Carillion plc (in liquidation) v KPMG LLP and KPMG Audit plc [2020] EWHC 1416 (Comm)

By Zara Yusuf

This article will examine the recent judgment that the Commercial Court handed down in the case of Carillion plc (in liquidation) v KPMG (comprising of KPMG LLP and KPMG Audit plc). The case concerns a pre-action disclosure application, which Carillion unsuccessfully made under CPR 31.16 and the issues raised by this will be assessed below.

Background:

Following the collapse of The Carillion Group in 2018, the former British multinational construction firm has expressed an intention to bring a claim for approximately £250 million against KPMG, its former auditors. Carillion alleges that KPMG breached its contract and duty of care, as Carillion was oblivious to its true financial position, whereas KPMG claims that it conducted its auditing role ‘appropriately and responsibly.’

Since then, the construction giant has issued a pre-action disclosure application against KPMG, in order to obtain working documents stored on KPMG’s ‘eAudIT’ electronic files. Carillion has argued that pre-action disclosure was necessary for three reasons: KPMG has refused to provide any of its working papers, that these would be core documents in any future claim and because these papers would be vital to proper pre-action consideration. The number of documents requested had been narrowed considerately between the issuing of the application and the hearing.

Pre-Action Disclosure Applications:

Pre-action disclosures encourage the early exchange of information and documents between the involved parties, thus saving time and money. Within the realms of the Commercial Court however, pre-action disclosure applications are relatively rare, with no recent examples of successful applications. In order to obtain pre-action disclosure, the circumstances must be outside the ‘usual run’ as noted by Steel J. in Hutchinson 3G UK Ltd. v O2 (UK) Ltd.[1]

Before arriving at his decision, the Judge (Mr Justice Jacobs) analysed the chronology of events, while providing guidance and clarity on the Pre-Action Protocol (PAP).

The court expects all parties to comply with the Protocol, which includes the following stages:

• The claimant serving a Preliminary notice, which briefly outlines the claimant’s grievance against the professional.
• The claimant sending a concise Letter of Claim. This needs to include some key details, such as: a clear chronological summary of the facts, identification of key documents, the allegation against the professional, how this error has caused the loss claimed, along with an estimate of the financial loss suffered.
• The respondent needs to acknowledge the Letter of Claim within 21 days, in a Letter of Response.

The Judgment and Why Pre-Action Disclosure is Problematic in this Case:

Despite the Court finding that the threshold jurisdictional requirements of CPR 31.16 were satisfied, the Judge dismissed Carillion’s pre-action disclosure application based on a number of reasons:

• Firstly, owing to the lengthy First and Second Letter of Claims that were issued, Mr Justice Jacobs reasoned that Carillion could plead its case without the requested documents.
• Secondly, it was determined that Carillion were ‘seeking a level of assurance and certainty which is inappropriate and does not justify the application which is made’, as they wished to cement a ‘concluded’ and ‘fully informed’ view on negligence. As noted by the Judge, Carillion’s audit expert had already formed a sufficient enough view to enable Carillion to start proceedings and plead its case.
• Thirdly, Mr Justice Jacobs accounted for the burden that KPMG would be under, as they would need to review a large number of documents, on a document by document basis (in the region of between 6000 and 8500 documents), so that they could comply with the order.
• Moreover, this is a case which will develop further, meaning that is it inevitable that further requests of documents will follow. This would increase the burden on KPMG and potentially lead to further serial applications by Carillion, especially since they had not indicated otherwise.
• Lastly, the Judge considered that KPMG did not breach neither the letter nor the spirit of the Protocol and therefore this case does not fall outside the ‘usual run’ of cases.

Conclusion:

The judgment reiterates that pre-action disclosures are unusual in the Commercial Court, while also offering helpful guidance on how to navigate pre-action disclosure in the professional negligence context. Despite audit working papers being key documents once the proceedings have commenced, it is useful to understand that claimants should not assume that they are entitled to these documents at a pre-action stage. This judgement also shows how judges need to think about the ‘big picture’ when making decisions on such applications.

[1] In Hutchinson 3G UK Ltd. v O2 (UK) Ltd. [2008] EWHC 55 (Comm), [55].