Document destruction may result in defence strike-out: Part II

Previously reported on Law-Now on 22 November 2002, was the first instance decision of the Supreme Court of Victoria in Australia of McCabe v British American Tobacco Australia Services Limited [2002] VSC 73. The earlier article can be accessed by clicking here.

In the first instance decision in this case the Defendant's defence was struck out because of the creation and implementation of a document retention and destruction policy which was held to have prejudiced the Claimant's right to a fair trial.

The Court of Appeal judgment in this matter was handed down on 6 December 2002 and may be accessed at: http://www.austlii.edu.au/au/cases/vic/VSCA/2002/197.html

The Court of Appeal addressed four main areas which were the subject of the appeal, these were:

• Whether and to what extent there had been default by the Defendant in compliance with the Order for discovery (in its original form) and whether such compliance as there was had been misleading;
• The Defendant's document retention policy and the destruction of documents by the Defendant from time to time under that policy;
• Prejudice to the Plaintiff in consequence of the Defendant's action; and
• The appropriate order in all of the circumstances.

Compliance with Order for Discovery

The Court of Appeal found that there was no obligation on the Defendant to discover documents which had been discovered in a previous litigation where the issues were different from those in the current case. Further, the Court of Appeal held that the failure to identify what had actually happened to documents no longer in the Defendant's possession would not have significantly advanced or prejudiced the Plaintiff's case. The Plaintiff's solicitor had from the very beginning of the litigation been alert to the possibility of the destruction of documents and therefore the degree to which he had been misled was difficult to ascertain. The obvious remedy would have been to require further affidavit evidence from the Defendants.

The Court found that failure to mention when documents had been destroyed did not occasion prejudice to the Plaintiffs. The Court of Appeal assessed that the judge at first instance had seen a "sinister purpose behind the destruction of the documents" and believed that this "coloured his … thinking".

Document Retention Policy

Legal advice given

The Court of Appeal examined the Defendant's document retention policy and its implementation. Much had been made by the court at first instance of legal advice given and the possible implementation of a strategy to destroy documents under cover of an innocent intention falsely claimed. This rested in a large part upon documents disclosed only after the Judge had overruled the Defendant's claim to legal professional privilege. The Court of Appeal held that the legal advice was properly given. The risk of adverse inferences being drawn from the wording of the policy, coupled with its timing and its consequences, even if no litigation was currently in progress, would be expected to have been explored by legal advisors. This did not necessarily imply a strategy for the destruction of documents under cover of an innocent intention falsely claimed.

Legal professional privilege

The court at first instance had held that legal professional privilege had been ‘waived' due to reference made to privileged documents in various affidavits.

The Court of Appeal addressed this issue and examined the doctrine of "implied waiver". The Appeal Judges stated that: "where legal professional privilege is waived in relation to one piece (or part) of advice, the privilege is impliedly waived in relation to another if – and only if – that other is necessary to a proper understanding of the first".

It was found that the affidavits were comprehensible without reference to other documents and this therefore meant that legally privileged documents had been improperly admitted into evidence. The foundation for the Judge at first instance's conclusions, which had resulted from a review of privileged documents, therefore had to be withdrawn.

Destruction of documents before litigation commenced

Separate from the issue of a general document retention policy and its implementation, the central issue of when a company can destroy documents prior to litigation was also addressed.

The Defendant's position was that there was no inhibition on a prospective party doing what it wanted with its own documents before the commencement of proceedings against it.

The Plaintiff's position was that the Defendant was bound not to destroy documents that were (or might be) relevant in litigation of the type that was anticipated, though not yet specifically known about.

The Court of Appeal held that, in its opinion, both parties had adopted a position which was too extreme and that rather the answer lay in the middle ground between these positions.

In examining this the Court of Appeal looked at various English and American cases. The English cases all concerned the strike out of a defence as a consequence of the destruction, or fraudulent concealment, of documents after the commencement of proceedings. The American cases explored the destruction of documents before suit commenced, however in the context of imposing a much broader range of "sanctions". These sanctions included striking out the whole or part of a pleading, the drawing of adverse inferences, the exclusion of particular evidence and the provision of pecuniary penalties by way of costs or additional costs. These various penalties and any drawing of adverse inferences involved the weighing up of two important factors: the intent of the offending party and the content of the evidence.

The Court reviewed, in particular, two American cases pertaining to whether or not it could properly strike out the Defendant's pleading. Firstly, Carlucci v Hyper Aircraft Corporation (in which there was an extensive history of misconduct by the Defendant, including a practice of destroying documents with the intention of preventing them from being produced in law suits and whether the destruction continued after the commencement of the law suit.) Secondly, Capellupo v FMC Corporation (in which the Court held that the Defendants' senior officials and senior employees were on notice of the specific potential law suit and were acutely aware of its subject.)

In the light of these cases the Court of Appeal in Australia found that the destruction of documents, before the commencement of litigation, may attract a sanction (other than the drawing of adverse inferences) if that conduct amounts to:

• An attempt to pervert the course of justice; or
• Open contempt of court, in the criminal context.

Although both attempting to pervert the course of justice and contempt of court are criminal offences, where a civil sanction is sought, a civil standard of proof was held to suffice.

The Court of Appeal accepted the submission that the rule of law is endangered if intervention by the court, for conduct occurring before the commencement of litigation, were to be grounded otherwise than on illegality proved to the civil standard. Therefore, normal "housekeeping" by companies prior to the commencement of litigation which does not involve illegality is permissible.

Prejudice

The third main heading examined by the Court of Appeal was what, if any, prejudice was caused to the Plaintiff by the non-compliance of the Defendant with its disclosure obligations.

However, as the Defendant had been shown not to have been in breach of any obligation in destroying documents before the commencement of these particular proceedings, relevant prejudice would be limited to the consequences of non-compliance with the order for discovery. The Court of Appeal therefore held that there was not sufficient ground for striking out the defence.

Remedies

The judge at first instance felt unable to make sanctions other than the strike out of the Defendant's entire Defence. The Court of Appeal found that there was no reason why a more restrictive order might not have been made, (denying the Defendant's right to contest certain issues,) if in relation to those issues there had been prejudice of such as a type as to require that remedy. A strike out of the entire Defence (save for loss and damage) meant that all other allegations in the Statement of Claim were taken to be admitted and it had become unnecessary for the Claimant to prove even that she had smoked, let alone smoked the Defendant's cigarettes. The Court of Appeal stated:

"There was no justification, even if the Judge's criticisms of the Defendant were accepted, for relieving the Plaintiff from the need to prove anything in respect of her claim save damage. The remedy should have been related more directly to the prejudice seen to have been suffered. With respect, the remedy adopted was out of proportion to the wrong, even if the Judge's criticisms of the Defendant's conduct, both in relation to the order for discovery and the destruction of documents more generally, were to be accepted".

Conclusion

This Court of Appeal judgment reinstated the Defence and the proceedings as a whole were remitted to the Trial Division for a new trial.

The judgment vindicates companies obtaining legal advice on their document retention and destruction policies and allows them to continue with "housekeeping" measures where there is no illegality and before the commencement of proceedings.

The Court has found that the stated intention of a document retention policy should be accepted where there is no evidence to the contrary. It held that legal advice which addresses the possibility of adverse inference, where it is disclosed, should be regarded as properly taking all potential aspects and circumstances into account in giving the advice. Provided it is properly given, this should not be held to be evidence of any ulterior motive by the company.

It was found that the thinking of the Judge at first instance was flawed and that he was unduly influenced by his belief in a "sinister" strategy being put to work. The Court of Appeal judgment found that the striking out of a defence was the most serious penalty to be imposed by a court and should only be utilised where there could be proved a perversion of the course of justice or criminal contempt of court.

This Australian judgment refers throughout to the "commencement of proceedings" as the "cut off" point for the destruction of documents under a document retention policy where there is no illegality. However, under UK rules as soon as a dispute seems likely, and before the issue of proceedings, the document retention policy should be revised with disclosure in mind. If there is any ambiguity legal advice should be sought as a priority.

For further information, please contact Zelda Pickup at [email protected] or on +44(0)20 7367 2043 or contact Jessica Burt at [email protected] or on +44(0)20 7367 3589.