The Power of Disclosure: How the completion of disclosure and potentially damaging documents may help agents drive up the price of settlement

May 14, 2013

Disclosure.

A key stage in the litigation process.  

Following both parties putting their best foot forward in their statements of case, where they set out the legal arguments upon which they are relying and a summary of the facts, this is where they start producing the evidence to back up their respective positions.

The standard disclosure obligation in proceedings is that parties should conduct a reasonable and proportionate search for all documents within their control upon which they rely and also which adversely affect their case or the case of another party.  The obligation is ongoing, therefore, documents created after the proceedings have been commenced may still need to be produced.  Also, it extends not only to hard copy documents but also electronic documents, like emails.  In reality, the first stage of disclosure results in parties producing lists of documents from which the documents to be inspected are selected.

While each case rests on its own facts, the disclosure process will generally be far harder on the principal which invariably is the bigger party.  Agents will usually have less locations and volume to search.  Also, the e-disclosure search will be far more extensive as a larger company will in the day to day course of business generate far more emails and other documents that will need to be searched and reviewed, even if they are not ultimately disclosed.  While searches can be limited by key words and time period, provided such limitations are reasonable, the volume of documents caught will normally still be substantial.  

Therefore, simply the prospect of disclosure can persuade a party to look again seriously at settlement.  Even if the search is conducted and managed by a designated individual, realistically significant hours of management time will be diverted and the review and production of the disclosure list will be far more costly.  The recent changes to the Court rules have sought to control the disclosure process by requiring parties before commencing the search to provide a list of the categories of documents for which they intend to search.  However, such controls are unlikely to substantially reduce the disclosure obligation in reality as they will always need to be linked to a party having reasonably looked for any relevant documents that might exist.    

Also, a further sting in the tail, may be that this is the stage at which the principal has to show the agent things that the principal does not want the agent to see and every document produced in disclosure has the potential to become a public document if it is read or referred to at the trial.  There are many internal documents that principals have, particularly relating to pricing strategy, discounting and the differing approaches to different customers, that they do not want the wider world to know about.  A principal may win or lose the action but what happens if afterwards the OFT or HMRC decide that they want to have a word or customers start asking questions about the principal’s policies towards them.  Long term damage that the principal wasn’t making provision for?  

Therefore, once these are disclosed, the agent may become aware of the size of the gun that it holding to the principal’s head and use it to its advantage to hold out for a higher settlement.  Equally, it is not unusual for agents to know of the existence of and the sensitivity of certain documents – often because the principal during the course of the agency told them about them.  If these documents do not appear in the principal’s initial disclosure list they have the potential to become an albatross around the principal’s neck – raising questions about the veracity of the declarations that have been made about the search conducted and also emphasising how worried the principal is about them.  Again, this kind of back drop can raise the price of making everything go away.

Is there any way to address these issues?  To a certain extent.  When an agent is terminated principals can often adopt an approach of throwing in the kitchen sink, on the basis that something “might” stick and the more arguments the better.  But this can have the effect of building a house of cards.  Once a ground is relied upon in a letter of termination it is very difficult to step away from –abandonment of one point can throws into question all other grounds of termination.  Presentationally, it can be fatal.  

The better way forward is to take advice before termination.  If certain matters are not in issue in the proceedings then a reasonable and proportionate disclosure search may not cover these points.  Also a principal should not conceal potential problems that are very likely to be known to the agent. It may be possible to find a way around the issue or, alternatively, at least the principal will know at a pre-action stage the potential risk and be able to plan according.
It is not possible to take up permanent residence in denial, when faced with:

  • a Court order,
  • advice that production of documents cannot be avoided, 
  • an agent can smell blood in the water, and
  • a Managing Director asking you how this all happened!          

But there is one bit of good news – the obligations and pitfalls of disclosure will apply equally to the agent...


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