A recent Companies Court decision demonstrates the danger of overreliance on technology in disclosure, particularly where there are significant volumes of old, hard copy documents. Treating hard copies like electronic documents may mean that there has been a failure to carry out a reasonable search, so that proper disclosure is not made.
In this case, the result was catastrophic for the applicants, who were subject to an unless order. Their failure to disclose hard copy documents properly led the judge to conclude that they had failed to meet their disclosure obligations. Inevitably, an application for relief from sanctions followed (which failed due to the serious and significant nature of the non-compliance, the inadequate care shown by the applicants, and the fact that they had failed to conduct the proceedings efficiently or at proportionate cost).
The case, Smailes and another v McNally and another  EWHC 1755 (Ch), concerned claims of dishonesty and fraud made against former office holders of an insolvent company that owed around £50m in tax. The applicant liquidators were funded by HMRC. The claim concerned events dating back to 2003. The claim was issued in 2011, five years after the company had gone into liquidation.
When it came to disclosure, the great majority of the applicants’ documents were hard copies (partly as the applicants had failed to preserve copies of the company’s servers). Earlier attempts at disclosure by the applicants had been deficient. This led to an unless order being made requiring the claimants to create an electronic database consisting of scanned copies of all the hard copy documents. From this it was intended that potentially relevant documents would be identified by the applicants’ solicitors carrying out key word searches.
None of this would have been an issue if the documents had been electronic, as such documents can be readily searched for key words. The problem here was the process of scanning the hard copy documents produced only an unreadable image of the document. In order for the applicants to be able to apply search terms to them, they first had to be subjected to “optical character recognition” or OCR to “read” the scanned images to determine the words contained within them.
In this case, as is sometimes the case, the OCR process did not provide accurate results. In his judgment, HH Judge Pelling QC (sitting as a High Court Judge) gave one dramatic example of a document which originally read as follows:
“REPORT TO THE ADMINISTRATOR OF ATRIUM TRAINING
SERVICES LTD (in administration) …
We report to the Administrator of Atrium Training Services Ltd in relation to circumstances leading up to the administration of the company with particular regard to contractor schemes used and payments due thereon to HM Revenue & Customs….”
The OCR version, to which the claimants’ applied their key word searches, read as follows:
“ATEIUIV[ TRAINT-NG SERVICES LTD ([= a~r~n[~tratton) …
~e~ A~u’m Training ~e~ Le~ (~ e~ed ~ aa OE~ ~ convenient) ~d remu~v]L-’atton syste~IS”_ In” very general ~e~ns, such syste!na operate .iu. ~he following .m~a~men~ ~mpany ~co~ora~ a ~mp~y ~d :~ges ~r ~ ~u~ ~ hold ~n~ o~ mo~ s~cS ~ ~he ~mpan~ (~he ae~ce ~mp~y)~ ~e ~n~aet be~een the”
The decisive issue before the judge was whether, by applying search terms to garbled data, the applicants could be said to have complied with their obligations in CPR 31.7(1) which states that “a party is required to make a reasonable search for [relevant] documents….” Without a reasonable search, a party cannot be said to have given disclosure, even if a list of documents is served.
The judge applied the test in CPR 31.7(2) to decide if the claimants’ search was reasonable:
The factors relevant in deciding the reasonableness of a search include the following –
(a) the number of documents involved;
(b) the nature and complexity of the proceedings;
(c) the ease and expense of retrieval of any particular document; and
(d) the significance of any document which is likely to be located during the search.
Applying that test (in particular the size of the claim, the serious allegations of dishonesty and fraud against the defendants, the reasonably manageable volume of documents, and the fact that it was impossible to say that there would be no helpful material for the defendants in the mis-transliterated documents), the judge found that the applicants had failed to undertake a reasonable search. In applying the Denton test in respect of the application for relief from sanctions (a story for another article perhaps) the judge found that the applicants failings with regard to the OCR issue were both serious and significant, and that they had no reasonable excuse, particularly in circumstances where the applicants were well resourced professional litigators who had been advised by experienced litigation firms throughout the proceedings.
Perhaps the time will come when disclosure is wholly electronic, and hard copy documents will be consigned to history. For the foreseeable future, however, hard copy documents remain a part of the litigation process, and legal advisers must not forget about them in the rush to e-disclosure.
Claims by liquidators and others against former office holders are particularly likely to have a large proportion of hard copy documents. This may be for a number of reasons, including the fact that directors may take steps to remove computers and servers (so claimants rely on archived boxes of files), the fact that liquidators are likely to look back to long past actions taken by directors many years previously (when paper was more prevalent), and the fact that claims may allege fraud, so circumventing limitation issues and allowing a deeper trawl into history.
The lessons to learn from Smailes are clear: first and foremost, hard copy documents cannot be treated the same way as electronic documents. They are different, and they require a different approach, which is likely to be slower, more intensive and costly. Second, do not rely on technology to resolve every problem, or assume that technological solutions will work with sufficient accuracy. And third, always review the results of technical processes and take steps to resolve any issues (including applying to court for more time or to vary the disclosure directions if necessary, before the deadline passes).
These burdens may be easier for larger litigation practices to bear, especially those that employ experienced e-disclosure project managers who understand the technologies, know the elephant traps and can provide solutions for problems when they arise. But even firms without such a dedicated resource need to understand the bottom line: disclosure is complex and lawyers need to get involved. E-disclosure platforms and key word searches reduce the burden, but they do not provide a universal panacea, especially not for hard copy documents.
Hannah Blom-Cooper is a commercial litigator who specialises in representing individuals and corporations in relation to serious allegations of fraud and misconduct at Mishcon de Reya.