The ruling is also a reminder of the circumstances in which the court may order indemnity costs for such failures.
On 29 July 2022, the UK High Court ruled in Cabo Concepts Limited v. MGA Entertainment (UK) Limited that toy manufacturer MGA should pay hefty costs for failure to conduct proper pre-trial disclosure.
In May 2020, Cabo, a rival toy manufacturer, had issued proceedings alleging that MGA had participated in secret anti-competitive agreements and/or concerted practices and abused its dominant position. Cabo alleged that this act was in breach of Articles 101 and 102 TFEU and the UK equivalent provisions under Chapters I and II of the Competition Act 1998. Cabo claimed that MGA had put pressure on UK retailers to refrain from buying, stocking, or supplying its new doll product, Worldeez, and had issued unjustified threats that Cabo was infringing MGA’s hugely successful, and patented, LOL! Surprise doll line. Cabo alleged that MGA’s conduct ultimately led to the failure of its business.
Cabo stated that it discovered MGA’s secret conduct after a retailer passed on email exchanges between the retailer and MGA. The High Court observed that the context of the proceedings meant it was “inevitable that the proper conduct of the disclosure process by MGA would be of the utmost importance”.
Three weeks before trial, MGA revealed that it had failed to collect around 800,000 documents, with half of all potentially relevant documents having never been reviewed. The trial listed for June 2022 was adjourned until October 2024, and MGA was ordered to repeat disclosure.
In a 29 July 2022 judgment, Mrs Justice Smith ruled that MGA should pay Cabo’s wasted costs for trial on an indemnity basis, with 45% of Cabo’s total costs to be paid on account. However, she declined to issue an “unless” order in respect of MGA’s second disclosure exercise.
Costs awarded on a standard basis must be proportionate and reasonable, with any doubt resolved in favour of the paying party. In contrast, costs awarded on an indemnity basis are not subject to such requirements, and doubts are resolved in favour of the receiving party.
The appropriate test to apply is whether, looking at the circumstances as a whole, the case was so out of the norm that indemnity costs were justified. Mrs Justice Smith identified four features of MGA’s disclosure exercise that justified indemnity costs:
- Rather than appoint an independent provider, MGA had insisted on conducting e-disclosure using its in-house IT team. As the IT team had no experience or knowledge of e-disclosure in English litigation, MGA’s solicitors assured the court and Cabo that independent UK specialists would oversee the disclosure. However, the disclosure was ultimately unsupervised. In light of the importance of disclosure to these proceedings and the prior assurance given, Mrs Justice Smith concluded that MGA’s approach was “unreasonable to a high degree”.
- The lack of supervision contributed to a series of extraordinary technical failings, including failure to collect and review 800,000 documents.
- MGA and its solicitors ignored a number of incidents raising serious “red flags” about the adequacy of the disclosure process that ought to have been investigated. One particular example was reported in the judgment: a key email (referred to expressly in the Particulars of Claim) was not in MGA’s disclosure and had not been harvested from custodians. MGA’s solicitors, however, commented that they were “not unduly alarmed by this”, knowing that “disclosure is an imperfect process and errors occur”, and decided not to re-harvest documents, a decision that Mrs Justice Smith called “surprising”.
- Finally, MGA’s flawed attempts to rectify the errors in the disclosure process reflected a “continuing failure to grapple with the need for proper supervision and oversight of the disclosure process”.
Having determined that the circumstances justified an order for costs on an indemnity basis, Mrs Justice Smith then considered the appropriate order for costs on account. A court will usually require the losing party to make a payment on account unless there is good reason not to. In this case, the order for indemnity costs related only to Cabo’s wasted costs, i.e., the preparatory work that Cabo will have to repeat in advance of the rescheduled trial in October 2024. Identifying which costs were wasted will be the subject of detailed assessment that was not for the court to determine. Nevertheless, Mrs Justice Smith concluded that payment on account should be determined by reference to Cabo’s total costs incurred in preparing for trial, as a very substantial part of these costs will have been wasted. MGA was ordered to pay 45% of Cabo’s total costs on account.
Cabo had applied for an “unless order”, such that MGA’s failure to properly conduct the second e-disclosure would have led to the court striking out MGA with judgment entered in Cabo’s favour. Mrs Justice Smith dismissed the application, noting that an independent specialist would undertake the second disclosure exercise and MGA’s solicitors would review the documents. Under those circumstances, Mrs Justice Smith did not believe MGA was likely to repeat the (inadvertent) errors from the first disclosure.
The judgment is a warning for parties to English proceedings that fail to take their disclosure and document retention responsibilities seriously, and illustrates why professionals should be consulted when conducting e-disclosure. It also reminds solicitors of the importance of scrutinising assurances provided by their clients, and following up on any defects or red flags that warrant investigation.