Steamship Mutual Underwriting ASSN Trustees (Bermuda Ltd) & Anor v Baring Asset Management Ltd

This is an application for pre – action disclosure pursuant to section 33(2) of the Supreme Court Act 1981, as amended, and CPR Part 31.16. The two applicants are Steamship Mutual Underwriting Association Trustees (Bermuda) Ltd (“the Trustee”) and Hamilton Investment Management Limited (“Hamilton”). The first applicant is the corporate trustee of the Steamship Mutual Trust, which has been referred to as “The Fund” in this application. The second applicant manages that Fund. The Fund’s principal business is the reinsurance of two P&I Clubs that are run by the well – known Steamship Mutual group of P&I Clubs.

The assets of the Fund are managed by external fund managers. The respondents, (“BAM”), were engaged as one of the Fund’s asset managers from 1988 until 2001. There were two other asset managers at the relevant time. They were Brown Brothers Harriman & Co and Goldman Sachs Asset Management Limited, (“Goldman Sachs”). BAM managed about 50% of the assets of the Fund during the period of its appointment as fund manager. I will refer to the part of the Fund that was managed by BAM as “the portfolio”.

The contract that governed the relationship between BAM and Hamilton was signed on 24 July 1997. It is called an Investment Management Agreement: “IMA”. At the date of the IMA the value of the portfolio managed by BAM on behalf of the Fund was about US$ 210 million. The IMA provided that BAM would manage the portfolio entrusted to it with a view to obtaining various investment policy objectives. These objectives included the out- performance of a specified index, which provided a benchmark, by 200 basis points, or 2%, on a rolling quarter basis.

In 2000 and 2001 the world’s stock markets were volatile. The dizzy climb of Technology, Media and Telecoms shares in particular was halted and then they fell rapidly. This decline had an effect on the value of all stock market indices and all benchmarks. But in the 12 months up to 20 February 2001 the portfolio managed by BAM under-performed the benchmark by 10.7%. In the 12 month period up to 31 May 2001 the portfolio managed by BAM under-performed against its benchmark by 8.1%. Although the Fund’s benchmark also declined, this underperformance cost the Fund approximately $32 million as against the Fund’s benchmark.

Goldman Sachs, one of the other two asset managers of the Fund, had a similar mandate and the same overall objectives as BAM. Although the assets of the Fund entrusted to Goldman Sachs also declined in value in the period from February 2000 to May 2001, the decline was far less marked than that of the portfolio managed by BAM.

In June 2001 BAM made a presentation to the applicants for the renewal of their contract to manage part of the assets of the Fund. However on 31 July 2001 BAM’s mandate to manage the assets under their control was terminated.

The first applicant, as trustee of the Fund, decided that it was duty- bound to consider the difference in the performance of the portfolio managed by BAM and the assets managed by Goldman Sachs. The two applicants therefore decided to retain Mr David Hager, who is a consulting actuary and investment consultant employed by Hewitt Bacon and Woodrow Limited. Mr Hager was instructed to carry out a performance and investment review of BAM’s management of the portfolio. The purpose of this investigation was to ascertain, if possible, why BAM’s investment of the portfolio had been so poor, particularly compared with the assets managed by Goldman Sachs. Ultimately the applicants wished to decide on whether they should make a formal claim against BAM for the losses that the applicants say that they have suffered.

Mr Hager wrote to Mr James Williams, Chairman of the Strategic Policy Group of BAM, on 9 September 2002. Mr Hager asked Mr Williams for assistance explaining the performance of BAM’s management of the portfolio in the two or three years up to the termination of BAM’s mandate. Mr Hager asked for several items, including (1) the overall tracking error for the portfolio from time to time; (2) the details of the overall strategic directions of the portfolio during the period; and (3) the reasons for the changes in the portfolio structure that appeared to have occurred fairly frequently during the period. BAM replied to this letter on 19 September 2002, asking to know the purpose for which the information was required and the use that would be made of any information that was given. After Mr Hager had written to explain that the information was required to carry out a performance and investment review of the Fund’s portfolio, BAM did send some information under cover of a letter dated 20 January 2003. That information consisted of copies of the valuation and accounting records that had been generated and had been provided to Hamilton during the period of BAM’s retainer. BAM indicated that it would not provide further information.

On 12 September 2003 Mayer, Brown, Rowe and Maw LLP, (“MBRM”), who had been instructed by the applicants, wrote to Ms Mala Dhillon, the Group Head of Legal and Compliance at BAM. It is a closely typed three page letter. In it MBRM sets out a number of points: (1) what it sees as the duties of BAM as fund manager, under the contract with Hamilton, and as a matter of common law. The letter identifies seven particular duties that BAM should have observed in the management of the assets entrusted to it. (2) The letter states that at all times BAM had available to it a variety of techniques and measures for controlling the level of risk in portfolios that were managed by BAM and for ensuring that the level of risk was commensurate with the performance objectives that had been set. These techniques were identified in the letter. In particular it referred to the techniques to control so – called active risk or tracking error. (3) The letter then asserted that the investment performance of the portfolio entrusted to BAM had been “abysmal” during the period 2000 – 2001. The letter stated that this performance had been far worse than that of other asset managers who were entrusted to other portions of the Fund. It claimed that if BAM had performed at the benchmark level, then the Fund would have been worth some $32 million more than it was at the end of BAM’s mandate. (4) The letter then stated that such underperformance called for a full explanation and it said that one had never been given. The letter continued:

“The explanations that the Trustee has been given by BAM and the research that the Trustee has been able to carry out suggests that the underperformance was attributable not simply to poor stock selection by BAM, but also to BAM’s failure properly to control risk and to diversify the sub – portfolios of the Fund”.

The Schedule attached to the letter identified six classes of documents sought. These are documents relating to: (1) Active risk or tracking error; (2) risk controls; (3) Portfolio review committee or strategic policy group records; (4) post – termination reviews; (5) House policy guidelines; and (6) performance attribution. Explanatory notes as to what these classes were intended to cover were provided.

BAM acknowledged the letter on 15 September 2003 and said that there would be a response in due course. On 27 October 2003 Slaughter and May (“S&M”), who had been instructed on behalf of BAM, said that they would reply to the 12 September letter in detail once they had considered it.

On 27 November 2003 MBRM issued the current application. The classes of document sought are the same as those set out in the schedule to the letter of 12 September 2003 to BAM, but with the addition of a further category, designated “House Strategy”. On 28 November 2003 S&M wrote to MBRM stating that they expected to be able to respond to the letter of 12 September the following week. On 2 December 2003 S&M wrote to MBRM saying that they hoped to reply “shortly”. There was a request for an extension of time in which to respond to the evidence served by MBRM in support of the application; that was granted. Then on 24 December 2003 S&M replied in detail to the letter of 12 September.

S&M’s letter is over six and a half pages long, in close type. The first point the letter makes is that as MBRM asked that the letter of 12 September 2003 be treated as a Preliminary Notice under the Professional Negligence Pre Action Protocol, then BAM was not under any duty at that stage to provide any documents. The letter also states that, given the existence of the Protocol, an application under CPR Part 31.16 is premature. The letter then makes a number of further points. First it states that the Fund had, generally, performed well under BAM’s management. Secondly it suggests that the decline in performance in the period 2000 to 2001 relative to the Fund’s benchmark was a direct result of stock selection in the TMT sectors, particularly in the US market. It is suggested that there was nothing in the terms of BAM’s mandate nor its house controls that could have anticipated the volatility in the market that had occurred and which had led to the decline in the Fund’s performance.

The letter then goes on to answer the assertions that had been made about the duties of BAM as a manager of the portfolio. The letter states: (1) that at all times the managers of the portfolio acted in accordance with the house controls that were in place; (2) that the portfolio was maintained within the level of active risk appropriate to the mandate, save for a very minor infraction for a brief period in the third quarter of 2000; (3) that the review process carried out by the Director of Investment Process at no time revealed any excessive ex ante risk in relation to the portfolio; (4) that at no time in the relevant period of 2000 to 2001 did BAM ever act outside the guidelines set in the IMA of July 1997.

The letter then deals with the “Performance of the Fund” during the relevant time and also the “Management and Composition of the Fund”. It rejects the allegations made in the letter of 12 September. It argues that if that letter was to be treated as a Preliminary Notice under the Professional Negligence Pre – Action Protocol, then either the matter should be closed or, if the Trustee wished to take it further, then the Trustee must serve a Letter of Claim. S&M’s letter then sets out in detail what such a Letter of Claim should contain. The requirements there set out are in line with those laid down by the current Protocol, although some aspects are dealt with in more detail. Lastly the S&M letter states that in these circumstances a request for documents was premature. However a number of documents were enclosed with the letter.

S&M’s letter concludes by saying that any claim by the Trustee which alleged a breach of contract or duty by BAM in the management of the Fund would be regarded as “entirely speculative” and would be vigorously opposed.

The documents enclosed were: (i) the June 2001 Proposal; (ii) a document entitled “Benchmark revisited” dated November 2000; (iii) a document entitled “Ex Ante Tracking Error for Steamship Mutual Fund; MSCI All Country World”; (iv) a spreadsheet headed “Top Ten Holdings”; and (v) spreadsheets for the equity portion of the Fund headed “Relative Contributions to Return”. In the evidence served by BAM in connection with this application Miss Finkler, a partner of S&M, states that in order that BAM could produce the “Top Ten Holdings” and the relative contributions to returns document, the data had to be reconstructed. This was because in the meantime BAM’s IT systems had been either replaced or upgraded, so that the original information was not readily available. That exercise took about 300 man hours. Furthermore BAM no longer had the appropriate algorithms to establish the tracking error for the combination of bonds and equities, so that BAM could not produce tracking error figures for the balanced portfolio of the Fund from the data it has now: (Finkler paras 21 to 26).

On 9 January 2004 S&M served two witness statements (of Ms Finkler and of Mr Michael Hughes, the Chief Investment Officer of BAM) in response to the evidence that MBRM had served with the application on 27 November 2003. On 23 January 2004 MBRM replied to S&M’s letter of 24 December 2003. In summary it expresses disappointment that more documents had not been produced; it comments on the remarks made by S&M on the substantive issues and it made comments on the documents that had been sent with the letter of 24 December 2003. The letter ends by stating that the application under CPR Part 31.16 would be pursued because:

“The admitted breach by your client of its internal controls, the disastrous results of your client’s fund management, together with the contemporaneous admissions made by your client referred to at paragraph 1.2 above and paragraph 31 of Mr Hager’s statement, give our clients compelling reasons to seek production of the limited numbers of documents that they have sought. Further in Black v Sumitomo [2001] EWCA Civ 1819, Lord Justice Rix states that the power to grant pre – trial disclosure was intended to assist “all those who needed disclosure as a vital step in deciding whether to litigate at all…” That is precisely the position in which our clients find themselves. Our clients have suffered an undoubted misfortune and need the disclosure to investigate the mechanism of their misfortune”.

There was further correspondence up to the hearing of the application which took place for virtually a full day on Friday 6 February 2004.

Section 33(2) of the Supreme Court Act 1981, as amended by Article 5(a) of the Civil Procedure (Modification of Enactments) Order 1998 (S.I. 1998/2940), made under section 8 of the Civil Procedure Act 1997 provides:

“On the application, in accordance with rules of court, of a person who appears to the High Court to be likely to be a party to subsequent proceedings in that court, the High Court shall, in such circumstances as may be specified in the rules, have power to order a person who appears to the court to be likely to be a party to the proceedings and to be likely to have or have had in his possession, custody or power any documents which are relevant to an issue arising or likely to arise out of that claim- - (a) to disclose whether those documents are in his possession, custody or power; and (b) to produce such of those documents as are in his possession, custody or power to the applicant …”

CPR Part 31.16 provides:

An order under this rule must –

Such an order may –

In Black v Sumitomo Corporation [2002] 1 WLR 1562, the Court of Appeal analysed comprehensively the history of section 33(2) and the matters that a court must consider on an application under CPR 31.16. It is clear from the judgment of Rix LJ that each of the matters referred to in paragraphs (a) to (d) inclusive of CPR Part 31.16 constitutes a “jurisdictional threshold” which must be crossed before the court can have any jurisdiction to consider whether it should exercise its discretion to make an order under CPR Part 31.16. Only if those thresholds have been crossed can the court then decide whether to exercise an overall discretion to grant pre – procedure disclosure. In exercising its discretion the court must take account of all the facts and the details of the case that is before the court.

In the present case it is agreed by Mr MacLean QC, appearing for the applicants, and Mr Rabinowitz QC, appearing for BAM, that the jurisdictional requirements of paragraphs (a) and (b) of CPR Part 31.16 (3) are met. In other words (using the interpretation adopted by the Court of Appeal in Black: paras 71 and 72), if there are subsequent proceedings, both the applicants and the respondent may well be parties to them.

Mr MacLean submitted that the jurisdictional requirements of both paragraphs (c) and (d) of CPR Part 31.16 (3) have also been met. Mr Rabinowitz challenged both those submissions as well as arguing that, in this case, the court should not exercise its discretion to grant an order even if the jurisdictional thresholds have been passed.

I will consider first the remaining two jurisdictional issues and then I will deal with the exercise of discretion.

In his judgment in Black, Rix LJ emphasised (at para 76) that the court cannot answer this jurisdictional threshold question without “clarity as to the issues which would arise once pleadings in the prospective litigation [have] been formulated”. In other words, as Waller LJ put it in the previous case of Bermuda International Securities Ltd v KPMG [2001] 1 Lloyd’s Rep PN 392 at 397 para 26, the court considering the application under CPR 31.16 “…must be clear what the issues in the litigation are likely to be: ie., what case the claimant is likely to be making and what defence is likely to be being run so as to make sure the documents being asked for are ones which will adversely affect the case of one side or the other or support the case of one side or the other”.

Rix LJ also stated (at para 77 in Black) that if there would be considerable doubt as to whether the disclosure stage would ever be reached in any subsequent litigation, that is a matter that the court can take into account at the discretion stage of the exercise it does on an application under CPR 31.16, if that is ever reached.

Mr MacLean submitted that the jurisdictional threshold in paragraph (c) had been crossed in this case. He said that the threshold was not a high one and that the issues are clear. He submitted that it could not be in dispute that BAM had managed the portfolio pursuant to a contract; that meant that it had duties to manage the funds with professional skill and care; in the period 2000 – 2001 the assets in BAM’s care had decreased in value dramatically and had done so far more than in the case of other asset managers who were subject to the same instructions and criteria as BAM; therefore there is a clear prima facie case that BAM must have failed to exercise its professional care and skill in managing the funds. The only issue in the proceedings, if they were brought, would be whether BAM had been negligent in the exercise of its professional care and skill.

I asked Mr MacLean whether the applicants had formulated precise allegations as to BAM’s failure to use professional care and skill. He accepted that no draft pleading had been prepared and that there had been no more precise formulation than that set out in the witness statement of Mr Hager in paragraph 31 and the letter of 12 September 2003. Mr MacLean accepted that the Professional Negligence Pre Action Protocol, which came into force in July 2001, applied to this case. He also accepted that before the application was made the applicants had not written a “detailed Letter of Claim” to BAM, in accordance with paragraph B2.1 of the Protocol. He had to accept, therefore, that (1) there was no document that set out a clear chronological summary of the facts on which the potential claim was based, identifying and producing key documents: (2) that there was no document which spelt out the allegations against BAM which specifically identified what it had done wrong and/or failed to do; and (3) no document identified how the alleged errors of BAM had caused the losses that were claimed, with supporting documentation.

However he submitted that the essence of the complaint was clear enough. He submitted that it was that (1) BAM had failed properly to manage the risk inherent in the instruction to beat the benchmark by 2%; and (2) BAM failed to operate its house controls properly. Mr MacLean submitted that the issues were sufficiently clear for it to be obvious that all of the documents requested in the schedule to the application would fall within the primary disclosure that BAM would be obliged to give if there were proceedings.

Mr Rabinowitz submitted that there was a fatal lack of clarity in the way the applicants put their case. He said that this was not surprising since the applicants had admitted that they needed this disclosure in order to see whether or not there was a case to pursue against BAM. Therefore, although the jurisdictional threshold in paragraph (c) of CPR 31.16(3) was not high, the applicants had failed to clear it.

In my view the precise issues that might be raised in future litigation have not yet been made clear by the applicants. But I think that the broad issues are clear enough for the purposes of founding jurisdiction under paragraph (c). The broad issue will be whether BAM exercised reasonable professional care and skill in the management of the assets entrusted to it during 2000 – 2001. Documents that adversely affect BAM’s case on that issue, or support the applicants on it would have to be given in standard disclosure under CPR 31.6 in any future action. In my view each of the seven categories of documents set out in the Schedule to the application, (if they exist, which is another question), would fall within BAM’s duty by way of standard disclosure.

In Black, Rix LJ emphasised (at paragraphs 79 - 81) that paragraph (d) constitutes both a jurisdictional threshold and an instruction to the court to consider its discretion in terms of the three goals that are identified in the paragraph. The Court has to engage in a two – stage process. When considering whether there is jurisdiction to make an order under CPR 31.16, then, in relation to paragraph (3)(d), the Court must ask whether, in principle, there is “a real prospect” 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”. If there is such a “real prospect”, then the court has to go on to consider the exercise of its discretion. In doing so it must not simply consider the matter “in principle”, but must consider all the facts of the case and in detail: see the Black case at paragraph 81.

As this is a jurisdictional test in the first place, it is the applicant who must show the court that at least one of the tests is satisfied, even if the test is not intended to be a high one.

Mr MacLean submits that, in principle, disclosure before proceedings in this case is desirable in order to do one of more of the things identified in CPR 31.16 (3) (d); that is (i) to dispose fairly of the anticipated proceedings; or (ii) to assist the dispute to be resolved without proceedings; or (iii) to save costs.

I am not satisfied, even in principle, that either (ii) or (iii) is the case. On (i), that, to my mind, contemplates that there will be proceedings and that the disclosure before them is desirable to help to dispose of the subsequent proceedings in a fair way. That could be by shortening them, or enabling the parties to focus more clearly on the issues. Looking at this case as it appears at present, I think that, in principle, pre – proceeding disclosure might shorten proceedings later and might focus the issues. So to that extent pre – action disclosure is desirable and that jurisdictional threshold is satisfied.

As to point (i) of paragraph (d), although the evidence and the submissions of Mr MacLean say that pre – proceedings disclosure is desirable in principle to assist the dispute to be resolved without proceedings, I doubt very much that it would, in fact, do so. BAM have given the applicants a lot of disclosure already. But the applicants, through Mr Hager’s second witness statement dated 23 January 2004, have expressed surprise at the “very limited nature of the documents that Barings [have] produced in response to the Applicants’ request for documents”: see para 5. Mr Hager goes on to say that he finds the apparent lack of contemporaneous documents concerning. That suggests to me that, in principle, production of further documents at the pre – proceeding stage may well not, in fact, assist the parties to resolve the dispute without proceedings.

As for the third reason why pre – proceedings disclosure might be desirable in principle – in order to save costs – that has not happened. I have seen the parties’ Statements of Costs in relation only to the current application. The costs of the applicants total £80,222.50. Those of the respondents are £69,957.15. It is obvious that considerable costs have already been spent on both sides in relation to this matter overall. I cannot see how making pre – proceedings disclosure is likely, even in principle, to save further costs.

In the Black case, Rix LJ pointed out that the exercise of discretion must depend on the facts of each case. He identified a number of “important considerations” at paragraph 88 of his judgment. These are: (i) the nature of the injury or loss complained of; (ii) the clarity and identification of the issues raised by the complainant; (iii) the nature of the documents requested; (iv) the relevance of any protocol or pre – action enquiries; and (v) the opportunity that the complainant has to make his case without pre – action disclosure.

At paragraph 95 the Lord Justice made these further general comments on the exercise of the Court’s discretion:

“In my judgment the more focused the complaint and the more limited the disclosure sought in that connection, the easier it is for the court to exercise its discretion in favour of pre – action disclosure, even where the complaint might seem somewhat speculative or the request might be argued to constitute a mere fishing exercise. In appropriate circumstances, where the jurisdictional thresholds have been crossed, the court might be entitled to take the view that transparency was what the interests of justice and proportionality most required The more diffuse the allegations, however, and the wider the disclosure sought, the more sceptical the court is entitled to be about the merit of the exercise”.

I will consider the issue of discretion under the headings that Rix LJ set out in the Black case.

Nature of loss: In the present case the loss complained of is one of up to $32 million. It is said that the loss might have occurred as a result of breaches of contract and duty by BAM as manager of the portfolio during the period 2000 - 2001. But at present the applicants are not prepared to assert positively that there were breaches of duty which give rise to a claim. As Mr MacLean put it at paragraph 5 of his written Outline Argument: “This application is brought so as to enable the cause of the Fund’s undoubted misfortune to be investigated”. However, in oral argument Mr MacLean did identify what the possible breaches by BAM might be. He said that there would be breaches if: (i) BAM failed to manage the risks inherent in setting performance goals 2% above the agreed benchmark; and (ii) BAM failed to operate its house controls. So the nature of the potential claim for loss is one of pecuniary loss (up to $32 million) as a result of contractual and common law breaches of duty by a professional fund manager in the way it managed the assets entrusted to it. The nature of the potential claim is clear. But at present there must be speculation as to whether any pre – action disclosure would result in any claim at all.

Clarity and identification of issues: The general potential issues as between the applicants and BAM have been identified. The applicants have made no attempt at a draft pleading. However, the letter from MBRM dated 12 September 2003 does set out the applicants’ case on BAM’s duties towards the Trustee in detail. The letter also states (and BAM accepts) that there were available to BAM a variety of techniques and measures for (i) controlling the level of risk in portfolios that they managed; and (ii) for ensuring that the level of risk taken in the portfolios was commensurate with the performance objectives of the client, in this case the Trustee. The letter sets out facts concerning the performance of the Fund during 2000 to 2001. The letter says that the performance was “abysmal” and calls for a comprehensive explanation. It goes on to assert particular failings on the part of BAM such as a failure to respond to overvaluation of certain shares; that BAM’s “crude” tracking error measures of risk had not worked and a failure to adjust properly the balance of the portfolio away from vulnerable TMT stocks.

In Mr Hager’s first statement at paragraph 31, he identifies five features which he says are important in understanding why BAM’s performance was so poor and why, in his view, BAM’s explanation of its performance was so inadequate. At paragraph 32 Mr Hager summarises this by saying that the information available “suggests” that BAM’s poor investment performance was “not simply attributable to poor stock selection or asset allocation but resulted from excessive risk taking, failure to diversify the sub – portfolios of the Fund together with control failings”.

To my mind the potential issues have been sufficiently identified by the applicants. The issues could be further clarified, but probably not at this stage.

Nature of the documents requested: I have set out the categories of document that the applicants seek, as listed in the schedule to their application. Mr MacLean submits that those categories are precise and production of them is necessary to enable the applicants to make a decision on whether they can advance a claim for breach of contract or negligence against BAM. Mr Rabinowitz submits that the categories are very wide, not related to issues identified or which might be relevant, or have either been produced or are not capable of production.

I will consider each of the categories of document sought to be disclosed.

Active Risk or Tracking Error data: Mr Hughes, the Chief Investment Officer of BAM, has stated that the ex ante tracking error figures for the relevant period for the equities portion of the Fund’s portfolio have been disclosed to the applicants: (Hughes para 18; the document is at page 187 of the bundle). He says that these show that the tracking error for the equities portion of the portfolio was within the upper limit of the BAM guidelines save for a very minor infraction for a brief period in the third quarter of 2000 and was then reversed in the next quarter. Mr Hughes says that this was irrelevant to the under – performance of the Fund. Mr Hager, in his second witness statement, disagrees with this and adds further argument. It strikes me that production of further documents on this topic would only result in greater argument between the two sides and would not be conclusive. One particular reason for this is that these documents have had to be recreated. As Mr Hager points out, (Hager (2) at para 10), he cannot be sure what figures BAM had at the time. If that is so, then how will further recreated figures assist the applicants in deciding whether to bring a formal claim?

Risk controls: Mr Rabinowitz argues that documents in this category do not relate to the issues raised by Mr Hager at paragraph 31 of his first statement. Whether that is so or not, Mr Rabinowitz also submits that the applicants have now been supplied with documents relating to BAM’s internal risk controls. These are set out, he says, in the BAM document called “Steamship Mutual, Request for Propsal” (sic) of June 2001. It is the document that was put forward by BAM when making its presentation to the applicants in June 2001 to renew its mandate to manage part of the Fund’s assets. The risk control process is set out at page 2 of that document (Bundle page 145). BAM had also given details of its risk management at paragraphs 5 and 6 of the S&M letter of 24 December 2003 (Bundle page 252). Further, at paragraph 25 of Mr Hughes’ statement, he explains that BAM used the “BARRA” proprietary software tool as a means of measuring tracking error and then supplemented that with “Value At Risk” from mid 2001. In my view, BAM have given enough disclosure of this class of documents and information already to enable the applicants to see what the risk controls of BAM were at the time. It is for the applicants to form a view on whether BAM breached their own risk controls.

Portfolio review documents: The applicants seek formal review documents. BAM produced “Quarterly Investment Reviews” at the meetings that were held with the applicants. The applicants therefore have those documents. Miss Finkler states, at paragraph 18 (B) of her statement, that there were no other formal documents containing a review of BAM’s portfolio of the Fund during this period. I have to accept that for present purposes. Therefore I conclude that, as at present advised, there are no further documents that could be disclosed in this category.

Post Termination Reviews: The applicants wish to have disclosure of any documents that were produced by BAM after its mandate had been terminated in July 2001. It is doubtless hoped that in such documents there will be an admission that BAM had failed in some way in managing the portfolio entrusted to it. I can see that such documents would pass the test for “standard disclosure” under CPR Part 31.6. They might well support the applicants’ case or be adverse to that of BAM. However even if these documents contained BAM’s internal assessment of the merits of BAM’s management of the portfolio, they cannot help the applicants decide on whether to launch proceedings against BAM. It must surely be the applicants’ view on BAM’s conduct that will determine whether proceedings are launched rather than BAM’s own view (given in retrospect) of its actions when it managed the portfolio. Therefore I doubt whether this class of document would assist the applicants in deciding whether to institute proceedings. In any event Miss Finkler states (para 18 D) that no disclosable documents were generated in the course of such reviews. I have to accept that statement for present purposes.

House Policy Guidelines: The applicants want documents that evidence internal guidelines and tolerances for fund managers concerning asset allocation, sector recommendations and equity recommendations, which might relate to BAM’s management of the portfolio. It is clear from Mr Hager’s first statement that he wishes to see whether the stock selection and management by BAM for the portfolio was inconsistent with internal guidelines to fund managers in BAM: see paragraph 39. BAM has already given information about its house policy, as set out in the June 2001 presentation document. (See in particular page 161 of the bundle). Mr Hughes has given an explanation of the BAM policy and whether there were breaches of it in his statement at paragraphs 11 to 14, 19 and 26 to 30. To my mind the request for further documents of this class is, at this stage, very wide. Given that the applicants already have information about the internal guidelines and tolerances, any further disclosure will not materially help the applicants decide whether or not to bring an action. This request is, in my view, a “roving inquisition” rather than a focused enquiry in relation to a particularised allegation. (See: the Black case at paragraph 92 per Rix LJ).

Performance Attribution: The applicants wish to see documents that contain or record BAM’s quarterly (or more frequent) analyses of the portfolio’s performance compared with its benchmark, so as to attribute relative performance to asset allocation, currency, stock selection and sector selection in relation to the portfolio during the relevant period. Miss Finkler states that this information has already been given, at least in relation to the equity portion of the portfolio, in a document headed “Relative Contributions to Return”, which is undated. (Bundle pages 189 – 221). (As stated already, Ms Finkler has explained that BAM cannot reproduce tracking error figures for the combined portfolio because it no longer has access to the appropriate algorithms to establish tracking error in the combined bonds and equities portfolio: see paragraph 26). In my view the applicants have not explained why more documentation (even if it existed) would assist them in formulating a claim against BAM.

House Strategy: The applicants wish to see documents that set out BAM’s house strategy as they related to the portfolio in the relevant period. Mr Hager says that he needs to see such documents in order to evaluate whether BAM managed the portfolio consistently with house strategy or not. In fact the BAM house strategy is set out in a document called “Baring Asset Management’s Global Balanced Investment Process”, which was attached to the document that BAM produced to the applicants in May/June 2001 when making its presentation to carry on its mandate to manage the portfolio. The strategy is also explained by Mr Hughes at paragraphs 10 to 14 of his statement: (Bundle pages 134 – 5). In my view the applicants already have much information on BAM’s house strategy.

I return to the next of the important considerations to be balanced in exercising the discretion on whether to grant pre – action disclosure, as identified by Rix LJ at paragraph 88 of his judgment in the Black case.

The relevance of any pre – action protocols or pre – action enquiries: It is accepted that the Professional Negligence Pre – Action Protocol, which came into force on 1 July 2001, applies to this case. MBRM refer to it in their letter of 12 September 2003 and ask that the letter be treated as a Preliminary Notice under paragraph B1.1 of the Protocol. This is instructive, because paragraph B1.1, which is headed “Preliminary Notice”, states:

“As soon as the Claimant decides there is a reasonable chance that he will bring a claim against a professional, the Claimant is encouraged to notify the professional in writing”.

I infer from the fact that MBRM asked that the letter of 12 September be treated as a Preliminary Notice that the applicants had come to the conclusion that there was, at that stage, a “reasonable chance” that they would be bringing a claim against BAM, even though no final decision had been made.

Paragraph B1.4 of the Protocol makes it clear that after the Preliminary Notice has been sent and acknowledged, neither party is under any obligation to take any further action. However, if a Claimant does decide that “there are grounds” for a claim against the professional, then he should write a detailed Letter of Claim: paragraph B2.1. That has not been done in this case. Mr MacLean says that the applicants have not written a Letter of Claim because they do not have the material on which to base such a letter. He says that the applicants are in a “Catch 22” position. Because they have not got the material on which to base a Letter of Claim they cannot write one; because they have not written one, they cannot get the material that they need in order to write one. He says that the only way that this “circulus inextriculabilus” can be broken is by the present application.

Mr Rabinowitz submits that the fact that the applicants have refused to write a Letter of Claim makes the application for pre – claim disclosure premature. He says that the applicants’ refusal to follow the Protocol should weigh heavily against the exercise of discretion to grant the application.

In my view it is highly significant that the applicants have not attempted to write a Letter of Claim, even after S&M had written their letter of 24 December 2003 and the material exhibited to Mr Hughes’ statement had been produced. Paragraph B2.1 of the Protocol states that the Letter of Claim should be written “as soon as the Claimant decides there are grounds for a claim against the professional”. To my mind it is obvious that there are “grounds” for making a claim against BAM. (Whether it would succeed is quite another issue). BAM were the fund managers of a portfolio of over $200 million. They had specific targets as to performance. In the period 2000 – 2001, under BAM’s management, the portfolio under – performed considerably. Moreover another fund manager, Goldman Sachs, managed to do significantly better with its part of the Fund, when it had the same objectives and targets as to performance as BAM. If the portfolio had performed in accordance with the targets set then it would have been larger by $32 million. In my view those bare facts indicate that there are “grounds” to make a claim against BAM. (I emphasise again that I make no judgment on the strength of any case against BAM). I think that MBRM and counsel could, without too much difficulty, have drafted a Letter of Claim that contained all the ingredients set out in paragraph B2.2 of the Protocol at any time after receiving S&M’s letter of 24 December 2003. The applicants have not given any satisfactory explanation why that course was not taken or why a draft pleading had not been produced by the time of the application.

The opportunities that the applicants have to make their case without pre – action disclosure: In my view, as I have already said, it would be possible to plead a credible case against BAM for damages for professional negligence. But I think that the question posed by Rix LJ is intended to see whether the applicant could have a better case if he had pre –action disclosure. If so, then it seems to me that it might be useful to ask this question: if the applicants had started proceedings and had served Points of Claim setting out a case, on the basis of the information that they have now, would it be likely to be dismissed under CPR Part 24.2, whereas if they have the disclosure sought, would the claim be less likely to be dismissed? A court might think that the applicants’ case, as I have suggested it above, was so weak that it should be dismissed under CPR Part 24.2. However, based on the information given in the statements of BAM, particularly that of Mr Hughes, I am not satisfied that there is a body of information that, if disclosed to the applicants, would make their case any stronger for purposes of pleading or resisting an application to dismiss summarily under CPR Part 24.2. Therefore on this aspect, I conclude that pre – action disclosure is not going to improve the opportunity that the applicants have to make a case against BAM.

It is clear from paragraph 85 of Rix LJ’s judgment in the Black case that before a judge exercises his discretion one way or the other, he must stand back from the detail. In that paragraph Rix LJ emphasises that an order for pre – action disclosure is not a normal order, or else it would be would be made in almost every dispute of any seriousness, irrespective of its context and detail. As I understand the Lord Justice, he is saying that the applicant must demonstrate, on the facts of the particular case before the court, why the court should exercise a power to order disclosure at other than the normal time, ie. after the action has started. Rix LJ also underlines the danger that a request for pre – action disclosure can lead to expensive satellite litigation. That is exactly what has happened in this case.

In my view the balance overall is firmly in favour of me not exercising my discretion to make an order. I note at this point that I have already decided that, in principle, any pre – action disclosure could only be desirable for the purpose of disposing fairly of the anticipated proceedings. As I have stated above, in my view it is most unlikely that any pre – action disclosure would assist the dispute to be resolved without proceedings and would not save costs. So the only basis on which the court has jurisdiction is through paragraph (d) (i) of CPR Part 31.16 (3). Despite this, and in case that assessment is wrong, I have considered the question of discretion broadly.

My reasons for exercising my discretion against making an order for pre – action disclosure are, in the light of the preceding analysis, in summary as follows:

Ultimately the applicants have to persuade the court that, on all the facts of the case, it is just to order that discovery be given at a time other than the normal one, ie. after an action has been started (see: Black case at paragraph 85). As I have said, this is not a case where BAM have acted unreasonably. In my view, for the reasons set out above, the applicants have not given convincing reasons why the normal discovery procedures should be set aside and pre – action discovery given. Accordingly this application is refused.