The importance of document retention

United Kingdom

To shred or not to shred

Document shredding hit the headlines during the Arthur Andersen trial that followed the collapse of Enron in America. Andersen’s lead auditor admitted to overseeing the destruction of documents with the intention of thwarting a government investigation into Enron’s accounting procedures. The jury found Andersen guilty of obstructing justice, a decision said to have dealt a fatal blow to the 89 year old accounting firm. The manner in which organisations operate their document retention policies and the treatment of documents once in litigation has recently been subject to judicial scrutiny in Australia and England. The decisions confirm that organisations cannot afford to ignore issues about their document retention policies, particularly once they are in litigation.

McCabe v British American Tobacco Australia Services Limited (BAT) [2002] VSC 93 was a personal injury claim against BAT in Australia. McCabe requested that documents from previous litigation against BAT be disclosed and as a result of non-disclosure, she applied to have the Defence struck out. It was submitted that a number of documents from the previous litigation had been destroyed under BAT’s document retention policy. At the point at which the relevant documents were destroyed BAT was not in litigation as the previous cases had finished and McCabe had not yet commenced her proceedings. Nevertheless, the Judge found that although there was not any litigation underway at the time of the destruction, it could nevertheless be anticipated that new litigation would take place. He found that new litigation was almost certain and that BAT had taken advantage of a ‘window of opportunity’ to destroy any potentially incriminating documentation.

Evidence that emerged during the hearing led the judge to take a very dim view of the defendant’s behaviour. BAT had a document retention policy that had been revised on several occasions and they had taken advice on the policy from various sources. The Judge focused on a note that stated only research which became part of the public domain should be kept whilst other documents should be destroyed letting the other side rely on verbal evidence of people who used to handle such documents. It also transpired that copies of shredded documents held offshore had not been disclosed which suggested that a policy of ‘warehousing’ of documents was taking place. Essentially this would mean putting the documents beyond the reach of any claimants but having them available for the defendant should they prove useful. Although BAT admitted that documents had been destroyed they were unable to identify exactly which documents. The judge found it of great concern that CD ROMs containing details of the shredded documents had also been destroyed. Justice Eames concluded that there had been a deliberate tactic to hide information and as a consequence BAT had caused prejudice to McCabe and denied her a fair trial. He therefore decided to strike out the defence and entered judgment for the claimant.

BAT successfully appealed the decision in the Court of Appeal in Victoria, Australia (British American Tobacco Australia Services Limited v Cowell (as representing the estate of Rolah Ann McCabe, deceased) [2002] VSCA 197). The Court decided that striking out the defence was too severe a penalty. The Court of Appeal decided the basis of the claimant’s original application was that BAT’s documents had been destroyed at a time when litigation was anticipated and deliberately so. The Court held that this was not the same as saying that relevant documents had been destroyed after the commencement of proceedings (as was the case in the Andersen trial). The appeal decision focused on the fact that the allegations against the defendant had evolved during the course of the trial and that as a consequence BAT had little opportunity to defend themselves against new allegations e.g. that of warehousing documents. The Court of Appeal also noted that the defendant had not denied the destruction of documents and agreed with BAT that it had disclosed many documents that were unhelpful to its case. BAT strongly denied having deliberately designed a document retention system to disadvantage prospective litigants and the Court of Appeal agreed with them. The Court felt that the Judge had erred in his finding that there had been a policy in place to deliberately destroy documents and that it was this that had led him to strike out the defence. The Court decided that rather than strike out the defence, the trial Judge should have made an order for further disclosure on the points in issue.

The BAT v Cowell decision was considered in the recent English case, Douglas and others v Hello! Limited and others [2003] EWHC 55 (ch), the high profile claim by Catherine Zeta-Jones and Michael Douglas against Hello magazine over the unauthorised publication of their wedding photographs. The claimants applied to have Hello’s defence struck out on the grounds that the defendants had deliberately destroyed or disposed of documents rendering any future trial unfair. The Judge refused this application basing his decision on the reasoning in BAT v Cowell. Whilst the Judge was critical of the behaviour of the defendants he was not persuaded that a fair trial was no longer possible. He decided that on the balance of probability the evidence of the defendants behaviour suggested that there were further undisclosed documents. However, he concluded that this inference did not justify striking out the defence. Even though the defendants had acted poorly, this should not remove the burden of the claimants proving their case. Following BAT v Cowell he said that the court may strike out specific issues of the defence which would be prejudiced by non-disclosure.

So what are the implications of these cases in relation to document retention policies and what should organisations do once they enter into litigation? First and foremost it is clearly established that organisations must not destroy any relevant documents once they have been notified that litigation is underway. BAT v Cowell suggests that it is acceptable for organisations to retain proper document retention policies and that so long as documents are preserved once litigation proceedings have commenced they will not be penalised for previously destroying documents in accordance with the policy. Essentially, the decision removes the burden of organisations keeping documents indefi- nitely in the anticipation of litigation. This case does not suggest that an organisation who operates a document retention/destruction policy in a suspicious manner will be removed from the burden of justifying their actions. The scrutiny of BAT’s document retention policy suggests that a court will be prepared to examine the treatment of documents very carefully to ensure that there is no evidence of damaging documents ‘disappearing’.

It must be remembered that BAT v Cowell is an Australian case and, as such, it is not binding upon an English court. Nevertheless, the judge in the Hello case felt that it was persuasive in its reasoning and chose to follow it. It is clear that any document destruction that takes place after a claim has been advanced is likely to draw adverse inferences from a Judge and may lead to either part or the whole of the defence being struck out. However, one dif- ficulty may arise in establishing the point at which a party was made aware of a potential claim. A good document retention policy will take into account the need for clear communication of any potential claims as it is particularly at the start of litigation that a party may fall vulnerable to an accusation of deliberately destroying documents. In conclusion, no organisation can afford to be complacent about the treatment of their documents as once litigation does begin the consequences may be serious.

For further information please contact Lucie Spurr at [email protected] or on +44 (0)20 7367 2164.