Court of Appeal overturns restrictive interpretation of litigation privilege in ENRC dispute with SFO

In its highly anticipated judgment regarding the scope of legal privilege in relation to documents created during internal investigations, the Court of Appeal has ruled that communications between the Eurasian Natural Resources Corporation (ENRC), its employees and advisers, including notes of interviews conducted during an internal investigation, were protected from disclosure by litigation privilege. The Court noted that large corporations need, as much as small corporations and individuals, to “seek and obtain legal advice without fear of intrusion.”

This decision reverses the first instance decision by Andrews J in Director of the Serious Fraud Office (SFO) v Eurasian Natural Resources Corporation Ltd [2017] EWHC 1017 (QB) that litigation privilege would not arise in internal investigations unless and until “the prospective defendant knows enough about what the investigation is likely to unearth, or has unearthed, to appreciate that it is realistic to expect a prosecutor to be satisfied that it has enough material to stand a good chance of securing a conviction”. Our LawNow on that judgment can be found here.

While the appeal raised issues in respect of both litigation privilege and legal advice privilege, the Court was constrained from determining the legal advice privilege questions by earlier authority. However, unusually, the Court gave its view as to how it would have decided those issues if it had not been so constrained, indicating that it would have overturned previous authorities to allow for a more practical and realistic approach to who is “the client” in a corporate body. Whether either party will now seek to appeal to the Supreme Court is presently unknown.

Background

In 2011, following a whistleblower report, ENRC instructed solicitors to investigate allegations of corruption and financial wrongdoing in relation to some of its overseas operations. The company also instructed forensic accountants to review its books and records in connection with both the whistleblower allegations and a general evaluation of its compliance controls.

The SFO became aware of certain allegations through press reports and in August 2011 wrote to ENRC to invite the company to consider self-reporting and cooperating with the SFO. Protracted meetings and correspondence followed, but it was in issue whether the company ever did formally self-report. ENRC provided a copy of its investigation report to the SFO in February 2013. The SFO opened a criminal investigation into the company shortly afterwards and issued notices to ENRC and its legal advisers to compel the production of documents using its powers under s.2(3) of the Criminal Justice Act 1987. The powers do not extend to documents covered by legal professional privilege, and ENRC resisted disclosure on that basis. The SFO applied for a declaration that the documents were not covered by privilege.

There were four main categories of documents at issue:

1. Notes taken by external lawyers of their interviews with various individuals, including current and former employees of ENRC;
2. Papers created by the forensic accountants as part of their review;
3. Documents indicating or containing the factual findings presented by ENRC’s external lawyers to its Corporate Governance Committee; and
4. Email communications between a senior ENRC executive and ENRC’s Head of Mergers and Acquisitions, a qualified lawyer who had previously been ENRC’s General Counsel, in which ENRC claimed that legal advice was sought and given.

Andrews J rejected all of ENRC’s claims for litigation privilege and found that ENRC was entitled to legal advice privilege in respect of only the documents in category 3. This category was therefore not considered further in the appeal.

Litigation Privilege

Litigation privilege applies to communications made when adversarial litigation is in progress or contemplated and for the dominant purpose of that litigation. The Court of Appeal considered a number of issues relating to this form of privilege, including:

Reasonable contemplation of proceedings

Having reviewed the facts, the Court of Appeal held that the judge was wrong to conclude that a criminal prosecution was not reasonably in prospect. Taking into account (i) advice given to ENRC by its legal advisers after the initial whistleblowing email including advice on privilege, (ii) that at various times before the SFO wrote to ENRC the company had indicated in internal communications that a raid was anticipated, and (iii) that the “sub-text” throughout the dealings between ENRC and the SFO was that a prosecution was likely to follow if the self-reporting process did not result in a civil settlement, ENRC had clearly demonstrated that litigation between itself and the SFO was a real possibility. The Court noted that not every “manifestation of concern” by the SFO would give rise to a prospect of adversarial litigation, the position was different “when the SFO specifically makes clear to the company the prospect of its criminal prosecution… and legal advisers are engaged to deal with that situation”.

The court commented that whilst a party will often need to make further investigations before it can say with certainty that proceedings are likely, that uncertainty does not in itself prevent proceedings being in reasonable contemplation. The court highlighted the disparity between individuals, small and large corporates in this regard: “An individual suspected of a crime will, of course, know whether he has committed it. An international corporation will be in a different position, but the fact that there is uncertainty does not mean that, in colloquial terms, the writing may not be clearly written on the wall.”

Andrews J had reached a controversial conclusion that reasonable contemplation of litigation was more difficult to establish in the criminal context, as a prosecutor has a higher threshold test to meet before commencing a prosecution – the Full Code Test – which does not apply to a claimant in civil proceedings. The Court of Appeal rejected that approach and noted: “Andrews J was not right to suggest a general principle that litigation privilege cannot attach until either a defendant knows the full details of what is likely to be unearthed or a decision to prosecute has been taken. The fact that a formal investigation has not commenced will be one part of the factual matrix, but will not necessarily be determinative”.

On the facts, the Court of Appeal held that ENRC was right to say that proceedings were in reasonable contemplation from the start of its investigation, even before the SFO formally opened its investigation into the company.

Dominant purpose

In Re Highgrade Traders [1984] BCLC 151, it was made clear that the exercise of determining the dominant purpose in each case is a determination of fact, and that the court must take a realistic, indeed commercial, view.

The SFO had argued that the dominant purpose of the investigation was to strengthen ENRC’s governance and compliance programme. The Court of Appeal held that, in context, this purpose could not realistically be separated from the defence of an anticipated prosecution: “Although a reputable company would wish to ensure high ethical standards in the conduct of its business for its own sake, it is undeniable that the ‘stick’ used to enforce appropriate standards is the criminal law and, in some measure, the civil law also.” Even if litigation was not the dominant purpose of the investigation at its inception, it was clear from the evidence that it swiftly became the dominant purpose.

Further, “it is obviously in the public interest that companies should be prepared to investigate allegations from whistle blowers or investigative journalists, prior to going to a prosecutor such as the SFO, without losing the benefit of legal professional privilege for the work product and consequences of their investigation. Were they to do so, the temptation might well be not to investigate at all, for fear of being forced to reveal what had been uncovered whatever might be agreed (or not agreed) with a prosecuting authority”.

The Court of Appeal considered the judge had gone wrong, firstly, in holding that documents prepared for the purpose of settling or avoiding a claim were not created for the dominant purpose of defending litigation. The Court of Appeal held that was an error of law. Secondly, the judge had failed to appreciate that investigating the existence of corruption was a subset of the defence of the contemplated legal proceedings. Thirdly, the judge misinterpreted the contemporaneous material, wrongly concluding that ENRC always intended or agreed to share the core material obtained from its investigation with the SFO (as opposed to any final report). Instead, the material clearly demonstrated that no such agreement was ever reached. ENRC led the SFO to believe it might in the future waive privilege in such material, but it never actually did so. Further, the judge did not appreciate that even if the ultimate intention in producing a document was that it would be shown to the opposing party, that did not deprive the preparatory work and drafts to finesse that document from the protection of litigation privilege.

Decision on litigation privilege

The Court of Appeal held that all of the interviews undertaken by ENRC’s legal advisers were covered by litigation privilege (category 1), as were the working papers of the forensic accountants (category 2). These were all part of ENRC’s fact-finding process at a time when criminal prosecution was in reasonable contemplation, and were undertaken for the dominant purpose of resisting or avoiding prosecution.

Legal Advice Privilege

Legal advice privilege applies to confidential communications between a lawyer and client for the purpose of seeking and receiving legal advice or advice as to what should prudently be done in a relevant legal context.

Having found in favour of ENRC on litigation privilege, the Court of Appeal did not strictly need to consider most of the issues of legal advice privilege in the case. However, given that these had been fully argued by the parties and by the Law Society (as an intervener), the court, unusually, did comment on a number of questions to indicate their dissatisfaction with the current law on legal advice privilege, as set out below.

The decision in Three Rivers (No. 5) [2003] CP Rep 34 (“Three Rivers”)

Three Rivers (No 5) is the leading authority on the scope of legal advice privilege and, in particular, the meaning of “client” for this purpose. The correct interpretation of the decision was in issue in the present case. The Court of Appeal confirmed that the earlier case, also in the Court of Appeal, decided that employees of a corporate are in the same position in relation to legal professional privilege as an independent agent of the corporate, unless specifically tasked with seeking and receiving legal advice. This controversial conclusion has had wide implications for corporate clients and has added significant complexity to ensuring instructions from large corporates benefit from legal advice privilege.

Applying the Three Rivers principle to the facts of ENRC’s investigation, the Court of Appeal agreed that the category 1 documents could not be protected by legal advice privilege on the basis that the interviewees were not authorised to seek or receive legal advice on behalf of ENRC. The email exchange with ENRC’s Head of Mergers and Acquisitions in category 4 was also not protected. Although he had previously been General Counsel, on the facts, at the time of the email exchange he was not acting in his capacity as a lawyer, but as “a man of business.”

However, the Court of Appeal indicated that it would have departed from the Three Rivers line of authorities if it were free to do so, but considered that this would require a decision of the Supreme Court. They noted that a “principled analysis of the purpose of legal advice privilege should be undertaken” rather than “a meticulous analysis of 19th century authorities”, when the distinction between litigation privilege and legal advice privilege was in its infancy and cases typically involved individuals or small companies rather than large multinationals. The court also noted that English law is currently out of step with international common law on this issue and that this was undesirable.

Comment

The relatively quick delivery of the judgment emphasises the perceived importance of the decision concerning the scope of legal professional privilege, especially as it applies to material gathered during the course of a company’s internal investigation into potentially criminal matters.

This ruling is significant for any company faced with undertaking an internal investigation in response to a whistleblower or other allegation of wrongdoing. It is important that companies are able to instruct lawyers to conduct investigations confidentially, or they may be incentivised not to investigate at all. However, this decision should not be taken as meaning that any internal investigation will benefit from litigation privilege protection from the outset. The Court of Appeal reached its view in this case on a careful review of the facts and circumstances in which the investigation was undertaken. A careful assessment of whether the test for litigation privilege is met will still need to be undertaken in any given case. What is helpful is the clarification that in relation to criminal matters, the threshold for litigation to be in reasonable contemplation is not the very high one that a prospective defendant must have enough evidence to believe a prosecutor would be able to meet the Full Code test for prosecution.

The thrust of the Court of Appeal’s approach is also positive from the perspective of corporate clients. In particular, the view that legal advice privilege should be assessed on a principled basis, rather than by reference to historical precedent, is both welcome and more likely to lead to an approach that reflects the realities of the modern world and business structures. The Court’s comments on the need to ensure equality of treatment and protection for larger corporates as compared to individuals and small businesses is also welcome. It is to be hoped that this matter will come before the Supreme Court soon and that they will endorse this approach.

In that regard, it is currently unclear whether either party will pursue a further challenge to the Supreme Court. Having succeeded in claiming litigation privilege over most of the relevant categories of documents, ENRC may not consider it worth appealing simply on the legal advice privilege issues, while in the light of the Court of Appeal’s criticisms, the SFO may not wish to take the risk that the Supreme Court would overturn Three Rivers.

The practical implications of this judgment (in addition to those identified in our previous LawNow) include:

• Companies should not assume that all internal investigations will attract litigation privilege. There must be a real likelihood of adversarial proceedings in order for this to be the case. This should be assessed on an ongoing basis as events unfold and evidence is gathered. Corporates should keep a written record of their assessment of the position to support any later claim for privilege.
• In structuring investigations to maximise the likelihood of establishing privilege, corporates may consider delaying detailed employee interviews until other aspects of the investigation, such as document review, have been completed or reached an advanced stage, at which time litigation may more reasonably be contemplated.
• Corporates should also consider whether wider litigation concerns are relevant here (including the risk of civil claims and employment claims) and whether the dominant purpose behind the creation of a particular document is in fact for that wider and reasonably contemplated litigation. Again, this should be kept under review and any positive analysis recorded.
• Companies should take care before entering into any binding commitment to disclose their findings to a regulator or prosecutor until the nature of the findings is known and the company can take an informed view of whether disclosure is in its interests. If it decides to do so, it may wish to seek to agree that any disclosure is on the basis of a limited waiver of privilege and cannot be used for purposes outside the investigation.
• Lawyers working in-house, whether in a legal or business role, must ensure they clearly distinguish between legal advice and business advice, and must be mindful of the risk that anything that falls on the business side of the line may be open to disclosure.

The authors wish to acknowledge the assistance of Natalie Haefner (Trainee, CMS London) in preparing this update.