HC 02 C 02875
Royal Courts of Justice
Strand
London WC2A 2LL
Before
MR JUSTICE LAWRENCE COLLINS
Between
(1) MORESFIELD LIMITED | |
(2) KENNETH SWIFT | |
(3) JEREMY SWIFT | Claimants |
- and - | |
BANNERS (a firm) | Defendants |
and | |
BANNERS (a firm) | Prospective Part 20 Claimants |
and | |
KPMG (a firm) | Prospective Part 20 Claimants |
Mr Julian Picton (instructed by Lovells) for Banners
Mr Paul Parker (instructed by Stephenson Harwood) for KPMG
JUDGMENT
Mr Justice Lawrence Collins:
I Introduction
This is an application by Banners, a firm of solicitors, for disclosure pursuant to CPR r. 31.16, alternatively r. 31.17, by KPMG, the international firm of accountants, for KPMG’s file in relation to the work carried out by KPMG with respect to the sale of shares in Kenal Services Holdings Ltd ("Kenal") by Moresfield Ltd ("Moresfield"), Kenneth Swift and Jeremy Swift ("the Swifts") to Hillbridge Investments Ltd ("Hillbridge") in February 1998. Together Moresfield and the Swifts will be referred to as "the Claimants."
Kenal and its subsidiaries are in the waste management business. They were ultimately owned by the Swifts through Moresfield. In 1998 the share capital of Kenal was sold for £5,440,000 to Hillbridge, a vehicle owned by Mr Michael Hewitt and NatWest Equity Partners Ltd. Moresfield and the Swifts were advised on the sale by Banners, a seven partner firm of solicitors in Chesterfield. The share sale agreement ("the Agreement") contained provision for a downward adjustment of the purchase price in the event of a shortfall (as computed according to the Agreement) in the assets of Kenal and its subsidiaries.
Kenal’s auditors were KPMG. Their Milton Keynes office was sent the share sale agreement by Banners for comment, but their role in the transaction is disputed. KPMG has two files of documents relating to the share sale which are the subject of the present applications.
The sale was completed on February 27, 1998. Half of the purchase price was payable on completion, and the balance was satisfied by the issue to the Claimants of a loan note. Hillbridge claimed that there was a shortfall of approximately £2.2 million, which it set off against the balance of the purchase price. Following proceedings, the Claimants entered into a Settlement Agreement with Hillbridge under which a shortfall of £1,427,364 was agreed.
After the Claimants had put Banners on notice that they held Banners liable for damage flowing from the drafting of the Agreement, in January 2001 Banners’ solicitors, Lovells, put KPMG on notice that, should the Claimants bring claims against Banners, Banners would be seeking an indemnity or a contribution from KPMG. In the course of correspondence KPMG’s solicitors, Stephenson Harwood, disputed the allegations and, in support of their position as regards one of the allegations against KPMG (that they had given assurances prior to completion that there would be no shortfall), provided Lovells with copies of two of KPMG’s file notes.
In February 2002 Lovells wrote to Stephenson Harwood to say that they considered that it would assist in resolving the dispute, and potentially avoid substantial costs being incurred, if KPMG were prepared voluntarily to disclose their files relating to the work carried out by them in connection with the transaction. In the following month Stephenson Harwood said that KPMG, while denying liability, were prepared to provide disclosure on terms that (a) disclosure would be mutual; (b) disclosure by would be treated as if it were being given pursuant to an Order made under CPR Part 31.16; and (c) the costs of disclosure would be borne by the disclosing party.
In May 2002 Lovells accepted these terms of behalf of Banners but said that, to avoid costs, disclosure should be delayed until it became clear that proceedings would be instituted by the Claimants against Banners.
In October 2002 the Claimants instituted proceedings against Banners, alleging that Banners were negligent in relation to the terms of the Agreement, and a trial has been fixed for November 2003. Among the allegations are that Banners failed properly to advise of a risk of items being double counted when calculating the shortfall, and to advise that the Agreement should have provide for the post-completion audit to be carried out on a basis consistent with Kenal’s previous audited accounts.
In February 2003 Lovells put Stephenson Harwood on notice of the proceedings, and took up the offer of mutual disclosure. Stephenson Harwood replied that the offer was no longer open because the proposal was made in the context of pre-action correspondence concerning KPMG’s possible joinder as a Part 20 defendant, and circumstances had changed in that it did not appear that they would be so joined.
II The Agreement
The Agreement contained the following material provisions:
(1) Clause 3.1 provided that the total purchase price for Kenal’s shares was to be £5,440,000.00 less the "Shortfall" as defined.
(2) Clause 3.2 defined the Shortfall as:
"The aggregate (if any) of the following amounts:
(a) The extent by which the Completion Net Asset Value falls below £1,387,268;
(b) The extent by which the Debt exceeds £1,200,000; and
(c) The extent by which the Completion Working Capital exceeds £1,000,000."
(3) The "Completion Net Asset Value" was defined as "the sum computed as such in accordance with Paragraph 3 of Schedule 9".
(4) "Debt" was defined as comprising various group liabilities "as at the Completion Date as shown on the Completion Balance Sheet".
(5) Completion Working Capital was not defined but "Completion Working Capital Requirement" (the relevant definition for the purposes of Clause 3.2(c)) was defined as "the sum certified as the working capital requirement from the Completion Balance Sheet in accordance with Schedule 9".
(6) Clause 3.3 provided that, upon completion (which was to take place immediately after the Agreement was signed) £2,720,000.00 was to be paid to the Claimants in cash. The balance of £2,720,000.00 was to be satisfied by Hillbridge issuing the Claimants a loan note.
(7) Clause 3.4 provided that any Shortfall was to be deducted from the price by way of a reduction in the payment due under the loan note.
(8) Clause 6 gave Hillbridge the right to set any Shortfall off against the payment due under the loan note.
(9) Schedule 9 provided how each of the 3 amounts referred to in Clause 3.2(a) to (c) was to be calculated, and once calculated, Hillbridge was entitled to a reduction in the price of £5,440,000 to the extent of the aggregate of those amounts. The Completion Balance Sheet was to be prepared by Kenal immediately following completion. The Balance Sheet was to be that of Kenal and its subsidiaries on a consolidated basis as at the Completion Date. The Completion Balance Sheet was to be prepared by reference to six general criteria, which included the historical cost convention and generally accepted United Kingdom principles of accounting, including all relevant Statements of Standard Accounting Practice. The calculation of the Completion Net Asset Value (element (i) of the Shortfall Calculation) was to be "the amount determined by reference to the balance sheet" representing the sum of (a) various assets, less (b) various provisions and reserves applicable to such assets, minus (c) various liabilities. The calculation of the Debt (element (b) of the Shortfall Calculation) was to be determined by reference to the Completion Balance Sheet. The calculation of Completion Working Capital Requirement (element (c) of the Shortfall calculation) was to be the negative amount determined by reference to the Completion Balance Sheet as the sum of the group’s stocks and work in progress, plus debtors (other than intra group debtors) but minus creditors (other than intra group ones).
(10) Paragraph 6 of Schedule 9 set out the procedure for determining the Shortfall, which included the audit of the Completion Balance Sheet by Kenal’s Auditors who, acting as experts, were to certify the Completion Net Asset Value, Debt and Completion Working Capital Requirement as well as any Shortfall calculated in accordance with Clause 3.2.
III Dispute between the Claimants and Hillbridge
The sale was completed on February 27, 1998. KPMG audited the Completion Balance Sheet. Hillbridge claimed that there was a Shortfall of approximately £2.2 million which they set against the balance of the purchase price. The Claimants disputed the Shortfall. They challenged the calculation on the basis of the provisions set out in Clause 6 of Schedule 9. This led to proceedings for the construction of Schedule 9.
On March 15, 2000, Rimer J. gave judgment in the Claimants’ favour on the construction of the Schedule. Hillbridge appealed, but on July 27, 2000 the Claimants and Hillbridge entered into a Settlement Agreement, under which a Shortfall of £1,427,364 was agreed.
IV Proceedings by the Claimants against Banners
The Claimants instituted proceedings against Banners on October 4, 2002. The defence was served on December 3, 2002. On January 9, 2003 Master Bowles ordered disclosure by March 14, 2003, inspection by April 4, 2003, expert’ reports by July 4, 2003, and a trial window for October/December 2003. The trial has been fixed to start on November 19, 2003, with a 10 day estimate.
The allegations by the Claimants are of (inter alia):
(a) failure by Banners properly to advise of a risk of items being double counted when calculating the Shortfall;
(b) failure by Banners to advise that Schedule 9 of the Agreement should have provided for the post-completion audit to be carried out on a basis consistent with Kenal’s previous audited accounts.
The Claimants seek damages for the amount by which the Shortfall is said to have been increased as a result of items said to have been double-counted when calculating the Shortfall. They claim that this amount is £976,000. With respect to the second allegation, the Claimants seek damages in the amount by which they say the Shortfall would have been reduced had the completion balance sheet been prepared on a basis consistent with Kenal’s previous audited accounts. They claim that there would have been no Shortfall, or alternatively, a significantly lower Shortfall, if consistent accounting policies had been applied.
V KPMG’s involvement
It is Banners’ case for the purposes of this application that KPMG were closely involved in the formulation of the Agreement and in the approval of its terms. Banners contend that KPMG assumed a responsibility to the Claimants to advise on the financial and accounting implications of the Agreement. Banners argue that, by KPMG’s involvement, the scope of Banners’ duty to the Claimants was restricted to the legal aspects and implications of the proposed share sale.
Banners rely on these matters:
On January 13, 1998 Banners forwarded the Agreement in draft form to KPMG.
On January 21, 1998 KPMG advised upon the proposed formula for calculation of the net asset worth of the group.
On January 29, 1998 Banners notified KPMG of revisions to the wording of Clause 3.1 and sought from them "appropriate reassurances that to the best of your knowledge, information and belief, that these targets will indeed be met on legal completion which it is envisaged will take place over the next couple of weeks."
On February 13, 1998 Banners forwarded to KPMG the draft wording for the calculation of the completion net worth.
On February 23, 1998 KPMG advised upon that draft wording.
On February 23, 1998 KPMG provided their computations of the base figures to be inserted in the Agreement by reference to which any Shortfall was to be calculated.
On February 26, 1998, immediately prior to the completion meeting, Banners advised the Claimants (as recorded in an attendance note) that
"they should satisfy themselves with KPMG that the provisions for the carrying out of the post completion audit were satisfactory and would not result in any shortfall against the figures in the contract which might trigger a repayment of part of the purchase price to the purchaser. JH[awkins] spoke to John Guy initially at KPMG and then put Mr Guy through to Ken Swift who spoke to Mr Guy at great length satisfying himself as to the position. Ken Swift then advised JH that he had satisfied himself with the position and that KPMG had confirmed to him that everything was satisfactory and that the figures shown would not trigger any such repayment. JH was instructed to proceed to complete the transaction."
Banners’ position is that if the Claimants succeed in proving their allegations against Banners, Banners believes from the information currently available it that they have a claim against KPMG for indemnity or a contribution pursuant to Section 1 of Civil Liability (Contribution) Act 1978 ("the 1978 Act") by reason of KPMG's liability to the Claimants in respect of the same damage, on the following basis:
(a) that KPMG were engaged on behalf of the claimants to advise in connection with the transaction and, as such owed a duty to the claimants to exercise due skill, care and attention in carrying out that role;
(b) if Banners were negligent in failing to advise that there was a risk of items being double counted in the calculation of the Shortfall, KPMG were also negligent in failing to advise of this risk when they provided advice as to the terms of the draft Agreement;
(c) if Banners were negligent in failing to advise that Schedule 9 of the Agreement should provide for the post-completion audit to be carried out by a basis consistent with Kenal Holdings' previous audited accounts, KPMG were also negligent in failing to advise that Schedule 9 should include such a provision; and
(d) that KPMG were negligent in assuring the Claimants that there would be no Shortfall upon completion.
KPMG say that the allegation of the retainer of KPMG is unclear. They accept that they did not advise that there was a risk of double counting or advise on the wording of Schedule 9, but say that no such advice was sought or required. They say that no assurance was given on completion that there would not be any shortfall. Their case is supported by the Claimants, whose solicitors, Walker Morris, in correspondence with Lovells prior to the proceedings against Banners, have said that KPMG were only instructed to advise on certain figures, and also that KPMG did not assure the Claimants that there would be no shortfall, merely that the figures to be inserted in clause 3.2 were the correct figures taken from Kenal’s last audited accounts.
VI Correspondence between the parties
After the Claimants had put Banners on notice that they intended to commence proceedings Lovells wrote to Stephenson Harwood to say that Banners would be pursuing a claim against KPMG for an indemnity, alternatively a contribution. On February 1, 2002 Stephenson Harwood disputed at length the allegations made against KPMG, and rejected any claim for an indemnity or contribution. In support of their contention that KPMG had given no assurances about the shortfall on completion, they provided copies of two of KPMG’s file notes.
On February 26, 2002 Lovells responded:
"In the circumstances, as explained at the outset, our view as to your clients’ liability in this matter has not altered. That view is, of course, based upon the information and documents available to us at present. Your clients have to date chosen to disclose only very limited documentation. No doubt, there are significantly more relevant documents on your clients’ files. We consider that it would assist in resolving this dispute, and potentially avoid substantial costs being incurred, if your clients were prepared voluntarily to disclose their files relating to the work carried out by them in connection with the transaction. Please confirm that they are content to make these files available for inspection. If they are not, then we anticipate instructions to make an application for pre-action disclosure.
If, in the meantime, the claimants commence proceedings against our clients, we will be issuing a Part 20 claim against your clients. Please confirm that you are instructed to accept service."
On March 28, 2002, Stephenson Harwood denied liability, but concluded:
"You have requested disclosure of our clients’ files concerning the transaction. Our clients are willing to provide this disclosure on the following terms:
(a) Disclosure will be mutual and your clients will make available their files for inspection and/or copying at the same time as our clients’ files are made available to you for the same purposes;
(b) Disclosure by both your clients and our clients will be treated as if it were being given pursuant to an Order made under CPR Part 31.16;
(c) The costs of disclosure shall be borne by the disclosing party in each case.
We confirm that we are instructed to accept service of any Part 20 proceedings which your clients may instruct you to commence. We would add, however, that any such proceedings would be entirely misconceived as well as premature."
On May 31, 2002 Lovells wrote to Stephenson Harwood:
"We are grateful to you for your confirmation that your clients will be prepared to disclose their files. We confirm that we have no objection to the terms stipulated at (a) to (c) of your letter. However, we would note that we have not heard from the Claimants’ solicitors for over 3 months and, until it becomes clear whether the Claimants will be pursuing their claim against our clients, we do not consider it appropriate to incur the costs that would be involved in inspecting your clients’ files. We will, of course, be willing to proceed on the basis that you have outlined should it become clear that the claim will be pursued. We will let you know as soon as we have a clear picture in this regard."
On October 4, 2002, the Claimants issued proceedings against Banners, and on February 10, 2003 Lovells wrote to Stephenson Harwood:
"We advise that proceedings were issued and the Defence has now been filed and a trial date set for 10 November 2003.
In light of that, we would like to take up your clients’ offer, as outlined in your letter dated 28 March 2002, for the disclosure of their files. We accept the terms of that disclosure set out in your letter of 28 March 2002."
On February 24, 2003 Stephenson Harwood replied:
"The disclosure referred to in our letter of 28 March 2002 was proposed in the context of pre-action correspondence between us. That correspondence ended in August 2002. Circumstances have clearly changed since then and we will consider your request in the light of the documents referred to above. For the time being we reserve our client’s position as to whether disclosure on the basis originally proposed is appropriate."
On February 25, 2003 Lovells wrote to Stephenson Harwood:
"We note what you say with respect to the disclosure referred to in your letter dated 28 March 2002. As we noted in our letter dated 31 May 2002, we were awaiting a clear indication from the Claimants that they would be pursuing their claim before inspecting your clients’ files. You did not object to that proposed course of action and that is the course we now wish to pursue."
On March 25, 2003 Stephenson Harwood replied:
"The offer of disclosure made in our letter of 28 March 2002 was made in the context of pre-action correspondence between us following your assertion that our clients were liable to indemnify your clients in respect of any liability they might have to the Claimants or alternatively to contribute to such liability. Your letter of 26 February 2002, in response to which our offer of disclosure was made, expressly stated that if the Claimants commenced proceedings against your clients, you would be issuing a Part 20 claim against our clients.
In fact, although proceedings against your clients were issued as long ago as 4 October 2002, you have not issued a Part 20 claim. An Order has now been made giving detailed directions and you have informed us that the trial date has been set for later this year. Against that background, it is apparent that your clients do not now intend to pursue a Part 20 Claim against our clients. Accordingly, it is no longer appropriate for the disclosure contemplated in our previous correspondence to take place."
On March 26, 2003 Lovells responded:
"It is certainly not the case that our clients do not intend to pursue a Part 20 claim against your clients …. Our clients are obviously free to commence a claim be it by way of Part 20 proceedings or otherwise, against your clients at any stage with the leave of the court or otherwise within the relevant limitation period."
There then followed an extensive correspondence in which Lovells raised the possibility that their clients might wait until after the trial to decide whether or not to pursue KPMG for indemnity or contribution. They also for the first time raised the possibility of an application against KPMG under CPR 31.17. On May 1, 2003 Stephenson Harwood wrote:
"We note that your clients intend to pursue a Part 20 claim in the current proceedings. In light of this statement, we will take our clients’ instructions on your request for disclosure under CPR Part 31.16. To assist us in doing so, we should be grateful if you would provide us with the following information: -
1. Why your clients did not pursue their request after the issue of proceedings against them in October 2002 and instead left it until now;
2. The issues raised on the current pleadings in respect of which the documents or classes of documents of which you seek disclosure are relevant.
3. Which ground or grounds under CPR Part 31.16(3)(d) you rely on, bearing in mind that the proceedings as between your clients and the Claimants are already significantly advanced."
On May 7, 2003 Stephenson Harwood wrote:
"It seems to us that none of the grounds in CPR 31.16(3)(d) are satisfied. It is now far too late for your clients to have any realistic expectation of being able to join our clients in time for them to participate in the trial. In such circumstances, it will be a waste of costs to pursue the application for disclosure now and a waste of costs for our clients to give disclosure when, if your clients succeed at trial, they will have no claim for an indemnity or contribution.
It seems to us that your request is more likely to be an attempt to obtain our clients’ documents without having to meet the requirements of CPR 31.17."
VII Governing principles: CPR 31.16 and 31.17
CPR 31.16 permits an order for pre-action disclosure "only where" the conditions in CPR 31.16(3) are fulfilled. These are:
"The court may make an order under this rule only where—
(a) the respondent is likely to be a party to subsequent proceedings;
(b) the applicant is also likely to be a party to those proceedings;
(c) if proceedings had started, the respondent’s duty by way of standard disclosure, set out in rule 31.6, would extend to the documents or classes of documents of which the applicant seeks disclosure; and
(d) disclosure before proceedings have started is desirable in order to —
(i) dispose fairly of the anticipated proceedings;
(ii) assist the dispute to be resolved without proceedings; or
(iii) save costs."
The authorities (especially Black v. Sumitomo Corpn [2002] 1 WLR 1562, following Bermuda International Securities Ltd v KPMG [2001] Lloyd’s Rep PN 392) establish the following principles:
(a) CPR 31.16 (like the enabling provision in section 33(2) of the Supreme Court Act 1981) does not require that the proceedings are likely, but rather that the respondent is likely to be a party if proceedings are issued, where "likely" means "may well";
(b) because disclosure will only be ordered in relation to documents which would be the subject of standard disclosure the court must be clear what the issues in the litigation are likely to be;
(c) the court is only permitted to consider a grant of pre-action disclosure where there is a real prospect in principle of such an order being fair to the parties if litigation is commenced, or of assisting the parties to avoid litigation, or of saving costs in any event;
(d) if there is such a real prospect the court should go on to consider the question of discretion which has to be considered on all the facts and not merely in principle but also in detail;
(e) pre-action disclosure should not be ordered as a matter of course, at any rate where the parties at the pre-action stage have been acting reasonably;
(f) the discretionary elements include the clarity and identification of the issues raised by the complaint, the nature of the documents requested, and the opportunity which the complainant has to make its case without pre-action disclosure;
(g) the more focused the complaint and the more limited the disclosure sought, the easier it is for the court to exercise its discretion in favour of an order on the basis that transparency was what the interests of justice and proportionality most required.
An order may be made under CPR 31.17 "only where" the following conditions are fulfilled:
"The court may make an order under this rule only where—
(a) the documents of which disclosure is sought are likely to support the case of the applicant or adversely affect the case of one of the other parties to the proceedings; and
(b) disclosure is necessary in order to dispose fairly of the claim or to save costs."
It is not necessary that the documents will support the applicant’s case or adversely affect the case of another party. It is sufficient that they are likely to do so, in the sense (again) of "may well" (and not "more probable than not"). When applying that test it has to be accepted, and is not material, that some documents which may then appear likely to support the case of the applicant or adversely affect the case of one of the other parties will turn out, in the event, not to do so. In applying the test to individual documents, it is necessary to have in mind that each document has to be read in context; so that a document which, considered in isolation, might appear not to satisfy the test, may do so if viewed as one of a class. There is no objection to an order for disclosure of a class of document provided that the court is satisfied that all the documents in the class do meet the threshold condition. In particular, if the court is satisfied that all the documents in the class, viewed individually and as members of the class, do meet that condition—in the sense that there are no documents within the class which cannot be said to be ‘likely to support … or adversely affect’—then it is immaterial that some of the documents in the class will turn out, in the event, not to support: Three Rivers District Council v. Bank of England (No 4 ) [2003] 1 WLR 210, 228.
VIII Banners’ position
Banners submit that pre-action disclosure of these files is appropriate because Banners and KPMG are likely to be party to proceedings between them and because those documents would be disclosable if such proceedings had already been commenced. The extent of disclosure sought is limited to KPMG's files relating to their involvement in the transaction which is the subject of the claim. Their files are not voluminous and disclosure will not be burdensome, because only two files are involved.
Pre-action disclosure is desirable in order to dispose fairly of the anticipated proceedings. The proceedings against Banners have already commenced and a trial date has been set. If Banners are to have the opportunity properly to investigate and bring the claim for indemnity or contribution to which they say that they are entitled, they need to be able to do so with minimal delay in order to avoid disruption to the current timetable.
Pre-action disclosure may also assist the dispute to be resolved without proceedings. Banners would hope that production would assist in a disposal of the potential claim against KPMG without the need for proceedings to be commenced. The documents may indicate that KPMG were clearly negligent, in which case it may be possible for some agreement to be reached with them and/or the claimants with respect to KPMG's liability (which might include an agreed apportionment of responsibility should the claimants be ultimately successful). Alternatively, the documents may indicate that KPMG were not negligent, in which case Banners would not issue their claim. If disposal of the potential claim cannot be achieved, such an order would in any event save costs as pre-action disclosure would enable those responsible for drafting formal proceedings against KPMG to do so with more particularity and to avoid the need for subsequent amendment.
Alternatively, if KPMG's arguments about the appropriateness of ordering pre-action disclosure are correct (which is denied), non-party disclosure of KPMG's files is appropriate. KPMG's documents in relation to the transaction are likely to support the case of Banners that it was not negligent with respect to the drafting of the Agreement as alleged. They are also likely to support the case of Banners that the Claimants relied on assurances from KPMG with respect to whether the documents are likely to adversely affect the case of the claimants.
Non-party disclosure is desirable in order to dispose fairly of the claim. KPMG played a significant role in the transaction about which Banners are being sued, and provided advice on the provisions that are at the centre of the dispute.
The issues to which the disclosure sought would go have been canvassed extensively in pre-action correspondence. The documentation requested is specific and easily identifiable. To make out a claim under the 1978 Act, Banners will have to establish that KPMG owed the Claimants a material duty. In correspondence, KPMG have denied that they owed the Claimants a duty of any kind. They have relied upon selected extracts from their file to substantiate their contentions. The exact extent of the Claimants’ resort to and reliance upon KPMG is central to any contribution claim. For that purpose, KPMG’s file will be critical, and KPMG have themselves resorted to parts of their file to support their arguments. It would be wrong in principle if Banners were prevented from seeing the entirety of that file before embarking upon proceedings.
Banners can formulate a case against KPMG, but without sight of KPMG’s file, they can have only limited confidence in any formulation. If KPMG’s arguments are valid, any such formulation would (or might) be wrong. If the file is as KPMG contend, it will be in KPMG’s interests to disclose it, since disclosure will result in Banners abandoning the contemplated proceedings. If the file is as Banners believe, Banners’ arguments with KPMG will be strengthened.
In March 2002, KPMG accepted that they should disclose their file. KPMG have simply changed their minds. If it was appropriate in 2002 for the file to be disclosed, it is no less appropriate now.
There is no inconsistency between Banners’ applications under r. 31.16 and r. 31.17. The disclosure sought will both serve to delineate the scope of Banners’ duty to the Claimants (and thereby enhance Banners’ defence to the claim) and serve to establish the extent of KPMG’s duty to the Claimants (which will provide the foundation for Banners’ claim against KPMG under the 1978 Act).
On the application under CPR 31.17, Banners argue that the three main elements of their defence to the claim by the Claimants on the merits are that : (a) the scope of their duty was limited to the legal aspects of the transaction and ensuing Agreement; (b) KPMG assumed responsibility for advising the Claimants upon financial or accounting aspects of the transaction and ensuing Agreement; and (c) in any event, the Claimants did not in fact rely upon Banners’ advice but upon KPMG’s advice when finally entering into the Agreement at the Completion Meeting.
Banners rely upon their attendance notes and correspondence to establish KPMG’s role in the transaction. Banners say that they are confident that KPMG’s file will confirm what Banners’ documentation indicates and will prove first hand that KPMG had assumed responsibility for financial and accounting matters. This will serve to show that Banners’ duty was restricted to purely legal questions. KPMG’s file will also support Banners’ case on reliance. In either event, Banners’ defence of the claim will be appreciably strengthened.
IX KPMG’S position
The evidence of Mr Foord, a partner in Stephenson Harwood, is that KPMG’s agreement to give pre-action disclosure was made in the context of correspondence from Lovells which expressly stated that, if the Claimants commenced proceedings against Banners, then Banners would issue a Part 20 Claim against KPMG.
In the event Banners elected not to inspect KPMG’s documents at that stage. Proceedings were not issued against Banners until October 4, 2002. The first KPMG knew of this was the receipt of a letter from Lovells on February 10. 2003 which stated not only that proceedings had been issued by the Claimants, but that a defence had also been filed, a case management conference had taken place on January 9, 2003 and a trial date had been set for November 2003. Given the delay in informing KPMG of these matters, it appeared to him that Banners were no longer proposing to issue a Part 20 claim against KPMG. KPMG declined to give disclosure. Given the change of circumstances since March 2002, in particular that proceedings had now been issued and were well advanced, that there had been no attempt by Banners to join KPMG as Lovells had previously stated was their intention and that it was now too late for them to do so, pre-action disclosure was no longer appropriate. It had in any event been offered on a mutual basis and there was no reference to whether Banners’ files would be made available or to the timescale for inspecting them, bearing in mind the much changed situation since March 2002.
KPMG argue that Banners cannot show that they and KPMG may well be parties to proceedings if proceedings are issued. The proceedings which are envisaged by Banners are a Part 20 claim. Given that the current action is well-advanced and that the 10-day trial of the action is due to commence in about 4 months’ time, and still no application to join KPMG as Part 20 Defendant has been made, there is no realistic prospect of a Part 20 claim being permitted to be made: Courtenay-Evans v Stuart Passey & Associates [1986] 1 All ER 932. In those circumstances, Banners cannot be heard to argue that they and KPMG are likely to be parties to those proceedings.
If, on the other hand, Banners now wish to argue that if there cannot be Part 20 proceedings but that there can be a subsequent fresh action, then (i) Banners’ current application is wrongly framed; (ii) as a matter of discretion it would be premature to make any order against KPMG until it is known whether Banners’ defence to the current action has succeeded or failed; (iii) as a matter of discretion the Court should take into account Banners’ failure in the nearly nine months that this action has been running to make any attempt to join KPMG.
Banners have been put to their election as to whether they are pursuing an application under CPR 31.16 or 31.17, but have declined to elect. Accordingly, Banners must be treated as unable or unwilling to decide whether (i) they require documentation in order to dispose of their disputes with KPMG; or (ii) they require documentation in order to support their case against the Claimants (or harm the Claimants’ case against it). In the face of such indecision, and where Banners appear to be content to receive documentation from KPMG on the basis that KPMG are a non-party and that the documentation is required for no other purpose than to support Banners’ case against the Claimants (or harm the Claimants’ case against it), the Court should be slow to conclude that KPMG are likely to be a party to subsequent proceedings brought against them by Banners.
The allegation by Banners that KPMG were engaged on behalf of the Claimants to advise on the financial implications of the proposed transaction is unclear as to whether the allegation is that the Claimants retained KPMG to advise them, or Banners as agents for the Claimants retained KPMG to advise the Claimants, or Banners retained KPMG to advise Banners. The allegation does not call for an examination of KPMG’s files, but only of the Claimants’ evidence (i.e. disclosure and witness statements) as to whether the Claimants retained KPMG to advise in the respects alleged. The disclosure requested is neither narrowly focused nor directly relevant to the question of whether KPMG were retained for the purpose alleged. If Banners’ defence on the scope of their instructions is right, then the Claimants’ claim in those respects must fail and there is no claim over against KPMG; to the extent that Banners’ case fails, the Claimants’ claim that the sole advisory responsibility was Banners’ must succeed and so again there would be no claim over against KPMG; accordingly no disclosure from KPMG would be decisive on the existence or conduct of the intended proceedings .
As regards the allegation that in providing advice as to the terms of the draft agreement (both as to the risk of double counting and the drafting of Schedule 9), KPMG accept that no such advice was given but will say that no such advice was sought or required. It is impossible to see how the examination of any further documentation is called for. Whether KPMG were under a duty so to advise is a matter for the trial judge’s interpretation of the request(s) to advise and opinion as to the duty thereby created (if any) and the quality of performance by KPMG of such duty. All relevant documents are in Banners’ possession. In particular, there seems to be no dispute between Banners and KPMG that the post-completion audit was carried out on an accounting basis consistent with Kenal’s previous audits. KPMG also rely on the fact that the Claimants disavow any duty on the part of KPMG.
As regards the allegation that KPMG assured the Claimants that there would be no shortfall on completion, KPMG’s attendance note has already been disclosed; the Claimants deny that such an assurance was given; if an assurance was given, then so much of the Claimants’ case as depends on their relying on Banners to ensure that there was no shortfall fails, and there is no claim over by Banners against KPMG; if no assurance was given, then the Claimants must succeed in showing reliance on Banners (if anyone), in which case Banners again has no claim over against KPMG; accordingly no disclosure from KPMG would be decisive on the existence or conduct of the intended proceedings.
The disclosure sought would not fall within the ambit of standard disclosure. The requisite clarity as to the issues between Banners and KPMG would be most readily discernible from draft pleadings in the prospective Part 20 claim, but no draft has been produced.
Banners say that they want the opportunity properly to investigate and bring their claim, albeit that they have already had ample opportunity to date. No indication is given as to what "investigation" is required. If Banners are clear that the Claimants retained KPMG, then they can without further investigation apply to start Part 20 proceedings or can bring fresh proceedings based on a retainer arising from one or more of those events. If Banners are not clear that the Claimants retained KPMG, despite the contrary impression given in the Defence and the correspondence between Banners’ solicitors and KPMG’s solicitors, then no amount of fishing around in KPMG’s files will produce such clarity in the light of KPMG’s consistent denials of any such retainer.
As regards the possible resolution of the dispute without proceedings, KPMG say that there are no documents or no documents which Banners do not already have that can conceivably shed light on the issues. On saving of costs (i.e. the ability to draft the Part 20 claim) with more particularity, thus avoiding the need for subsequent amendment, KPMG say that there is no reason why the claims could not now be properly pleaded.
As regards the discretionary factors, KPMG say that, despite threatening Part 20 proceedings against KPMG as early as January 2001, Banners failed to bring those proceedings before or at the time of its Defence, and have still taken no steps to do so nearly seven months later, which indicates that Banners’ allegations against KPMG are speculative. This is supported by the absence of any assertion by the Claimants that KPMG undertook any relevant duties to them and the absence of any complaint by the Claimants against KPMG. The ambit of the disclosure sought is wide. Banners have already had some significant voluntary disclosure from KPMG. Banners appear to want to treat the unusual step of disclosure before action as a matter of course.
Banners’ case ought to be pleadable now without any further disclosure. Given that it is too late now to attempt to bring KPMG in as Part 20 Defendants, it would be more appropriate to await the outcome of the current action to see whether Banners’ defence succeeds (in which case there will be no claim over); or the extent to which and/or the respects in which the Claimants’ claim succeeds, without which it will be impossible to say with any clarity which (if any) liabilities of Banners to the Claimants are capable in point of law of translating into 1978 Act claims against KPMG.
On the CPR 31.17 application, KPMG repeat much of their argument on CPR 31.16. In particular, Banners cannot show that the documents sought may well fall within the ambit of standard disclosure. KPMG’s files are incapable of showing what duty Banners undertook, and are incapable of showing whether or not they discharged their duties. It is impossible to see how KPMG’s files will show the scope of the duty owed by Banners to the Claimants, or can make good the negative proposition that Banners did not assume any duty to advise on the financial and/or accounting implications of the transaction. Only Banners’ files and evidence can show the scope of the duty it undertook. Only Banners’ files and evidence (and perhaps the Claimants’ disclosure and evidence too) can show the extent to which they directed the Claimants to KPMG. No other disclosure is necessary. Voluntary disclosure has been given of KPMG’s limited attendances on Banners and the Claimants. From those documents, and the Claimants’ disclosure and evidence, the trial judge will have to conclude the extent (if any, which both the Claimants and KPMG deny) to which the Claimants looked to KPMG for advice. KPMG’s files cannot support Banners’ contention that the Claimants did not look to Banners for advice. Only Banners’ files (and the Claimants’ disclosure and evidence) can show the extent to which the Claimants looked to Banners for advice. It is impossible to see how KPMG’s files can demonstrate reliance by the Claimants. Even assuming (which is denied) that the Claimants took advice from KPMG, KPMG’s files are incapable of showing whether, and if so to what extent, the Claimants relied on that advice. Only the Claimants’ disclosure and evidence can do that.
As for the excessive width of the application, it cannot be said that every document generated by KPMG in relation to its work carried out in relation to the transaction: there are bound to be documents within that broad class which are neutral and/or irrelevant.
X Conclusions
In my judgment Banners have made out a case for pre-action disclosure under CPR 31.16 in respect of the two KPMG files. One of the striking features of KPMG’s argument on this application is that it is to a large extent based on the hypothesis that they are not liable because they were not given the instructions to advise which Banners allege, nor gave the assurances about the shortfall which Banners allege, and that (apart from the two notes which they have disclosed) the documents relevant to those issues will emanate exclusively from Banners and the Claimants. It may well be that at the end of the day it will appear that KPMG were not given the instructions to advise and did not give the assurances which are alleged. But I am satisfied that it is mere assertion to argue that their documents are irrelevant, for example, to the questions of what Banners’ instructions were (which may well depend on the respective roles of Banners and KPMG) or whether there were assurances by KPMG on which the Claimants relied.
As regards what were described in Black v. Sumitomo Corpn as the jurisdictional aspects of the rule (i.e. the necessary conditions for its application), it is of course a tautology to say that if a Part 20 claim were made KPMG would be a party. At one time I thought that it was being said by Banners that they recognised that it was too late to bring a Part 20 claim and that what was envisaged was a fresh action after the trial of the claim by the Claimants. But I now understand Banners to be saying that if they wish to make a Part 20 claim then they accept that there is a risk that permission will not be given under CPR 20.6, and that in any event it is likely that the November 2003 trial date will be lost. On that basis I am satisfied that Banners and KPMG "may well" be parties to a Part 20 claim if it is brought and that there is no bar to its being brought, although the permission of the court will be required under CPR 20.6.
Nor do I doubt that on the basis of the allegations made by Banners against KPMG the two files would be the subject of standard disclosure. I say nothing about the strength of Banners’ claim against KPMG, but, despite KPMG’s arguments, I am satisfied that the allegations are clear, in particular that KPMG were retained to advise on the draft agreement, and that the Claimants relied on assurances by KPMG. I am also satisfied that the two files, which relate exclusively to the work done by KPMG in relation to this transaction, will, expressly or by inference from the work done, tend to show what their instructions were and whether they gave assurances as alleged, and accordingly be within the scope of standard disclosure with the potential to adversely affect KPMG’s case.
I do not accept the argument by KPMG that the only remaining relevant material on the scope of their instructions is that emanating from the Claimants or Banners. KPMG assert that there is no basis for the claim that all relevant documents are in Banners’ possession. The essence of KPMG’s argument is that they are not liable and that there are no documents which Banners does not already have that can conceivably shed light on the issues. KPMG’s files may not be decisive, as KPMG claim, but if there is a genuine dispute as to the scope of KPMG’s retainer, it cannot be right that the allegation does not call for an examination of KPMG’s files, but only of the Claimants’ and Banners’ evidence. The limited disclosure given does not show that there are no other relevant documents. The concession that KPMG did not advise in the relevant respects does not dispose of the allegation that they had a duty to advise. As I have said, it does not follow that because the allegation by Banners is that the Claimants did not rely on their advice, and relied on the advice of KPMG, then the only relevant documents will be in the possession of the Claimants.
I am also satisfied that pre-action disclosure would assist the parties to avoid litigation. If the files do not suggest that KPMG had the instructions which Banners allege they had, or do not suggest that KPMG gave the assurances, then Banners will be in some difficulty in pursuing a Part 20 claim, given that they will get no support from the Claimants. If they support Banners’ allegations then there will be scope for a tri-partite settlement.
I take into account the following factors in the exercise of the discretion. First, I accept that pre-action disclosure should not be ordered as a matter of course. Second, I also accept that it is probable that Banners could formulate their claim without pre-action disclosure. Third, there has been delay in the pressing of the claim against KPMG, but there has been no prejudice to KPMG as a result.
Fourth, KPMG did agree to give the disclosure. It is not suggested that the agreement is of a kind which might be binding, but I consider that I am entitled to take it into account in the exercise of the discretion. I do not consider that the reasons for their change of position are convincing. There has not been any relevant change in circumstances. The only change is that there are now proceedings on foot in which a Part 20 claim can be made, and of which Lovells had warned, and that the delay in making the Part 20 claim has strengthened KPMG’s position.
Fifth, the likely issues are reasonably clear. Sixth, the documents requested are limited to KPMG’s two working files, and the whole of what they did is relevant to the extent of their instructions. Seventh, the administration of justice requires that any uncertainty over the parties to the main proceedings, and the scope of the trial, be determined as soon as possible. If Banners have a viable claim against KPMG, it is important that it is decided as soon as possible whether it is sensible for overlapping issues to be determined in separate trials.
If I had been wrong in treating the Part 20 proceedings as the relevant proceedings, I would have come to the same conclusion with regard to any post-trial proceedings against KPMG, and would have given permission for the application to be amended.
If I were wrong on the application under CPR 31.16, I see no objection to an alternative application under CPR 31.17, and would have acceded to it. KPMG’s objections to such an order were in essence that their files would not support Banners’ case, or adversely affect the Claimants’ case. But the test is whether they are likely (in the sense of "may well") to do so, and their assertion that there is nothing in their files which do so is not a sufficient objection in the light of the nature of the transaction, their admitted involvement, and Banners’ defence. In particular, I do not accept the submission that their files are "incapable" of showing what duty Banners undertook, and are incapable of showing whether or not they discharged their duties; or that it is impossible to see how KPMG’s files would show the scope of the duty owed by Banners to the Claimants, or could make good the negative proposition that Banners did not assume any duty to advise on the financial and/or accounting implications of the transaction. It is plain that that the duties which KPMG undertook may have an impact on the scope of Banners’ duties.
If the form of the order cannot be agreed, I will hear argument.