Document retention: Where do I start?

Introduction

Many companies have been reassessing their document retention strategies in light of the considerable attention focussed on this issue by recent cases and legislative changes, particularly in Victoria.

This article provides a brief outline of some key considerations which can drive an effective document management or retention strategy, and provides some practical tips in devising a policy which has a reasonable prospect of consistent implementation. We conclude that when lawyers drive document management systems, they often place a disproportionate emphasis on managing perceptions of litigation risk, and insufficient weight on ongoing business need for the records. This risks treating the issue as one solely of legal compliance, rather than taking the opportunity of integrating knowledge management with broader business strategy.

While lawyers should be involved in a business’s document management process, a genuinely cross-business approach almost always delivers more workable, consistent (and therefore compliant) outcomes.

What documents must be kept?

At some stage in assessing the adequacy of a document retention strategy, it is necessary to determine which documents must be retained to comply with the law. Not surprisingly, this is where lawyers offer most value.

As a general proposition, a company’s documents are its own property, and it can deal with them in any way it sees fit. This includes its hard copy documents, and the very many documents stored by various means electronically. There are exceptions, including those rules aimed at requiring documents to be available to permit a review of the company’s compliance with tax laws and regulatory measures, and to ensure that documents can be produced in litigation in which the company is involved. It is these exceptions which must be understood and applied for document management strategies to meet legal requirements.

Most companies are comfortable with those detailed rules relating to retention of their transaction records and other laws which require the retention of particular documents in the specific industries and jurisdictions in which they operate. These laws can be readily complied with by application of a mechanical ‘checklist’ approach when the legislation is understood. Examples include the Income Tax Assessment Act 1997 (Cth) which requires the retention of tax records and the Corporations Act 2001 (Cth) which requires the retention for seven years of those documents which disclose the company’s transactions, financial position and performance. In retaining records from major transactions, most companies prudently retain documents disclosing the process of negotiation, in addition to the executed agreements. The Electronic Transactions Act 1999 (Cth) accommodates the trend of storing documents (which are otherwise required to be retained) electronically, provided the integrity of the documents remain intact.

Document retention strategies tend to respond less adequately to the need to ensure the company will be in a position to produce relevant documents in court proceedings.

As was famously demonstrated by different judges in litigation commenced by a cancer sufferer, Rolah McCabe, against British American Tobacco Australia Services Limited¹ (BAT), reasonable minds may differ on the scope of documents which may need to be retained in anticipation of litigation, particularly where no litigation is then on foot.

The issue in the early stages of that case was the impact of the destruction by BAT of documents, in compliance with its document retention policy, which Mrs McCabe contended were necessary for her to prove her case. The documents were destroyed before the proceeding was commenced.

The trial judge, Justice Eames, found that BAT had acted deliberately to put its documents beyond the reach of the discovery process, and that this had denied Mrs McCabe a fair trial. He struck out BAT’s defence. BAT successfully appealed against the judgment to the Victorian Court of Appeal.² The plaintiff died within a few weeks of the appeal being heard and before the appeal judgment was delivered.

The Victorian Parliament responded to the controversy generated by the McCabe case by introducing two pieces of legislation, the first³ making it an offence to destroy or conceal documents reasonably likely to be required in evidence in an ongoing or potential legal proceeding, or authorising another to do so, and the second⁴ giving Victorian courts a broad discretion to make life difficult for those involved in litigation where their conduct has had the consequence that relevant documents are unavailable to be produced in the proceeding. Loosely, a document is ‘unavailable’ if it was available to a party to the proceeding but has been destroyed, disposed of, lost, concealed or rendered illegible, undecipherable or incapable of identification (whether before or after the commencement of the proceeding).⁵

These changes brought into sharp focus the need for companies to implement an effective process to defer their normal document deletion or destruction procedures where documents are reasonably likely to be required in actual or anticipated legal proceedings. In the absence of an effective ‘legal hold’ approach, companies (and, in some cases, individuals within companies) may be exposed to criminal penalties, and place themselves at a distinct disadvantage in civil litigation.

What documents should be kept?

It is not ordinarily in a company’s best interests to destroy all documents falling outside the categories which they are required to retain. Nor is it usually efficient to go to the other extreme and seek to retain all documents that have been created in paper and electronic form. As with most things in life, finding the right balance is the key. And then being consistent. This is usually the stage where lawyers do well to defer to others in the business.

An emerging trend within Australian companies seems to require the destruction of all documents other than those which are strictly required to be maintained. This is perhaps driven by a combination of factors including:

• alarm at the number of documents generated in the electronic age and the perceived inability of the company’s management to control their contents
• the cost of searching for and producing very large numbers of documents in discovery processes in litigation
• a pessimistic, and often unfounded, sense that documents are more likely to damage a company’s prospects in litigation than support them, and
• the raw cost of document storage.

This approach follows a lead from the United States, where that country’s appetite for litigation has caused the costs of litigation, particularly associated with document discovery, to balloon. Perhaps not surprisingly, there has been a commensurate reluctance to retain large volumes of paper and electronic records.

Legal implications of poor document retention

Excessive or arbitrary destruction of documents may hinder the interests of an organisation as documentation commonly destroyed contains information which may be valuable in future legal disputes. A carefully considered document retention policy, and a corporate culture to suit, will protect that company (and its officers) from:

• criminal penalties for wrongful destruction⁶
• having adverse inferences drawn (or other undesirable orders) in future litigation, regardless of whether the documents in question were actually prejudicial to the company or not⁷
• incurring prohibitive costs in seeking to respond in an ad hoc way to discovery obligations when legal proceedings arise, and
• perhaps most importantly, destroying those very documents which will be required to rebut allegations which may be brought against the company based on a small number of documents taken out of their original context. Increasingly, litigation is fought on the basis of the documentary record, and the litigant best able to recreate it at the lowest cost carries a valuable advantage into any dispute.

Business implications of poor document retention

While business managers, in-house lawyers and company secretarial and finance teams do well to understand the implications of legislation like that introduced in Victoria, it will not normally be the case that a document retention strategy ought be defined entirely by legal considerations.

There are also important general business needs for a considered document retention policy as careful management of a company’s information enables:

• a smoother transition and easier maintenance of document management when there is staff turnover 
• easy identification and access to information on a client’s (or others’) request, and 
• simpler retrieval of knowledge valuable to the company’s business activities.

Electronic records

Particular care needs to be taken with the retention (and destruction) of electronic records. A number of complexities arise in relation to the consistency of naming protocols, maintaining the integrity of the documents (including the metadata, or information stored automatically about the document), and maintaining the hardware which will permit the documents to be accessed in a cost effective way.

Deletion of electronic information results in a digital trail that can often be tracked, and may be important to disputed facts in litigation. To avoid unnecessary cost of retrieval (as well as potential breaches of the law), an effective storage mechanism for electronic information needs to be implemented consistently with, and as part of, the approach to document retention. The ‘legal hold’ mechanism when litigation is anticipated also needs to extend to electronic records.

Courts to date have not shown much sympathy for companies who seek to narrow their discovery obligations by complaining about the cost and expense of document recovery. In a case brought by NT Power Generation,⁸ the Federal Court required the respondent Power & Water Authority to retrieve its electronic information including emails and discover those which were relevant, notwithstanding the time and cost involved. The court rejected Power & Water Authority’s request that their discovery of emails be limited to those which existed in hard form. The court acknowledged the substantial burden to the respondent of going through its back-up tapes to restore the emails to permit them to be reviewed for relevance, but found that the interests of justice required those steps to be taken.

While it is easy to criticise the courts for not reducing the costs of discovery in an electronic age, litigants are often the authors of their own misfortune. Considered document retention systems should anticipate the need to identify and recover electronic information from time to time, and will make use of available technology to do so in a cost efficient way. Adopting this approach is entirely consistent with a range of business objectives which require sensible stewardship of the company’s knowledge. It will have the added benefit of allowing the company to respond in a cost effective way to litigation which will from time to time arise. That often provides a very important strategic advantage to the company in the litigation, as the cost of pursuing the company’s rights or defending its conduct through the courts will be less onerous than those of its opponent.

Implementing the considered approach

The most carefully crafted document retention policy will prove of little utility unless it is both able to be, and practically is, implemented consistently on the ground.

In our view, the best starting point for a company to use when determining the scope of its document retention policy should be to retain those documents which the company expects to have an ongoing business use for. This approach has a number of advantages:

• implementation of the policy will be easy to ’sell’ to employees in the company who will each need to take ownership of its application in respect of documents they generate or receive
• such a policy will focus on avoiding unnecessary costs associated with storage of documents not needed for the business. Costs may be saved by de-duplicating multiple copies of documents (including emails sent to multiple internal recipients) and removing unnecessary internal ‘chatter’
• centralising storage of ‘necessary‘ documents avoids the perils of loss of valuable information on the departure or promotion of staff (as the most useful information is often retained by them in their own hard copy files or electronic files kept on their hard drives), and
• information of this character is also likely to be of the most value in any litigation involving the company.

To adopt the alternative approach and build a document retention policy and strategy entirely around litigation risks is likely, in the vast majority of cases, to disproportionately weight the risk of litigation and detract from the company’s ability to operate its business efficiently.

Of course, the most sophisticated companies are far more conscious of the documents they create (and their content) than those they choose to destroy or retain. But that is a discussion for another day.

This article was written by Sam Chadwick, Solicitor, and Malcolm Cooke, Partner, of the Melbourne Litigation team.

Endnotes

Name : Malcolm Cooke
Title : Partner
Office : Melbourne
Phone : +61 3 9288 1273
Fax : +61 3 9288 1567
Email : malcolm.cooke@freehills.com