Privacy series part one: Everything but the kitchen sink – the consequences of failure to give full and frank disclosure

Our series focused on privacy and transparency considers issues encountered by practitioners across a range of different dispute resolution specialities. This blog explores the importance of giving full and frank disclosure in applications made without notice to the other side.

As Mummery LJ noted in Sidhu & Anor v Memory Corporation Plc, “[i] cannot be emphasised too strongly that at an urgent without notice hearing for a freezing order, as well as for a search order or any other form of interim injunction, there is a high duty to make full, fair and accurate disclosure of material information to the court and to draw the court's attention to significant factual, legal and procedural aspects of the case”.

This applies equally to other forms of ex parte application. The general rule if a party breaches this high duty by failing to disclose something “material” is that the court should discharge the order obtained. This deliberately extreme effect is designed to act as a deterrent and to protect the integrity of the court’s process. The aim is to ensure a fair hearing even in circumstances where the defendant is absent and unaware of that process.

Nonetheless, the court does have the discretion to continue the order or grant a new one if it is in the interests of justice to do so. The court will consider all the relevant circumstances in deciding whether to exercise this discretion, including whether the non-disclosure was deliberate, the importance of the undisclosed points and the prejudice that would be caused to the applicant if they lost the benefit of the order.

Two recent cases demonstrate the courts’ exercise of this discretion: Border Timbers Ltd & Anor v Republic of Zimbabwe and Derma Med Ltd & Anor v Ally & Ors .

Border Timbers Ltd v Republic of Zimbabwe

In this case, the claimants obtained an ex parte order for registration and entry of a judgment on an ICSID arbitration award against the Republic of Zimbabwe. Zimbabwe applied to set aside the order on the basis of state immunity and that the claimants failed to draw the arguments regarding state immunity to the judge’s attention. The claimants’ answer was that it was so obvious that Zimbabwe was not immune there was nothing to disclose.

The Judge decided that “albeit culpable, the breach was not deliberate or contumelious”. As she had decided that state immunity was irrelevant, it was also immaterial. Overall, she concluded that to set aside the order would have been “excessively harsh” on the claimants, and the penalty should instead sound in costs.

This case also acts as a warning in relation to the claimants’ argument that there was nothing to disclose because the point was obviously wrong: it is not for an applicant to assess whether a point is arguable in without notice applications; that is for the court to decide.

Derma Med Ltd v Dr Ally

Dr Ally was a high-profile aesthetician. He built a successful business, Derma Med Ltd, which the second claimant bought. Under the sale agreement Dr Ally was not allowed to compete with Derma Med or use its confidential information. The claimants believed that Dr Ally was doing just that and obtained an injunction enforcing the non-compete and confidentiality provisions. The injunction was discharged at the return hearing due to failures of full and frank disclosure.

On appeal, the Court of Appeal again held that there had been “culpable, albeit not deliberate” failures of full and frank disclosure by the claimants. The Court of Appeal concluded that these failings were “relatively insubstantial when the case is viewed in the round”, i.e. compared to the apparently well-founded allegations against Dr Ally, and granted a further interim injunction.

There are references throughout the judgment to maintaining a due sense of proportion in relation to full and frank disclosure in complex, urgent cases. The quote from Kazakhtan Kagazy Plc v Arip is particularly striking:

“In applying the broad test of materiality, sensible limits have to be drawn. Otherwise there would be no limit to the points of prejudice which could be advanced under the guise of discretion.”

Comment

These cases demonstrate the difficulties faced by applicants (and their lawyers). On the one hand, parties are expected to maintain a sense of proportion. The duty of full and frank disclosure does not require that every conceivable argument be analysed. On the other hand, it is for the court, and not the parties, to decide what is and is not arguable and what is and is not material. When even the courts admit that the line between material and non-material can be uncertain, it is easy to see how it can be difficult to reconcile these competing maxims in practice.

It would still be a brave litigator to leave something out of a without notice application that they are (or should be) aware of. The court’s discretion may provide a safety net, but it is to be used sparingly and an innocent breach is not a get out of jail free card. There is no general rule that it will be excused (or that a deliberate breach will be sanctioned) and it could still justify the discharge of an order.

Any relief felt may also be short lived even if the order is continued or renewed. The defaulting party could still be punished in other ways. The terms of the order may be changed to be less favourable to the applicants and there is always the old costs chestnut.

Further information

If you have any questions or concerns about the topics raised in this blog, please contact Sophie Evans.

About this author 

Sophie Evans is an Associate in the Dispute Resolution Team. Her experience covers a broad range of commercial disputes, with a particular focus on shareholder and director disputes, civil fraud and breaches of contract.