Legal Briefing

Out of control

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Dispute resolution | 01 April 2012

A party’s obligation to disclose documents in a dispute is limited to documents which are, or have been, in its control (CPR 31.8). In North Shore Ventures Ltd v Anstead Holdings Inc [2012], the Court of Appeal considered the meaning of the word ‘control’ in the context of CPR 71.2, which provides that the court may order judgment debtors to attend court to provide information about their assets and to produce documents in their control. As the Court of Appeal treated ‘control’ as having the same meaning in CPR 31.8 and CPR 71.2, North Shore Ventures is likely to become the most important post-CPR authority on a party’s obligation to disclose documents within its control. Among other things, the case is likely to be relevant to the question of whether a group company involved in a dispute can be required to disclose documents in the possession of related companies.

The obligation to disclose 
documents in a party’s control

CPR 31.8 provides that:

‘1) A party’s duty to disclose documents is limited to documents which are or have been in his control.

2) For this purpose a party has or has had a document in his control if:

a) it is or was in his physical possession;

b) he has or has had a right to possession of it; or

c) he has or has had a right to inspect or take copies of it.’

Two points, although not strictly relevant to the facts of North Shore Ventures, are worth highlighting about this rule:

  • The distinction between disclosure and providing inspection is important. Disclosure is the process of telling the other side (by list) that certain documents exist. A party provides inspection by allowing the other side 
to look at the original documents and take copies of them. A party retains 
an obligation to disclose documents even where it cannot provide inspection of them.
  • As there is a continuing obligation of disclosure, litigants should take care throughout the case to avoid creating documents that may be prejudicial or adversely affect their case. Categories of documents that might be created and be prejudicial include, for example, board minutes, internal memoranda, e-mails and correspondence with other professional advisors (such as notes to accountants) commenting on the dispute and, even worse, its merits. Litigation privilege may not attach to such documents if they are not created for the purpose of preparing for litigation.

The meaning of control: Lonrho v Shell and subsequent cases

The House of Lords decision in Lonrho Ltd v Shell Petroleum Ltd [1981] is generally regarded as the leading authority in this area. It predates the introduction of the CPR and the issue in that case was whether documents were in a party’s ‘possession, custody or power’ (the test under the Rules of the Supreme Court, which were then in force) rather than the ‘control’ of a litigant. Nevertheless, despite the difference of terminology, Lonrho remains good law 
since the introduction of the CPR and 
was considered in some detail in North Shore Ventures.

In Lonrho, the House of Lords had to decide whether a parent company should be obliged to disclose relevant documents held by its subsidiaries. It was argued by Lonrho that certain documents were within the ‘power’ of Shell and BP because those companies were in a position to obtain possession of the documents by, among other things, procuring the alteration of the articles of association of the relevant subsidiaries so as to entitle Shell and BP to inspect and take copies of the subsidiaries’ or sub-subsidiaries’ documents.

The House of Lords rejected Lonrho’s arguments, holding that documents are only within a party’s power if it has:

‘… a presently enforceable legal right 
to obtain from whoever actually holds the document inspection of it without the need to obtain the consent of anyone else’.

Therefore a parent company could not compel its subsidiary to provide documents; documents in the possession of the subsidiary were not in the power of the parent.

However, despite this apparently clear statement of principle, it seems that the test was not to be applied rigidly. Elsewhere in his judgment, Lord Diplock noted that the facts of Lonhro were exceptional and said that the case was not suitable for a ‘general disquisition’ on the relevant law. In particular, he said that different considerations might apply to ‘one-man companies’. This was a reference to statements made in the Court of Appeal by both Denning and Shaw LJJ, who said that each case was fact specific and suggested that documents in the possession of a company that was controlled by an individual shareholder and their nominees could be treated as being in the power of that shareholder.

In Re Tecnion Investments Ltd [1985], it was suggested that disclosure might be ordered where companies in possession of relevant documents were under the ‘unfettered control’ of the litigants ‘so as to be their alter egos’.

In Schlumberger Holdings Ltd v Electromagnetic Geoservices AS [2008], the fact that a litigant had already carried out searches of files belonging to other companies in the same group, and had disclosed some of the documents located in those searches, meant that the litigant could be ordered to conduct further searches and to make specific disclosure of other documents belonging to the same group companies. Importantly, this decision was based not on the fact that the third-party companies were in the same group as the party to the dispute, but because, on the evidence, the third-party companies appeared to have given the party a general consent to search for documents.

North Shore: the facts 
and first instance decision

The claimant, North Shore Ventures Ltd (North Shore) entered into a written agreement with the first defendant, Anstead Holdings Inc (Anstead), for a loan of $50m. The loan was guaranteed by 
Mr Ruslan Fomichev and Mr Vasily Peganov (the guarantors). Anstead’s assets were subsequently transferred to various trusts (the trusts), which the guarantors set up in Nevis and under which they were discretionary beneficiaries.

The loan was not repaid. North Shore issued proceedings, successfully applied for freezing orders against the guarantors and subsequently obtained judgment in its favour. However, the guarantors claimed not to have any assets to pay their judgment debt of approximately $35m because they had put nearly all their assets into the trusts.

North Shore obtained an order, under CPR 71.2, requiring the guarantors to attend court and give information about their assets. At the hearing, Mr Fomichev said that he could not provide documents about the trusts because they were not in his control. Furthermore, prior to the hearing, the trustees had obtained injunctions against the guarantors (which were later discharged) prohibiting them from answering questions about the trusts, which limited the scope of North Shore’s cross examination. Mr Peganov did not attend the hearing, claiming that he had visa problems.

North Shore then applied for an order requiring the guarantors to produce various specified categories of documents relating to the trusts (the trust documents). At the hearing of that application, the guarantors informed the court that the trustees had removed them as beneficiaries of the trusts (although no reasons were given for this) and that they did not have any of the relevant documents in their control (except for the letters of settlement and their consultancy agreements with the trustees).

In response, counsel for North Shore argued that ‘in real life’ the guarantors could obtain the documents by asking the trustees, their wives or their children (who remained beneficiaries of the trusts). North Shore also pointed to the fact that the timing of the setting up of the trusts seemed to coincide with the intimation of North Shore’s claims against the guarantors and submitted that the purpose of doing this was to render the guarantors judgment proof.

Floyd J granted North Shore’s application and ordered the guarantors to disclose the trust documents. Furthermore, he declined to include in the order the usual qualification that the guarantors were only required to produce the trust documents ‘in so far as they are within [their] knowledge, possession, custody or control’. The judge took the view that, as the beneficiaries of the trusts were the guarantors’ wives and children, it was:

‘… wholly unrealistic to suppose that if Mr Fomichev does not keep copies of these documents himself then there is no way in which he would be able to obtain copies’.

The Appeal

The guarantors appealed, submitting that the judge erred in law because either:

  1. he wrongly took the view that an order could properly be made in respect of documents that were outside the guarantors’ control, provided that they were in a position to obtain them; or
  2. he misdirected himself as to the meaning of control, wrongly equating the ability to obtain documents with the guarantors’ having the documents in their control.

The guarantors relied, in particular, on the House of Lords’ decision in Lonrho, arguing that a document that is not in the physical possession of a party is not within their control unless they have a currently enforceable legal right to its possession (or to take copies of it).

The Court of Appeal dismissed the guarantors’ appeal and upheld Floyd J’s order requiring the guarantors’ to disclose the trust documents. Toulson LJ, who gave the only reasoned judgment, made the following points:

  1. The concept of ‘right to possession’ in CPR 31.8(2)(b) covers a situation where a third party is in possession of documents as agent for a litigant.
  2. The same would apply if the relationship was ‘akin to agency’. Toulson LJ gave the example of a situation where the litigant was the ‘puppet master’ of a third party who was handling money entrusted to them for the specific purpose of defeating the claim of a creditor.
  3. Even if there was no strict legal ‘right to possession’, the court could still find that, as a matter of fact, documents were nevertheless within the control of a litigant within the meaning of CPR 31.8(1). This will depend on the ‘true nature of the relationship’ between the litigant and the third party and whether the litigant has the ‘real say’ as to whether a document is disclosed.

Perhaps the most striking aspect of Toulson LJ’s judgment is his statement that:

‘CPR 31.8(2) states that for the purpose of CPR 31.8(1) a party has or has had a document in his control if the case falls within paragraphs a) to c). It does not state that a party has or has had a document in his control if but only if the case falls within one of those paragraphs.’

In other words, a document may be in a party’s control even if that party: i) does not have the document in its physical possession; ii) has no right to possession of the relevant document; and iii) does not have a right to take a copy of the document, or to inspect it. While it is likely to require an unusual set of circumstances for the court to order the disclosure of documents that do not fall into one of the above categories, it seems that there are no conceptual boundaries to the situations in which the court can find that a party has control of a document.

In applying those principles to this case, Toulson LJ noted that:

‘… for a wealthy man (or in this case two wealthy men acting simultaneously) to make himself a pauper, with the genuine intention of disposing of his money down to his last dollar irrevocably and with no ability to control what was to happen to it, is an unlikely scenario.’

He also noted that family trusts were ‘a well known possible device’ for attempting to put assets beyond the reach of creditors. Furthermore, the trustees appeared willing to assist the guarantors with their efforts to prevent North Shore from enforcing their judgment – for example by removing the guarantors from even being discretionary beneficiaries under the trusts. Taken together, these considerations constituted sufficient circumstantial evidence to infer that there was an understanding and arrangement between the guarantors and the trustees such that the trustees would take whatever steps the guarantors wished in the administration of the trusts. On those facts, the court had jurisdiction to order the guarantors to disclose the trust documents.

Comment

A test of whether a litigant has a ‘presently enforceable legal right’ to obtain documents promotes certainty because it should be relatively easy for the parties and, if necessary, the court to identify whether such a right exists. However, if strictly applied, that test could enable a litigant to avoid disclosing relevant documents, notwithstanding the fact that the litigant, outside the context of the litigation, had untrammelled access to those documents. Even allowing for the fact that circumstances in North Shore Ventures were extreme, and that the court was highly suspicious of the guarantors’ conduct, this case suggests that the court can and will adopt a flexible approach to the question of whether documents are in a litigant’s control to stop such a situation from arising.

For in-house lawyers, this case is likely to be most relevant to the question of whether group companies involved in litigation can be ordered to disclose documents belonging to related companies. Even before North Shore Ventures, it was clear that such an order could be made where the related company had consented to the litigant taking documents from its files (as in Schlumberger) or where there was a sufficient relationship of dominance or dependence between a parent litigant and its subsidiaries (as envisaged in Re Tecnion and Lonrho). However, the decision in North Shore Ventures arguably increases the scope for the court to investigate the true nature of the relationship between group companies and to find that documents in the possession of related companies are in fact in the control of a party to a dispute, notwithstanding the absence of any legal right to possession. To prevent this from happening it may be appropriate to impose restrictions on the passage of documents between group companies, for example by storing them separately; requiring the consent of a group company before documents are provided to a related company; and ensuring that any such consents are only given on a limited basis.

By Geoff Steward, partner, 
and Jonathan Pratt, 
professional support lawyer, 
Macfarlanes LLP.