’s pre-action disclosure application (the “Application”), indicating an intention to apply for the requested documents under CPR 31.16, unless KPMG provided these voluntarily.

(2) On 16 October 2019, KPMG's solicitors responded stating that Carillion had made no attempt to engage with the Protocol and arguing that Carillion already had sufficient material to ascertain whether there was any basis to criticise the conduct of KPMG.

(3) On 14 November 2019, Carillion's solicitors circulated a lengthy letter headed “First Letter of Claim and Request for Pre-Action Disclosure”, inferring various shortcomings in KPMG’s approach to audit, and requesting a narrowed selection of documents. This letter was drafted on “materially the same terms” as the Application. The letter confirmed that it was not a complete statement of the claim which Carillion was contemplating at the time, and that a “full” letter of claim would be sent at a later stage.

(4) On 6 December 2019, KPMG argued that Carillion had failed to produce a Letter of Claim, and that the correct order of events was for Carillion to engage properly with the Protocol, for KPMG to respond and then for Carillion to make an application if required. The letter also identified various shortcomings in the First Letter of Claim.

(5) On 16 December 2019, Carillion's solicitors sent a further letter stating that they intended on providing a “full Letter of Claim, addressing all the requirements of the Protocol, following receipt and review of the material” requested.

(6) On 19 February 2020, Carillion issued the Application, supported by lengthy witness statement evidence.

(7) On 24 April 2020, Carillion's solicitors sent a further letter described as “the Second Letter of Claim”, intended to meet the points previously raised by KPMG on 6 December 2019, and narrowed the documents requested in its Application.

(8) On 6 May 2020, KPMG requested confirmation as to whether the First and Second Letters of Claim encompassed the full scope of the anticipated claim against KPMG. No such confirmation has since been provided.

Compliance with the Protocol

Jacobs J was highly critical of the stance taken by Carillion across the pre-action correspondence and its purported attempts to comply with the Protocol. He noted that it was important to view the question of compliance with the Protocol as a matter of substance not form, to pay regard to the spirit of the Protocol, and to disregard minor or technical infringements. Notwithstanding, he agreed with KPMG that the 14 November 2019 letter did not constitute a valid Letter of Claim for a number of reasons including:

1. that it did not attach key documents or documents to support the estimated calculation of loss;
2. that it failed to address the question of Carillion's proposed expert; and
3. most importantly, that it failed to set out the full scope of Carillion's intended allegations against KPMG.

The judge confirmed that “the Protocol envisages … that there will only be one Letter of Claim, to be sent when the claimant decides there are grounds for a claim against the professional. It must then include the intended allegations against the professional, and this must mean all of those which are intended at that stage”.

The judge also provided guidance on what could be considered as a “reasonable request” for documents in pre-action correspondence under the Protocol. As per Assetco plc v Grant Thornton UK LLP [2013] EWHC 1215, pre-action disclosure of audit working papers is not viewed as the norm for audit negligence in the Commercial Court, notwithstanding that such documents will in due course likely be core documents for disclosure (once the proceedings have started). Whilst it is right that a reasonable request for documents can be made at any time, the usual course is that such request "will be made at the time when the claimant has formulated his Letter of Claim", although the judge noted that a request at an earlier stage may be justified "where a claimant knows that something has gone wrong very badly, but has little idea as to why, and needs documents in order to formulate a Letter of Claim".

As to volume, whilst the judge recognised that there is a "certain amount of elasticity" in the concept of providing "key" documents, "it would be surprising if, in most cases, the ‘key’ documents could not fit very comfortably in one lever arch file". The very broad categories of documents requested by Carillion were of a magnitude not "consistent with either the letter or spirit of the Protocol". Indeed there was some doubt as to whether all of the documents sought by Carillion would fall within the scope of standard disclosure – a requirement for pre-action disclosure and something the court has interpreted as excluding "categories of documents which will simply prove to be relevant (if at all) as part of the background, let alone documents which might merely lead to a train of inquiry" (albeit Jacobs J noted that the court had discretion to modify (rather than dismiss) an order that was drafted too widely).

Application under CPR 31.16g

Carillion’s Application argued that pre-action disclosure was necessary because KPMG had refused to provide any documents voluntarily, and the auditor’s relevant working papers would be key documents to the negligence claim. Indeed, in Carillion’s witness statement in support it was said that there was a “strong prima facie case against KPMG, based on the information known to Carillion at present” and that the requested documents were necessary to enable Carillion to reach a “concluded and fully informed view”.

The legal principles involved in a pre-action disclosure application were summarised by Blair J in Assetco as follows:

1. The respondent and applicant must both be likely to be parties to subsequent proceedings (CPR 31.16(3)(a) and (b)), although it is not necessary to show in addition that the initiation of such proceedings is itself likely.
2. The documents sought must fall within the scope of the standard disclosure which the respondent would have to give in the anticipated proceedings (31.16(3)(c)).
3. Disclosure before proceedings have started must be desirable (a) to fairly dispose of the anticipated proceedings; (b) to assist the dispute to be resolved without proceedings; or (c) to save costs (31.16(3)(d)). Case law indicates this is a relatively low jurisdictional threshold and there are many authorities where judges have been persuaded that the jurisdictional threshold is crossed because it will enable the pleadings to be more focused and avoid the need and cost of later amendments.
4. In considering whether to make an order, among the important considerations are the nature of the loss complained of, the clarity and identification of the issues raised by the complaint, the nature of the documents requested, the relevance of any protocol or pre-action inquiries and the opportunity which the complainant has to make his case without pre-action disclosure.
5. The anticipated claim must have a real prospect of success.
6. In the commercial context, a pre-action disclosure order is unusual.

Further, as noted above, the request must be highly focused and confined to what is strictly necessary.

On 31.16(3)(c), Jacobs J found that it was more likely than not that the majority of the documents sought by Carillion were within the scope of standard disclosure in regard to the issues that are likely to arise.

He also considered, with some hesitation, that the jurisdictional threshold at 31.16(d) was crossed. In his view, if the documents were produced Carillion could prepare a more focused pleading, at least in relation to certain issues. The judge's hesitation derived from the fact this was, to his mind, clearly a case where amendments to the pleadings would be inevitable (for example, following disclosure and exchange of factual evidence) – a position that was exacerbated by the fact Carillion had been forced to limit its request to a relatively small number of documents in order to make the Application attractive.

Nonetheless, in exercising the Court’s discretion, Jacobs J dismissed the Application. The judge referred to judicial observations from the Court of Appeal that required consideration of the “big picture” of a case: "a judge should look at the case in the round, and take into account how matters are likely to proceed in the litigation in the event that disclosure is ordered or refused…the court must also stand back at some point and look at the matter in the round… The question at that level 'may include the general question: does the request for pre-action disclosure further the over-riding objective in this case or not'".

Having done so, the judge gave a number of reasons why this was not, in his view, an appropriate case for the court to exercise its discretion in favour of the applicant, Carillion:

1. First, Carillion could satisfactorily plead its case in relation to the 9 contracts and goodwill based on the documents it already had available to it and without the material now sought, as evidenced by its articulation of the claim in the First and Second Letters of Claim, and in the witness evidence submitted in support of the Application. Whilst the ability to plead a case on negligence is not determinative, it is a relevant factor, particularly in considering the "big picture".
2. Secondly, in seeking disclosure in order to obtain a "concluded" and "fully informed" view on the alleged negligence, Carillion was "seeking a level of assurance and certainty which is inappropriate". It would, of course, be possible to say in every professional negligence case in the Commercial Court that pre-action disclosure would assist the claimant's expert in coming to a fully informed or concluded view, but pre-action disclosure is not the norm. As Jacobs J noted: "The nature of civil litigation is that it is uncertain, and the process of providing information in order to enable experts and others to give concluded or 'fully informed' views is necessarily a lengthy one. The provision of disclosure is certainly a key part of that process, but the norm is for that to be provided once the litigation has started….".
3. The court also examined the burden on the KPMG of complying with the order sought, particularly in circumstances where a large-scale piece of litigation was to be pursued in any event.
4. In the judge's view, this is a case which will develop further even if the disclosure sought were to be ordered. Amendment of the pleadings after disclosure was viewed as inevitable and there was a very real possibility of "further serial applications for further pre-action disclosure".
5. The judge was unpersuaded that KPMG had acted in breach of the Protocol. Whilst it is right that a reasonable request for documents can be made at any time, the usual course is that such request will be made at the time when the claimant has formulated its Letter of Claim, which, as noted above, Carillion had not done.

Finally the judge noted that he had endeavoured to "stand back from the detail and give consideration to how matters should proceed as a matter of sensible case management". In his view, neither the overriding objective nor efficient case management of the litigation would be furthered by granting the Application. Instead, it was for Carillion to now submit a Letter of Claim (which may include a Protocol-compliant request for documents) and then for KPMG to send its Letter of Response, enclosing "key" documents (which may include certain, specific working papers). At that point, in the judge's view, it would be for “Carillion [to] simply get on with the case in the usual way, by setting out the case in a pleading”.

Conclusion

In considering an application, the Court will analyse the jurisdictional thresholds in the CPR carefully, considering the case "in the round" to determine whether disclosure would assist at a pre-action stage. Throughout, the Court will be minded that pre-action disclosure is not viewed as "the norm", and that simply progressing a case in the standard way is preferable. Whilst key documents can be requested before the Letter of Claim is sent, this is unusual and may only be justified where, without them, the claimant would be unable to formulate its claim.

As such, if making an application for pre-action disclosure, the applicant should focus its efforts on demonstrating that, without the requested documents, it will be unable to plead its case satisfactorily, and not merely that with access to the documents any pleaded case will be improved.

Lastly, any applicant should keep its document requests narrow, and ensure that compliance with any order would not be too burdensome for the respondent. As enshrined in B3.2 of the Commercial Court Guide: "restraint is encouraged".