October 2, 2018

Court of Appeal decision in SFO v ENRC: practical implications for law firm investigations

The Court of Appeal recently handed down its judgment in SFO v ENRC [2018] EWCA Civ 2006, which is of key relevance to the application of privilege in internal fact-finding investigations.

The judgment restores the orthodoxy on litigation privilege and undoubtedly improves the prospects of documents generated as part of an initial fact-finding exercise being the subject of a successful claim to such privilege.  However, there is no bright-line test for when the fruits of an investigation of this nature will attract privilege, meaning firms must continue to tread carefully. The judgment also does not resolve the longstanding difficulties experienced by corporate bodies in claiming legal advice privilege.

In this briefing, we summarise the key findings by the Court of Appeal and explore the practical issues that arise for law firms conducting internal investigations.    

Background

The defendant engaged with the Serious Fraud Office ('SFO') with regard to an investigation and the possible utilisation of a self-reporting process, following a whistle-blower notification identifying alleged fraudulent practices at the defendant.  The issue subsequently arose as to whether certain documents created by external solicitors and forensic accountants on the defendant's behalf in the context of the investigation were subject to litigation and/or legal advice privilege. 

First instance judgment

At first instance, Andrews J rejected the claim to privilege in respect of most of the documents.  The key findings were:

  • The documents were not subject to litigation privilege[1] because no criminal prosecution was in contemplation when they were created. The fact that an SFO investigation was imminent was not sufficient, as the investigation itself was not adversarial litigation.
  • The dominant purpose for creating the documents was not litigation, but to avoid litigation and to report to the SFO. Documents created for the purpose of avoiding litigation are not privileged.
  • Applying Three Rivers (No 5), legal advice privilege[2] extends only to communications between a lawyer and a client, and the "client" in a corporate entity is limited to the individuals authorised to obtain legal advice on the client's behalf.
  • As such, legal advice privilege did not extend to employees' communications with the defendant's lawyers (where those employees were outside the narrow category of the "client"), nor to notes of interviews with employees.

Court of Appeal judgment

The Court of Appeal allowed the defendant's appeal in part, overturning the findings of Andrews J in respect of litigation privilege.  The key findings by the Court of Appeal were:

Reasonable contemplation

  • An SFO criminal investigation being reasonably in contemplation will not lead inevitably to the conclusion that a criminal prosecution is similarly in contemplation; nor will every SFO manifestation of concern properly be regarded as adversarial litigation.
  • However, on the facts, a criminal prosecution was reasonably in prospect at the relevant time: the sub-text of the relationship between the SFO and defendant was the possibility, if not the likelihood, of prosecution if the self-reporting process did not lead to settlement.It was of relevance that the SFO's self-reporting guidelines specifically envisaged that the corporate considering self-reporting would obtain legal advice.
  • A party anticipating prosecution will often need to carry out further investigations to determine with certainty that proceedings are likely but that uncertainty does not prevent a criminal prosecution from being in contemplation.
  • The distinction drawn by Andrews J between civil and criminal proceedings was illusory (essentially that it is easier to contemplate litigation in civil proceedings because there is no inhibition against bringing civil proceedings; in contrast, a criminal prosecution cannot be commenced without a sufficient evidential basis and the public interest test being met). On the facts, there was no suggestion that the threat of criminal prosecution was anything other than serious.

Dominant purpose

  • Legal advice given to head off, avoid, or settle reasonably contemplated proceedings is covered by litigation privilege, as much as advice given to defend such proceedings.
  • The exercise of determining the 'dominant' purpose in each case is one of fact. In this instance, there was no distinct purpose, or a second purpose of equal importance, that prevented the possible criminal proceedings being the 'dominant' purpose. Further, fact-finding can be an integral part of obtaining information or advice in connection with, or of conducting or aiding the conduct of, litigation.
  • The fact that a document might be created with the intention of showing it to the opposing party does not automatically mean that it, or the preparatory legal work, cannot be subject to litigation privilege.

Legal advice privilege

In light of the findings that the documents were subject to litigation privilege, it was not necessary for the Court of Appeal to consider the application of legal advice privilege.  However, as it had heard arguments on legal advice privilege (including from the Law Society, which intervened in the proceedings), it gave an obiter view.

The Court of Appeal declined to determine whether Three Rivers (No 5) had been decided wrongly, holding that it was a question that could only be determined by the Supreme Court.  However, the Court of Appeal indicated that it would have been in favour of departing from that decision had it been able to do so, observing that the way in which legal advice privilege applied to a narrowly defined 'client' within a corporation might present no problem for individuals and small businesses seeking legal advice, but in the modern world created difficulties for large corporations and multinationals.  It was also undesirable that English law was out of step with international common law on this issue.

Practical implications

It is becoming increasingly necessary for firms to carry out internal investigations in response to an issue.  In some circumstances it will be clear that litigation privilege applies, in others it will be far less so.  For example, this might be where the SRA indicates that it has received a complaint; where the firm receives a request that individuals appear at a select committee hearing; criticism in the press of the practices of a client, on which the firm has advised; or a whistle-blower making an allegation.

The findings of the Court of Appeal, and the manner in which it has applied the legal principles to the facts of this case, represents a lowering of the high bar set for claiming litigation privilege in the decision of Andrews J.  It means, for example, that it should no longer be necessary for a firm to discover the 'smoking gun', before it can be said that litigation is in contemplation, and litigation privilege can be claimed.   Also, the fact that a firm is engaging in a process of discussion with a regulator that might ultimately lead to settlement does not necessarily mean that litigation is not a real possibility.  

Even so, firms should bear in mind that it will still be a question of fact in each individual case whether litigation privilege is available.  As such, practical matters to consider include the following:

  • How far does the investigation need to go in order to achieve its aim? Does there need to be a detailed consideration of documents and witness interviews, or will a high-level review of the client file by a member of the risk and compliance team be enough?
  • The preparation of a contemporaneous record of the reasons why litigation is in contemplation before documents are created in the investigation. This is in addition to taking steps appropriate to that contemplation – for example, putting in place a litigation hold on any document destruction policy.
  • The appointment of external lawyers to assist in the investigation might aid a later claim to privilege, being a possible factor weighing in evidence that litigation was contemplated. The reason for the appointment of external lawyers might be included within the retainer letter.
  • Whether there is any scope to engage legal advice privilege. It remains difficult to maintain a claim to legal advice privilege in respect of witness interview notes even if taken by a lawyer, and even if that material is required by the lawyer to give legal advice.However, depending on the length and amount of information involved, consideration should be given to whether information obtained from witnesses might properly be recorded in advice letters and so forth rather than in verbatim notes.
  • Managing the creation of new documents and circulation of material:
    • It is of course often easier said than done to oversee documents being created, but giving advance training to staff, and contacting key staff involved in the matter early on in the investigation process, can assist.
    • Documents created should not be circulated widely – for example, if interview notes are made, witnesses should not be given copies, and legal advice (whether internal or external) should not be circulated outside the group comprising the "client" in the Three Rivers sense.
  • Where investigations cross borders because the work in question was carried out across multiple offices, the local law in relation to privilege and its impact should also be considered. Documents that would be privileged in one jurisdiction may not be in another, and this may have a bearing on decisions taken in relation to the creation and storage of documents.
  • If a document potentially subject to a claim to privilege is shared with a regulator or prosecutor (for example, a report by external lawyers of their findings in an investigation), consideration should be given to doing so subject to a limited waiver of privilege.

Conclusion

While the judgment in this case is a welcome development, the issues in this area remain knotty, and the law on legal advice privilege continues to be out of step with other common law jurisdictions.

References

1 Litigation privilege applies to: confidential communications between a client and their lawyer, or either one of them and a third party; when litigation is pending, in reasonable contemplation or has been commenced; and the communication is made for the dominant (although not necessarily the sole) purpose of obtaining information or advice in connection with, or of conducting or aiding the conduct of, such litigation.

2 Legal advice privilege applies to: confidential communications; between a client and his or her lawyer; which came into existence for the purpose of giving or seeking advice in a relevant legal context.