February 19, 2020

BREAKING NEWS: The final whistle on Sports Direct -v- Financial Reporting Council – game over? 

Yesterday the Court of Appeal handed down its long-awaited decision on the 'no infringement exception' whereby, in certain circumstances, a regulator could compel the disclosure of privileged documents without a general loss of privilege in those documents.

Mr Justice Arnold's first instance decision on 11 September 2018[1] saw the FRC succeed with its proposition that powers under Statutory Auditors and Third Country Auditors Regulations 2016 (SI 2016/649) ("SATCAR") enabled it to compel the disclosure of material (originally provided under an implied limited waiver of privilege by a client to its auditor for the purposes of the audit) without any infringement of the audit client's legal professional privilege.

The Court of Appeal has allowed Sports Direct's appeal in relation to its privileged emails. 

The decision means that audit firms will need to continue to protect audit clients' claims to privilege over material in the firms' possession.

"Once privileged, always privileged"

Legal professional privilege plays a crucial role in upholding the rule of law and is a fundamental constitutional protection.  There are only two scenarios which trump the general rule that the disclosure of privileged material cannot be compelled:

  1. Where the 'iniquity exception' applies to a solicitor-client relationship with a criminal purpose. This is not relevant for the purposes of the issues to hand.
  2. In circumstances where a statute has expressly modified or abrogated legal professional privilege.

The so-called 'no infringement exception', which was the predominant subject of the appeal, arises from authorities concerned with the second scenario above.  The Court of Appeal's decision has revisited both the authorities from which the concept originates (Parry-Jones -v- The Law Society and Ors [1969] 1 Ch 1 and R (Morgan Grenfell & Co Ltd) -v- Special Commissioner of Income Tax and Another [2002] UKHL 21, [2003] 1 AC 563) and the cases which have followed in their wake. 

Yesterday's decision is a resounding and detailed rejection of the 'no infringement exception' as applied by Mr Justice Arnold at first instance.  Per Lady Justice Rose:

"There is no justification for regarding what Lord Hoffmann said in para. 32 of Morgan Grenfell as authority either for the existence of a no infringement exception to the protection conferred by [legal professional privilege] or for the application of some lower threshold for implying a statutory override on the grounds that any infringement of Sports Direct’s LPP would be technical. The task of the court is to apply the test laid down in Morgan Grenfell and B v Auckland, by looking at paragraph 1 of Schedule 2 to see whether Parliament must have intended to override the privilege. Paragraph 1(8) and 1(9) of Schedule 2 [of SATCAR] preclude any such implication."

The Court of Appeal did not consider it necessary to examine whether the conditions for the 'no infringement exception' would be met on the facts of the Sports Direct case.  It also rejected the concept accepted in the Court below that the law permitted a 'technical infringement' in this case.  The Court of Appeal found no support for a gradation of infringements of privilege. 

Non-privileged email attachments

The Court of Appeal has nevertheless upheld the disclosure of certain email attachments which are not privileged in their own right. 

It is trite law that pre-existing documents which are not themselves privileged do not become privileged by being attached to a privileged letter (Ventouris -v- Mountain [1991] 1 WLR 607).  Sports Direct argued that an analytical discrepancy arises from the context of considering the responsiveness of those attachments to the FRC's Notices under paragraph 1 SATCAR and rule 10(b) of the Audit Enforcement Procedure (the "Notices"). 

The Court of Appeal has ruled that the privileged versus non-privileged status of the email attachments should be assessed on a standalone basis.  On one view, the responsiveness of the same attachments to the Notices should also be tested on that basis – in which case some would fall outside the scope of the Notices.  But the Court of Appeal has held that such documents are to be regarded as responsive to the Notices simply by virtue of their being attached to the privileged emails which have been withheld.

UPDATE

It was reported yesterday that both parties are seeking leave to appeal this decision in the Supreme Court: the FRC hopes to appeal the 'no infringement' point and Sports Direct hopes to appeal the 'email attachments' point.  Watch this space!

[1] Sports Direct -v- Financial Reporting Council [2018] EWHC 2284 (Ch)