Jersey Unreported Judgments

Companies - decision - application by the defendant for counterclaim judgment

[2020]JRC079

Royal Court

(Samedi)

5 May 2020

Before     :

Advocate Matthew John Thompson, Master of the Royal Court

 

Advocate J. D. Garrood for the Plaintiff.

Advocate E. Moran for the Defendant.

contents

		Paras
1.	Introduction	1-2
2.	Background	3-11
3.	The Applicable Legal Principles	12-13
4.	Decision	14-34
5.	Is there any good reason for the breach?	35-36
6.	What is an appropriate sanction?	37-45
7.	Costs	46-48

judgment

the MASTER:

1.        This judgment contains my decision in respect of the defendant's application that the plaintiffs have failed to comply with my order of 16^th December 2019 and so judgment should be entered on the defendant's counterclaims.

2.        The act of court of 16th December 2019 provides as follows:-

"1.       unless the Plaintiffs by Friday, 31st January, 2020 file an affidavit in compliance with the order of the Deputy Bailiff Le Cocq (as he then was) dated 19th June, 2017 then judgment on liability in respect of the Defendant's counterclaim will be automatically entered without further order;

2.        the Plaintiffs shall pay the costs of and occasioned by the application leading to paragraph 1 of this order on the standard basis, such costs to be taxed if not agreed;

3.        the Defendant's application to adduce expert evidence is adjourned to the next directions hearing;

4.        the costs of and occasioned by the application leading to paragraph 3 of this order are costs in the cause; and

5.        by no later than Friday, 28th February, 2020 the parties shall attend upon the Master's Secretary to arrange a further directions hearing to deal with amendments of pleadings, expert evidence and fixing dates for trial."

Background

3.        The relevant background is set out in my judgment in this matter dated 16^th December, 2019 reported at Hard Rock and Anor v HRCKY Ltd [2019] JRC 243 at paragraphs 5-11 which I adopt for this decision.

4.        I also refer to the following paragraphs:-

"33.    It is also right to record that I asked Advocate Garrood specifically whether the auditors of the plaintiffs in 1997 to 1999 had been asked whether they had any relevant records or whether board minutes or records relating to meetings of boards of the plaintiffs had been reviewed to see whether they contained any documents analysing the profitability of the restaurant side only in the business.  He candidly confirmed that these sources had not been reviewed.

40.      My construction of the order of the Deputy Bailiff Le Cocq is that what this required was that, if a document exists that contains any profit summary containing the same or similar information to that already disclosed about profitability of corporate cafes, then such a document is disclosable.  It does not therefore matter what type of document contains the information.  Rather the disclosure obligation is determined by what information about the profitability of corporate cafés is contained in a document.  If a document contains information that is the same as or similar to information about such profitability already disclosed then that document is disclosable.

53.      These statements enable me to conclude that the extract from the accounts referred to above is based on a profitability assessment of the restaurant side of the business carried out and provided to the auditors.  The fact that the Rank Group no longer own the Hard Rock business does not affect the statements in the accounts that there were strong control environments, identification of risks and close monitoring of operations including the provision of financial results and key business statistics.  This accords with my own experience as a partner owning a business and as a lawyer advising many other businesses.  Analysis of whether restaurants run by the Hard Rock Café itself as distinct from franchises were profitable is an obvious measure to review because, if under the business model corporate cafés or particular corporate cafés were losing money, the plaintiffs' directors would be obliged to consider what steps to take.  In extreme cases directors can be held liable for deliberately trading while insolvent.  While this possibility does not arise in this case, the potential liability of directors for trading while insolvent means that analysis of profitability of a business and its key parts is almost always reviewed for consideration by directors and on a regular basis.  There is no reason to conclude why the plaintiffs would not follow this general approach. This analysis is also consistent with the evidence of Mr Leonard to which I have already referred.  By contrast, no evidence was produced to me to state that the plaintiffs did not analyse profitability of the restaurant side of the business in 1997 or 1998 either in response to Mr Leonard's statement or to rebut the general approach I have described.

55.      The above reasons lead me to conclude that documents exist or likely to exist in relation to the probability of the restaurant side of the business which were required to be disclosed by Sir Michael Birt and Deputy Bailiff Le Cocq and which have not been disclosed.

56.      The documents are also clearly relevant to the issues in dispute as formulated by the Court of Appeal.

57.      Without affidavit evidence in response to say which documents exist or do not exist or are no longer held by the plaintiffs, I am satisfied that the plaintiffs have not complied with their discovery obligations.

62.      In my judgment it is however appropriate to make an unless order to the effect that if the plaintiffs do not file an affidavit in compliance with the order of the Deputy Bailiff dated 19th June, 2017 by 31st January, 2020 then judgment on liability in respect of the defendant's counterclaim be entered.  The affidavit to be filed in accordance with the order of the Deputy Bailiff Le Cocq requires a supplementary list of documents to be produced and must also specify any documents that the plaintiffs had but no longer possess.  In other words if the plaintiffs did produce profit summaries for the corporate cafés but the plaintiffs no longer possess or have access to these records, then the affidavit should make this clear including setting out when the plaintiffs last had possession of any disclosable documents and the reasons why they no longer have possession of any such documents.

63.      Finally, the affidavit must also define precisely areas searched in much more detail than provided to date.  To simply state that an extensive search of relevant paper records has been provided, in view of the conclusions I have reached, is not sufficient."

5.        Subsequent to the Act of Court of 16^th December 2019, the plaintiffs filed four affidavits as follows:-

(i)        Affidavit of Candice Pinares-Baez, which exhibits the Plaintiffs' Fifth Supplemental List of Documents;

(ii)       Affidavit of Thomas J. Gispanski;

(iii)      Affidavit of Christian Charles Burden; and

(iv)       Third Affidavit of Francis Keegan.

6.        Advocate Moran for the defendant contended that these affidavits failed to address the following:-

(i)        The Plaintiffs had not made any inquiries of their auditors before the deadline for compliance with my order had expired;

(ii)       The Plaintiffs had not looked for or disclosed minutes of meetings of the "Appointed Officers" of Hard Rock Café International (USA) Inc ("HRI");

(iii)      The Plaintiffs had not undertaken a proper search for the documents covered by the Deputy Bailiff's Order and there has been no proper description of the search undertaken;

(iv)      The Plaintiffs had not listed the documents that they once possessed, but now no longer did so.

7.        This summary was supported by the thirteenth affidavit of Mr Kevin Doyle which set out in more detail why my order had not been complied with.  No evidence has been filed in response to this affidavit.

8.        What has been filled is a letter from Carey Olsen dated 25^th March, 2020 for the plaintiffs suggesting an order in the following terms:-

"1.       Unless the Plaintiffs carry out the action detailed below liability be entered in favour of the Defendant:

(i)        the Plaintiffs shall confirm that by 5.00pm on Monday 30 March 2020 they have written, to:

(a)       the Plaintiffs' auditors for the years from 1997 to 2004 requesting copies of any documents that they retain relating to the audits that they conducted from 1997 to 2004, and

(b)       the auditors of Rank plc for the years from 1997 to 2004 requesting copies of any documents that they retain relating to the audits of Rank plc that they conducted from 1997 to 2004.

(ii)       the Plaintiffs confirm they have conducted a physical search, by 5.00pm on Monday 11 May 2020, for:

(a)       minutes of meetings of the Appointed Officers of the Plaintiffs, and

(b)       spreadsheets produced by or for Appointed Officers of the Plaintiffs (including, for the avoidance of doubt, amongst the Lawson backups).

(iii)      the Plaintiffs shall by 5.00pm on Monday 11 May 2020 serve an affidavit describing the scope of the searches undertaken pursuant to paragraph 2 above, and exhibiting a list of all documents identified as a consequence of the searches undertaken pursuant to either paragraphs 1 or 2 above that discuss or refer to the profitability of the restaurant business.

(iv)      Compliance with the requirements of paragraphs 1 and 2 above shall be confirmed by an affidavit to be sworn by Advocate Garrood to be filed and served by 5.00pm on Tuesday 12 May 2020."

9.        I was also provided with copies of a letter written to the accountants Deloitte, their reply and letters to what were described as appointed officers i.e. various individuals who acted as directors of the plaintiffs at various times seeking access to any documents such officers may have retained.

10.      In summary Advocate Moran contended that the draft order suggested by the plaintiffs was firstly an admission that the order of 16^th December, 2019 had not been complied with.  Secondly, there was no application for relief from the breach.  Thirdly no excuse had been advanced for the breach.  Accordingly, the appropriate sanction was for judgment to be entered.

11.      Advocate Garrood contended that his clients should be given one final chance to comply and to enter judgment at this stage was disproportionate given the amount claimed.  He also argued that his clients had made significant efforts to comply with their discovery obligations over the years and should not be penalised for a failure to produce documents they did not believe existed and where extensive searches had been made and were going to be made.

The Applicable Legal Principles

12.      There was no dispute between the parties on the applicable legal principles which I considered in Powell v Chambers [2018] JRC 169 and Newman v de Lima [2018] JRC 155.  These are the principles I have applied in reaching my decision.  In summary I have to consider whether compliance has occurred and if it has not I must ask the following:-

(i)        Was the breach serious or significant?

(ii)       Was there good reason for the breach?

(iii)      What is the appropriate sanction for the breach?

13.      Any sanction must also be proportionate having regard to the overriding objective and the right to a fair trial.  This included ensuring that court orders are complied with.

Decision

14.      The starting point for my decision is whether or not my order of 16^th December 2019 requiring compliance with Deputy Bailiff Le Cocq's order has been complied with.  In my view it has not for the following reasons:-

(i)        No enquiries were made of auditors until after the deadline for compliance had passed.

(ii)       There were no searches of any files held by the plaintiffs relating to communications with their auditors for relevant material.

(iii)      The letters written to PWC and Deloitte were sparse in explaining why the enquiry was being made.  In particular there was no reference to the accounts of the Rank Group for the year 1998.

(iv)      Just writing to the auditors without searching for any internal files was too narrow a construction of both Deputy Bailiff Le Cocq's order and my order.

(v)       Enquiries were not made of KPMG who appeared to be the auditors of relevant entities within the Hard Rock Group at the relevant time.

(vi)      While board minutes were reviewed, no searches were made of any email accounts held in the names of appointed officers.  Discovery is an ongoing obligation and so identification of these individuals should have led to searches of any email accounts held for them.  Simply writing to them after the event for documents they have retained does not excuse the obligation to search any email accounts held by or for the plaintiffs for such individuals.

(vii)     Enquiries were made for documents held by officers of the second plaintiff; however, it is not clear why, given that the counterclaim for misrepresentation concerns the agreement with the first plaintiff. This appears to be trying to be seen to make enquiries to demonstrate compliance but they were after the event and ultimately were irrelevant.

(viii)    What back up tapes are held has not been clearly explained.

(ix)      Nor has any description been provided of what further searches whether physical or electronic were carried out to comply with the Deputy Bailiff's order. 

(x)       Nor has there been any statement from Carey Olsen that they are satisfied that the plaintiffs have met their discovery obligations either in relation to the Deputy Bailiff's order or my last order or generally.

15.      The fact that the plaintiffs are themselves now suggesting that further enquiries are made is also supportive of the conclusion that my order has not been complied with, despite the clear warnings given in my last judgment.

16.      In paragraph 40 of my judgment of 16^th December, 2019, I made it clear that if any document contained any profit summary that contained the same or similar information to that order disclosed about profitability of corporate companies within such a document, it was disclosable.  I also emphasised that it did not matter what type of document contained information.  Rather I spelt out the discovery obligation was determined by what information about the profitability of corporate cafes a document contained not the type of document.

17.      In light of this clear guidance, the narrow construction and approach taken by the plaintiffs is not justified.  Firstly, the affidavits filed for the present application primarily focused on the argument I rejected namely, that profit summaries were not produced prior to 2005.  This was contrary to the ruling at paragraph 53 of my previous judgment, which has not been appealed.

18.      In paragraph 53, I referred to the statement of Mr. Leonard.  Mr. Leonard's statement was supported, in relation to the present application, by the statement of Mr. Beaudrault attached to Mr. Doyle's thirteenth affidavit.  As with the statement of Mr. Leonard, Mr. Beaudrault's statement has not been challenged in any affidavit in response from anyone on behalf of the plaintiffs.  Indeed I note that in his affidavit Mr. Gispanski admits that it may be true that restaurant only data was created using Lotus 1-2-3 (paragraph 20).  I also observe that Mr. Burden, while attempting to cast doubt on Mr. Leonard's statement at paragraphs 20 and 21 of his affidavit, does not expressly rebut the central thrust of Mr. Leonard's evidence.  That does not surprise me as Mr. Burden was only retained as legal adviser in December 2014 for litigation in Florida involving HRCC.  It does not appear that any searches have been made of the email accounts of Mr. Leonard or Mr. Beaudrault.

19.      Subsequent to informing the parties that I was not going to enter judgment but I was going to require the plaintiffs to produce further discovery, I received submissions about what costs order I should make.  Advocate Moran for the defendant as part of her submissions referred me to an email from Stephen Goodwin dated 28^th March, 2020, received in response to enquiries made by Carey Olsen.  In this lengthy email, Mr. Goodwin sets out a number of reasons why he considers that an analysis of profitability of the corporate only cafes existed in the late 1990s.  In particular, he stated the following:-

"I moved from Rank to its subsidiary, Hard Rock, in January 1998 to become Vice President, Strategic Development reporting to Jim Berk, CEO. My responsibility was future development of cafes, hotels & casinos, new construction projects and franchise territory sales. I was a member of the Executive Committee at Hard Rock from then until mid-1999.

 During this time each head of department was charged with presenting a 'presentation deck' for any proposals made during executive committee meetings. There was no single 'executive pack' presented in each meeting. It was up to each Vice President to prepare and present their individual deck. I do not have any of these presentation decks now and believe I left them all at Hard Rock. I do have extensive knowledge of what was discussed with regards to cafe profitability as it was integral to the work of my department and it was a continuation of my work prior to going to Hard Rock from Rank. This was a major factor in why Rank appointed me to this role. I summarize these items below:

 In early 1998 Pete Beaudrault, VP Operations, presented the fact that corporate restaurants were on the whole loss making when looked at as a stand-alone restaurant. Comparison was made to restaurant profitability at restaurant chains Applebees, Ground Round and Ruby Tuesdays, where publicly available financial information was used to compare gross profits and net profit margins to those of Hard Rocks restaurants without the merchandise operations. Store overhead was allocated to restaurant operations and merchandise operations. Most restaurants made a loss which was sometimes made up for by merchandise sales but with the collapse of the themed restaurant industry merchandise sales were also declining rapidly and restaurants needed to begin to support their restaurant operations themselves to allow the company to survive. Jim Berk, CEO of Hard Rock, stated that it was unacceptable for restaurant operations to lose money and rely on merchandise department to make up for their running an inefficient cafe and he demanded changes. Significant operational changes were implemented as a result of this presentation, including reduced food portion sizes and elimination of key operations positions like the kitchen expeditor, certain Directors of Operations and Kitchen Managers.

 We prepared projections for new cafes under consideration for development and during this time it was a challenge to find and identify potential new cafe locations that would meet the internal investment hurdle rates for Rank. Each of these would be developed with restaurant and merchandise operations departments and presented to the Executive Committee. Due to declining merchandise sales, many executives were worried about over expansion of the brand and the corresponding decline in merchandise sales that would ensue. All new proposed cafes were submitted to Rank's finance committee using their specific capital expenditure approval forms. Restaurant and merchandise operations were separately identified on these forms and they mirrored the monthly financial reporting packs that were submitted to Rank by the finance department. In addition we were required to do 'playbacks' on all new developments to compare actual results to projected results. These were submitted to Rank. I do not recall any new units exceeding their projections during this time as the themed restaurant industry was in crisis and competitors like Planet Hollywood had recently filed for bankruptcy.

 With few high merchandising tourist locations left to develop, we were tasked with developing a new concept that relied less on merchandise and more on beverage (liquor) sales from adding an active bar in to the product mix. The first of these was to be in Manchester, England with others planned for other UK cities. With the 1990's expansion of 'designer pubs' in the UK, it was felt that we might be able to compensate for the lower merchandise sales by becoming a version of a designer pub. The challenge was to design a restaurant that would also be profitable and meet the heavy capital investment required to make a Hard Rock look and feel like a genuine Hard Rock cafe. We discussed and reviewed profitability at corporate stores at length during this exercise and we worked hard to reduce the cost per square foot of new cafes so that they would be able to meet Rank's investment criteria. In reality, it was hard to reduce the cost of construction and fitting out a new unit and we became somewhat dependent upon tenant improvement allowances from landlords wanting a Hard Rock Cafe as an anchor tenant or from a city who would provide tax breaks to attract a Hard Rock Cafe to their town. Finding locations that would meet the Rank investment criteria was a challenge as the restaurant operations continued to be generally loss making which made the store overall unprofitable as merchandise sales continued to decline and bar sales were often limited to weekends and event days rather than throughout the week as required to meet the hurdle rates.

 In 1997/8 the Asian crisis struck Hard Rocks Asian franchisees very hard and we negotiated to buy back certain Hard Rock hotel rights that we had sold them previously so they could raise cash for their own survival. I negotiated this re-acquisition and presented the deal to the Rank Board as integral to the future growth of the Hard Rock brand due to the declining performance of the cafe portfolio and limited growth potential otherwise. The acquisition was approved on this basis.

 During this time we developed a new concept "NBA City" in conjunction with the NBA (The National Basketball Association). I participated in the presentation of this opportunity to the Rank Board and led physical development of this new concept. Rank wanted a new concept to leverage the overhead of the Hard Rock corporate office, the hope was that a new high-profile brand like the NBA would provide additional income to offset growing same store sales declines at Hard Rock.

 We were presented an Executive Bonus Plan by HR during this time that was related to overall cafe profitability as well as department profitability. The stated goal was to align everyone on improving the cafe profitability and corporate profitability. None of the targets were met as performance continued to decline and no bonuses were paid.

 Early in 1999 Hard Rock conducted a sizable lay off of corporate staff. This was the result of a major budget review exercise conducted by Finance/HR to streamline the cost structure as a result of declining overall cafe performance of both the restaurant and merchandise operations.

 At this time Rank faced a cash crunch across all of its businesses and appointed a new CEO. This led to a cessation of development of new corporate cafes and a further reduction in corporate overhead.

In mid-1999 Rank hired the investment bank Donaldson, Lufkin & Jenrette (DLJ) to conduct a review of options for its Hard Rock investment, including potential sale. Since my experience in Special Projects was acquisition and disposal work I was assigned to work with them on reviewing the overall business and each business segment. DLJ presented a memorandum to the Rank Board (copy is attached). In general the findings were that the cafe business had limited growth potential due to declining same store sales and that this would be a major challenge to any sale process. DLJ determined that the majority of Hard Rocks' then current value was in the Hard Rock Entertainment brands and potentially in the Hard Rock Hotel and Casino rights that Hard Rock had repurchased in 1998. Rank decided to hold on to Hard Rock at that time."

20.      This email supports the conclusions I had previously reached summarised at paragraph 53 of my earlier judgment.  Those conclusions, the evidence of Mr. Leonard, Mr. Beaudrault and Mr. Goodwin further mean that the plaintiffs' approach in adopting a narrow construction of my previous order and that of Deputy Bailiff Le Cocq was not justified.  It is simply plain that documents existed within the Hard Rock Group in the late 1990's analyzing the profitability of the corporate cafes only.

21.      However in deciding whether a breach of my order is serious I also have to consider whether relevant documents might still exist which requires me to analyze the approach the plaintiffs have taken to discovery generally.  This is because the plaintiffs argue that the searches already conducted by the plaintiffs mean that all financial documents held by the plaintiffs themselves would have been searched for and disclosed (paragraph 58 of the plaintiffs' skeleton for this application).

22.      I have already observed that the plaintiffs have not explained what searches they have carried out since my order of 16^th December 2019.  The submission referred to in the paragraph above also ignores paragraph 40 of my last judgment which made it clear that a document was discoverable if it contained information about profitability.  What I therefore required was discovery of any document that contained such information.  I should add that the order of 19^th June, 2017, of Deputy Bailiff Le Cocq also required discovery of any documents that contained (my emphasis) the same or similar information to that contained in profit summaries already discovered.

23.      The plaintiffs' error in its approach to whether or not it had complied with these orders was to focus on looking for profit summaries alone not for documents that contained information about profitability about the restaurant side of the business.  Such documents could include letters, emails, memos, minutes of meetings, or reports.  Yet these have not been looked for since my order of 16^th December, 2019 because of the narrow construction taken and the repetition of arguments already rejected.

24.      I also cannot safely assume that the plaintiffs have met their discovery obligations generally in respect of documents already searched.  This is for the following reasons.

25.      The most detailed description of what has been searched is found in Rebecca Roby's fourth affidavit which refers to the following:-

(i)        Proportionate searches were made of electronic archives (paragraph 7)

(ii)       emails to or from Mr Doyle and Mr. Marable were searched for (paragraph 12)

(iii)      emails sent after 2007 were searched using specific key words (paragraph 18)

(iv)      key relevant issues were identified (paragraph 20)

(v)       the staff members searched (paragraph 23)

(vi)      the search terms used (paragraph 24)

26.      However, these descriptions do not allow me to conclude that further searches would not produce relevant material.

27.      Firstly, there are no searches of email accounts of appointed officers, audit files or files relating to information sent to auditors or the Rank Group (while it owned the Hard Rock Group).  Nor, as noted above, have searches of email accounts of Messrs. Leonard, Beaudrault or Goodwin been carried out.

28.      Secondly, the profitability of the restaurant side of the business is not described as being in issue by Ms. Roby.  Yet it has been at the heart of the defendant's counterclaim at least since 2015. The searches carried out over the email accounts listed do not therefore appeared to have covered this issue expressly.

29.      Thirdly, while Ms. Roby's fourth affidavit provides information about which email accounts have been searched, the level of information required by the schedule to Practice Direction 17/08 has never been provided.

30.      Fourthly, back up tapes have not been searched.  This is clear from Mr. Burden's affidavit where he exhibited his clients' response to the discovery requests by HRCC.  Paragraph 1 of the general responses states:

"Defendants object to producing documents that may, but are not known to, exist on data backup tapes or data backup systems.  Such data are not archives organized for the retrieval of individual documents or files but for wholesale disaster recovery and emergency uploading onto an existing computer system.  The organisation of data therein mirrors the network and system structure and not a typical records structure in any cognisable fashion.  The restoration expense for data backup tapes or data backup systems is estimated to be in excess of $15,000 plus the cost of server rental and maintenance along with obtaining copies of obsolete or expired software systems because of the undue burden and cost presented by said expense.  In sum, data backup tapes and backup systems in the possession of Defendants are inaccessible sources of data that cannot be practically or without undue expense searched."

31.      Fifthly, this response also explains why Ms. Roby and Mr. Burden are both careful to say that "generally" emails or other documents prior to 2000 were not stored on back-ups.  This is because, having not searched the back-ups, they cannot know what in fact might have been stored or backed up.

32.      Sixthly, the same exhibit to Mr. Burden's affidavit also sets out a specific response to request 24 as follows:-

24.      Any documents concerning losses sustained by any Hard Rock Café restaurant franchise or "company-owned" restaurant with respect to food sales and/or costs, from 1995 to present.

Response: Objection.              This request is overbroad, vague and unduly burdensome, "Losses" could mean loss of potential food sales that could have been made but for supply issues "Losses" could also mean the cost of spoiled or unused food items before expiration?  Or, "losses" could be the selling price of food less than its ingredients' cost.  Or, "losses" could be the selling price of food less its ingredients and production costs.  Also, there are more than 140 franchised and corporate-owned Hard Rock Café locations.  Each one of those restaurants would have multiple discussions per week concerning "food sales and/or costs".  Even assuming there were just 100 restaurants, that is at least one hundred restaurants times two communications per week, multiplied by ten years (instead of the twenty years demanded by this request) equals more than one hundred thousand communications to review in response to this request.  In order to this request, from those 100,000 communications, one would need to ascertain whether or not "losses" are demonstrated in whole or in part as to "food sales and/or costs".  This would further require a review of all food vendor communications, amounting to tens of thousands of emails, invoices and other communications per year to determine if in any of them discussions were had with those vendors concerning the cost of food items or if it can be ascertained if the cost of those food items for any particular restaurant and whether those items would cause a loss to the franchise or restaurant entity being affected.  Further still, this would require an independent examination of the restaurant financials - monthly and annually at a minimum - for each of the 140 restaurants to determine whether or not any of those financials show or demonstrate "losses", whatever that term may be intended to mean, concerning "food sales or "costs".  Using the parameters of the prior illustration, this would entail a review of the financials for at least 100 restaurants x 13 times per year for 10 years equals 13,000 sets of financials that would need to be reviewed by persons qualified to do so to determine if any of them show "losses".  Defendants estimate that it would require four weeks of review by a person qualified to review financial information and data (a full time, specifically-retained accountant, for example), plus the time of two paralegals over the course of eight weeks (640 hours) to review and sort the correspondence and other information.  In addition, each of the foregoing persons would need the continual assistance of on-site personnel familiar with the documents and data retained by Defendants.  Further, this request is temporally overbroad as it relates to time periods at least four years before representatives of Plaintiff first sought a Hard Rock Café franchise."

33.      This response means that it is also clear that there have been no searches for documents relating to the profitability side of the restaurant side of the business only.  Mr. Doyle expressly raised this in his thirteenth affidavit at paragraph 38 and no evidence was filed in response.  Yet I have found both in this judgment and in my previous judgment that analysis of the profitability of the restaurant side of the corporate cafes was taking place in the 1990's within the Hard Rock Group as referred to above.  It does not matter whether any analysis was produced using different software/analysis packages no longer used by the Hard Rock group such as Lotus notes, Excel or the Lawson package.  What matters is not that different packages were used but that any such analysis of the profitability of the restaurant side of the business only may have been saved or referred to in backed-up documents including in emails referring to any such analysis.

34.      The above failings are clearly serious because, as noted in Powell at paragraph 69, discovery is a fundamental obligation in Jersey's legal system (as in many other legal systems where an adversarial approach is used) because documentation in most cases forms a key part of the evidence before a trial court.  In my judgment that is particularly so in the present case in relation to the defendant's allegation that Mr. Doyle was deliberately misled about the profitability of the restaurant side only of the plaintiffs' businesses and that had he known the true position, the defendant would not have entered into any agreement with the plaintiffs.

Is there any good reason for the breach?

35.      By reference to the evidence filed, I am not satisfied that there is any good reason for the breach.  In particular, as noted above I am not satisfied that the narrow approach taken is justified.  Nor is there justification for the repetition of arguments I had already rejected in my previous judgment.  No other justification was offered. 

36.      In addition, while the offer to carry out further searches itself recognises that more attempts are required, what was proposed was a physical search only.  When I enquired about electronic searches of Advocate Garrood in response to his offer, I received no reply.  This failure to respond confirms my conclusions that appropriate e-discovery searches were not carried out in particular in relation to backed up data.

What is an appropriate sanction?

37.      Advocate Moran contended that the breaches by the plaintiffs were sufficiently serious that judgment should be entered.  She argued that the plaintiffs have had more than adequate time in order to comply with discovery obligations and the extent of their failings made it clear that they were not taking those obligations seriously.  Parties should be required to comply with court orders and sufficient orders had been made that the plaintiffs knew exactly what they were required to produce.  Each of those orders had however effectively been ignored.

38.      There is serious force to these criticisms.  However, Advocate Garrood reminded me, correctly in my view, that this is a case where significant damages are sought based on allegations of fraudulent misrepresentation and a lack of good faith.  Unless it is absolutely plain that a party will not comply with its obligations of discovery or comply with other procedural orders, I agree with Advocate Garrood a trial is the best place for allegations of fraudulent misrepresentation and a lack of good faith to be resolved, rather than a judgment in default being entered.  I have therefore been persuaded, albeit only just, that the plaintiffs should be granted one final opportunity to ensure that relevant documents are produced.  I cannot emphasize strongly enough however that this is the final opportunity for the plaintiffs.

39.      In relation to what steps the plaintiffs should take, I am going to spell these out because I have been invited to do so by the plaintiffs in Advocate Garrood's skeleton argument.  However, this is not the approach that should usually be taken.  Normally it is for parties themselves to determine how to approach discovery with the Court only resolving areas of disagreement.  They are best placed to know where documents are stored and what would be a proportionate approach. 

40.      The steps to be taken are as follows:-

(i)        The discovery process from now on must be managed by Carey Olsen who will take the lead in its searching for relevant documents.

(ii)       In terms of what is relevant, so that there is no dispute about what is to be provided, the plaintiffs must look for any documents relating to the issue of the profitability of the corporate cafes only in their possession, custody or power for the years 1997 to 2004.

(iii)      Any searches must cover any appointed officer, files containing communications between the Hard Rock Group and any auditors at any relevant time, and any documents to or from Mr. Leonard, Mr. Beaudrault and Mr. Goodwin and any back up tapes.

(iv)      Email accounts previously searched will have to be re-reviewed for any documents relating to the issue of the profitability of the corporate cafes only in their possession, custody or power for the years 1997 to 2004.

(v)       The searches carried out must include electronic searches which will be carried out by independent e-discovery provider appointed by Carey Olsen on behalf of the plaintiffs.

(vi)      Appropriate artificial intelligence tools should be used to search for documents.

(vii)     The affidavit of discovery must contain all the information required by Schedule 1 of Practice Direction RC17/08.  This information should also be provided to the e-discovery provider.

41.      The affidavit of discovery will be provided by Friday, 26^th June 2020.

42.      If the terms of this decision and the accompanying act of court are not complied with, then judgment in default will be entered on the defendant's counterclaim and the plaintiffs' answer to the counterclaim will be struck out automatically without further order.

43.      If there is any dispute about whether or not there has been compliance and if the court finds there has not been material compliance, then the plaintiffs' answer and counterclaim will be struck out.  In other words no further relief from sanction for any material breach will granted.

44.      If documents no longer exist then the affidavit of discovery must also specify which categories of documentation used to exist but no longer do so.

45.      In relation to the extent of any searches, this must be across any entity within the Hard Rock Group storing information for any of the plaintiffs.  I have referred to this expressly to address any suggestion that discovery only applies to documents held by either of the plaintiffs themselves.  If other entities are holding material containing records of the plaintiffs, then the plaintiffs should be entitled to those records and any searches carried out should extend to that other material.

Costs

46.      In relation to the costs of and occasioned by this summons, although I have not granted judgment as requested, the criticisms I have made of the plaintiffs are extremely significant and I came very close to granting the defendant's application.  In the circumstances, I have no hesitation in concluding that the threshold for indemnity costs is made out and therefore the plaintiffs must pay the costs of and occasioned by this application on the indemnity basis.  The plaintiffs themselves accepted that a breach of the order has occurred by making and proposing further enquires.  I have found that those breaches are far more significant than was conceded.  I have also found that the plaintiffs had not complied with their discovery obligations in a manner that is serious.  No justification has been offered for these breaches.

47.      When it comes to taxation of any costs, if the plaintiffs are successful and recover a costs award in their favour, they should also not recover the costs of any searches required by this judgment which amount to a repetition of searches already carried out.

48.      Finally, I will assess the costs of the application summarily but in the meantime order a payment on account of costs of £5,000, such costs to be paid within 7 days.

Authorities

Hard Rock and Anor v HRCKY Ltd [2019] JRC 243. 

Powell v Chambers [2018] JRC 169. 

Newman v de Lima [2018] JRC 155. 

Practice Direction 17/08