Commission claims: Responding to pre-action disclosure demands

Pre-action disclosure in commission claims: Lessons from Windermere Educational Trust v Northern Gas and Power & ENGIE

Fuelled by a claims management company-driven consumer ‘claim culture’, energy suppliers and financial services firms are being hit with allegations that they’ve paid hidden or secret commissions to brokers/agents/introducers.  In our recent briefing, Partner Nick McQueen highlighted some of the legal hurdles facing a would-be commission-claimant.  He explained that it’s not as easy to succeed in these commission claims as some claims management firms are suggesting to energy and finance customers.

Consequently, claims management firms are increasingly pursuing inopportune, potentially vexatious and costly, court applications for pre-action disclosure [1] in commission cases.  This is often done as a tactical attempt to extort a commercial pay-out from an energy or finance company wishing to dispense with a troublesome (albeit not necessarily a sound) legal claim.

Walker Morris has helped energy companies to resist pre-action disclosure demands made by claims management companies on behalf of would-be commission claimants. In this article, Nick (who successfully represented the energy suppliers in the recent pre-action disclosure application in Windermere Educational Trust Ltd v (1) Northern Gas and Power Limited, (2) ENGIE Power Ltd, (3) ENGIE Gas Ltd [2] – see below) offers practical advice for energy suppliers and financial services firms faced with demands for pre-action disclosure.

Commission claims pre-action disclosure demands: What to watch out for

Would-be claimants (or, more commonly, their appointed claims management companies) are increasingly demanding pre-action disclosure – sometimes threatening, or even making, a court application to that effect.

Often, the demand will be very wide-ranging – effectively constituting a ‘fishing expedition’ for any possible information or documentation which could potentially help the would-be claimant to formulate or strengthen its intimated claim.

In some cases, the demand will be deliberately intended to put the potential defendant energy/finance company to such inconvenience, cost and public/reputational/commercial exposure that it becomes willing to pay to make the potential claim go away, even regardless of its merits.

Pre-action disclosure: What businesses need to know

Strict rules govern pre-action disclosure that can be sought via, and ordered by, the court (Civil Procedure Rule (CPR) 31.16 (3)).  So, energy companies and financial services firms should ensure that staff are educated not to respond to – and certainly not to comply with – demands for commission claim pre-action disclosure without the business having first taken specialist legal advice.

There are several key points to note about pre-action disclosure demands generally:

• ‘Fishing expeditions’ are not allowed.

• For any pre-action disclose demand to be valid, the persons making the demand, and the persons to whom the demand is made, must be likely to be a party to any subsequent court proceedings issued in relation to the intimated claim. That might seem like an obvious point, but in many cases identifying the correct parties to a legal claim is not straightforward.  That’s particularly the case where complex contractual arrangements or corporate structures are in place.

• The documents or classes of documents demanded must fall within what could be ordered under the duty of standard disclosure if proceedings were underway…

• …and, again, there are strict rules as to what can be sought via, and ordered by, the court in terms of standard disclosure [3].

• Pre-action disclosure must be desirable to dispose fairly of the anticipated proceedings, to assist resolution of the dispute without proceedings, or to save costs.

• Even if all the above requirements are met, certain principles derived from case law [4] may be relied upon to prevent pre-action disclosure. For example, the anticipated claim must have a real prospect of success; in the commercial context, the courts require more persuading to award pre-action disclosure than in non-commercial cases; and the court is required to take a ‘big picture’ view, taking into account all relevant circumstances.

• It’s also possible that some requested documents will attract legal professional privilege [5]. Privilege is a hugely valuable legal construct, which could be relied upon to prevent disclosure in any event.  However, there’s a separate set of rules and requirements relating to the law of privilege.  It’s important to educate staff so as minimise the risk of any action or correspondence on their part undermining or waiving privilege protection.

Responding to a commission claim pre-action disclosure demand

Specifically in commission claims, there are a number of legal and practical reasons why pre-action disclosure can, and usually should, be resisted:

• Many widely formulated pre-action disclosure demands constitute unlawful ‘fishing expeditions’.

• Would-be claimants often demand documents showing the details and amount of commission paid. However, it’s likely that such documents wouldn’t be disclosable even had proceedings been started, never mind pre-action.  That’s because such information goes right to the heart of a key issue in any commission claim dispute, and can’t be disclosed without pre-determining that issue.

• In addition, disclosing commission details isn’t usually necessary to enable would-be claimants to formulate their claims. Neither is it likely to prompt resolution of the dispute.  Instead, it’s information that goes merely to quantum (that is, to the value of the dispute).  Disclosure of commission details can be ordered by the court if appropriate and if/when liability is decided against an energy/finance respondent/defendant in subsequent litigation.  As such, it isn’t generally suitable for pre-action disclosure.

• Commission details also constitute commercial information that could be used by would-be claimants or their representatives for purposes unconnected with the claim in question:
  • Another current trend is for claims management companies to engage in ‘bulk litigation’ – bringing multiple claims, on behalf of hundreds or potentially even thousands of customers, and all on the same basis. In this context, claims management companies are bringing bulk litigation against particular energy and finance companies.  Any commission information disclosed pre-action in one case, could be used against the energy/finance company in numerous other claims, causing unfair prejudice to the business in those matters.
  • Commission information could also be passed to competitors of the business, causing unfair prejudice in the commercial market.

• Prospects of success are generally lower in business-to-business cases (as Nick explained in his earlier article), and a court order for pre-action disclosure is, if not exceptional, at least unusual in commercial cases.

What happened in Windermere Educational Trust v Northern Gas and Power & ENGIE?

Windermere Educational Trust Limited (WET), the customer, operates a boarding school.  Northern Gas and Power is an energy broker for utility services, whose role includes the comparing of gas and electricity prices.  At all relevant times, ENGIE Power Limited and ENGIE Gas Limited (part of the same group of companies) supplied electricity and gas respectively to the customer.

Represented by Winn (a private equity-backed claims management company), the customer alleged in correspondence that when Northern Gas and Power negotiated and executed energy supply contracts for its premises, the broker received commission without its knowledge, which essentially amounted to bribery.  Northern Gas and Power denied those allegations.  It responded to the customer’s pre-action letter of claim setting out, amongst other things, that the customer knew it was being paid and there was, therefore, no secret commission and/or bribery.

In an attempt to obtain documents which may assist with its claim, the customer applied to the court for pre-action disclosure.  Initially, the pre-action disclosure request was extremely wide-ranging, seeking some 10 different categories of documents.  Almost immediately prior to the court’s hearing of the application, the request was narrowed to just one category:  all commission statements and invoices detailing the calculation and payment of commission in relation to the energy contracts entered into between ENGIE and WET and brokered by Northern Gas and Power.

WET sought disclosure on the bases it was necessary and desirable for it to achieve its claim, and it would save costs.  WET’s arguments related to quantification of the claim, informed consent to payment of commission, and it not being a ‘sophisticated’ customer for these purposes.

The broker and energy suppliers submitted that the requested pre-action disclosure would effectively pre-determine, without trial, a substantive issue in the claim – namely, whether Northern Gas and Power was under a duty to provide the particulars and amount of commission paid by ENGIE.  They argued, for that reason in itself, the court should not order pre-action disclosure.  Northern Gas and Power and ENGIE also submitted that the commission claim itself had no real prospect of success.  They denied that the customer – a business, albeit a charity – was an unsophisticated, vulnerable person within the scope of secret commission claim authorities, and they stated that the customer was undoubtedly aware that ENGIE was paying commission to Northern Gas and Power.  They argued that the various requirements for pre-action disclosure under CPR 31.16 (3) were not met.  Finally, Northern Gas and Power and ENGIE referred to the fact that this was a commercial case, meaning that the court should require more convincing grounds before ordering pre-action disclosure, and they advanced the ‘bigger picture’ facts – that pre-action disclosure in this case could result in unfair exposure within other commission claims brought against the broker and/or energy suppliers and within the commercial commission market generally.

What did the court decide?

The judge explained that the courts are required to address pre-action disclosure application in two stages.  Firstly, to determine whether the threshold requirements set out in CPR 31.16 (3) are made out, and secondly, and only then, to exercise its discretion considering whether pre-action disclosure is desirable, in the particular circumstances of the case, to dispose fairly of the anticipated proceedings, to assist resolution of the dispute without proceedings, or to save costs.

Adopting that approach, the judge decided:

• Whilst it could not necessarily be said that WET’s claim had no prospects of success…

• …the CPR 31.16 (3) requirements were not made out.

• The requested documents would not be disclosable under standard disclosure rules had court proceedings been issued. Pre-action disclosure would go right to the heart of a key issue in the commission claim dispute, and would effectively determine the issue without trial.  The court should avoid determining substantive issues wherever possible in a pre-action disclosure application.

• The customer could properly plead its claim without the requested information. The information went to quantum, and could be determined after any subsequent judgment on liability.

• Although it wasn’t necessary for the court to exercise its discretion in this case, the judge went on to confirm that this was a commercial case, for which extraordinary circumstances would be required to justify pre-action disclosure. The case involved no facts or circumstances outside the usual run, so pre-action disclosure would not be allowed.

• Finally, WET was ordered to pay the costs of the broker and the energy suppliers.

The judgment in Windermere Educational Trust v Northern Gas and Power & ENGIE, including the costs order made against the customer/applicant, should be helpful for energy and finance firms faced with pre-action disclosure demands in other intimated commission claims.

How we can help with commission claims

Energy companies and financial services firms should take specialist legal advice immediately upon receipt of any demand for pre-action disclosure.  Importantly, staff should be educated to recognise such a demand, and not to respond to it unless and until in receipt of legally-guided instructions to do so.  Responding incorrectly, or disclosing items unnecessarily, could severely prejudice the business’ position in any subsequent litigation or settlement negotiations.

Walker Morris’ Commercial Dispute Resolution lawyers are experts in responding to pre-action disclosure demands, and in representing energy and finance businesses in all aspects of commission claim disputes.

As well as helping clients to handle and defend an increasing number of commission claims, we support businesses with health check reviews of existing contracts and relationships, including considering the extent to which commission has been disclosed, thereby helping to ‘future-proof’ against commission claims. We can also provide tailored training, to educate staff about commission claims, and about associated issues such as disclosure and legal professional privilege.  Where necessary or advisable, we also help our clients to ensure regulatory compliance and to proactively change internal processes to minimise future risk.

Please contact Nick for further information or advice.

[1] Pre-action disclosure is the disclosing of documents relating to a potential or intimated court claim before court proceedings are commenced.  A request for pre-action disclosure can be made (and responded to) privately and informally between the potential parties to an alleged claim, or it can be dealt with via an application to court.

[2] County Court, 8 February 2023.

[3] CPR 31.6

[4] Black v Sumitomo Corp (2001), Carillion Plc v KPMG LLP (2020), Assetco Plc v Grant Thornton UK LLP (2013), Rose v Lynx Express (2004), First Gulf Bank v Wachovia Bank (2005)

[5] See Walker Morris’ note on the law of privilege.