Privilege: A rock and a hard place

For years, privilege was the invaluable asset taken for granted by the profession. But those days have long since passed, with regulators increasingly testing the boundaries of privilege in a series of investigations and court actions.

This trend has re-opened much of the settled law on privilege and generated several cases – most notably the court battle between the Serious Fraud Office (SFO) and mining group ENRC over the disclosure of internal documents – that have made the area one of the most closely watched fields of civil law.

Assembling a group of veteran advocates, litigators and clients at the Commercial Litigation Summit under moderator Tamara Oppenheimer of Fountain Court Chambers, the panel discussed several key rulings. Oppenheimer kicked off the discussion running delegates through SFO v ENRC, the High Court ruling earlier this year that is regarded to have limited the scope of privilege in regulatory investigations (Oppenheimer represented ENRC alongside Richard Lissack QC).

ENRC had been the subject of an SFO investigation since April 2013, with the watchdog launching a civil claim in the Queen’s Bench Division to secure documents that ENRC argued were privileged. The primary group of documents related to interview notes conducted during an internal investigation and materials generated by a forensic accountant as part of the process.

ENRC had previously instructed lawyers in December 2010 after receiving a claim from a whistleblower alleging corruption related to a Kazakh subsidiary, triggering an internal investigation. In April 2011 their lawyer, Neil Gerrard, then of DLA Piper, wrote a memo stating that criminal and civil proceedings were reasonably likely. In August 2011 the SFO wrote to ENRC’s general counsel (GC) inviting him for a meeting and referring to self-reporting guidance, triggering a period of discussion between ENRC, its lawyers and the SFO until March 2013 when the watchdog began criminal proceedings.

The case turned on whether ENRC could claim litigation privilege, drawing on whether the two-stage test had been passed of a reasonable expectation of litigation and that the documents prepared for the dominant purpose of that litigation, tests that Mrs Justice Andrews concluded ENRC had failed to meet.

‘There is a real idea among regulators that lawyers are misusing privilege to try to hide information.’
David Owen, Barclays

Noted Oppenheimer: ‘Those in practice find it rather surprising that this sort of fact pattern is not sufficiently confrontational to get you over the line on the first limb of litigation privilege. The other bit that is very difficult to understand is that the judge seemed to come from a position that the reason why she did not think litigation was in reasonable contemplation was because prosecution was one possible outcome. She did not see that it moved from the realm of mere possibility to a real possibility.’

The case has major implications for companies facing pressures to self-report and increasingly proactive oversight from regulators. Oppenheimer also stressed the contrast between civil procedures and the straightforward means by which privilege is triggered in civil litigation and the much more ambiguous situation in potential criminal actions.

She concluded: ‘ENRC was between a rock and a hard place here: how do you do anything more than make an assertion that you have been told by your lawyers that litigation is anticipated? That, of course, is what it did, but in the judge’s view that did not go far enough.’

RBS

Herbert Smith Freehills (HSF) partner James Norris-Jones turned to another recent case that has attracted much attention for impacting privilege, the long-running legal battle over The Royal Bank of Scotland (RBS)’s 2008 rights issue, which triggered an investigation of the bank’s governance and securities disclosures.

The dispute, which recently settled, dates back to 2008 when US regulators requested information of the bank’s handling of credit exposures, leading to the instruction of legal advisers in the US and UK and the conduct of 130 interviews as part of its internal investigation.

Norris-Jones, who acted for RBS, told delegates: ‘We said that these interviews, which were relevant to the issues in the rights-issue litigation, were privileged… for three reasons: first, the interviews amounted to lawyer-client communications for the purposes of the giving or obtaining of legal advice; second, if that is not right, at least the notes prepared by the lawyers should be treated as lawyers’ working papers and, therefore, privileged; third, even if both of those two things were wrong, the court should apply US law, because it was not disputed that these notes were privileged as a matter of US law.’

The bank lost on all three points, triggering a leapfrog appeal to the Supreme Court. However, the claimants in the rights issue case dropped two-thirds of their case ahead of the May trial date (the case subsequently settled), ending the reliance on the documents. Noted Norris-Jones: ‘There was no order to appeal, so the appeal fell away as a result, which is disappointing from the point of view of looking at the law of privilege but a good result for RBS.’

He noted that much of the RBS case turned on the definition of the client, building on the famous Three Rivers (No 5) ruling thrown up by the BCCI/Bank of England litigation 14 years ago: ‘The judge [Mr Justice Hildyard] ultimately concluded he was bound by the Three Rivers (No 5) decision that required him to adopt a narrow definition of “client”.’

He added: ‘He took the view that the approximately 120 interviewees were too broad a category to be the client, so we could not have a lawyer-client communication because we had not sufficiently identified who the client was.’

RBS argued that Three Rivers was a ‘red herring’ as that case turned on internal communications, not lawyer/client communications as the RBS case. Norris added: ‘We said Three Rivers (No 5) meant that when you are dealing with a corporate situation, the client is the company – and the judge accepted that point. Then what the question should be is: does the relevant person within the organisation have the relevant authority to be instructing the lawyers? That is where the judge diverted from us. He said that a broad category of 120 people could not all be authorised to be instructing and receiving the advice from the lawyers.’

As with ENRC, Norris-Jones highlighted the challenges of initially asserting privilege at the point of an initial contact from a regulator, as watchdogs will typically try to structure the initial contact to give maximum flexibility.

‘I am often asked why we did not assert litigation privilege,’ said Norris-Jones. ‘The subpoena was, however, framed in a way that these documents often are: it was stated to be only a fact-finding investigation and that the regulator had not concluded that anything bad had happened – it just wanted some information. We concluded that we were unlikely to get over the first threshold of the litigation-privilege test.’

However, Norris-Jones noted an unease from the judge about the case law and narrow definitions of client, noting: ‘I have been to one of these events recently where Mr Justice Hildyard was speaking, and he said fairly plainly that he thought this point needed to go to the Court of Appeal.’

Tamara Oppenheimer, Fountain Court: Clients trying to assert privilege are between a rock and a hard place

 

Norris-Jones reflected on the impact of the ENRC ruling. ‘There are two things of note from ENRC: first, [the judge] did not specifically endorse the directing mind and will point and, reading between the lines, did not think that that was the right way forward. Second, she indicated that a board of directors and a company’s in-house legal function would usually be within the scope of ‘client’. The latter part is particularly welcome for people who have large in-house legal departments dealing with external lawyers but who may have people there who [are] authorised to do that but are at a relatively junior level within the organisation.’

Asked to address the client response when being targeted in an investigation by the SFO or Financial Conduct Authority, Dechert associate Matthew Banham noted there was now a ‘more complicated landscape’.

He added: ‘Where it is now the current state of the law that litigation privilege is not going to apply to – at the very beginning, at least – an SFO investigation, companies are going to have to work on the basis and understanding that documents that have been prepared up to that point are now potentially discoverable.’

He did argue that there was still considerable scope to retain privilege provided clients planned in advance. ‘I do not think the judgment means that litigation privilege has gone forever on any criminal investigation. Far from it… If companies, from the very beginning, are clear and take care as to what they want their outcome to be, and plan carefully their evidence, thought process and decision-making at the beginning and at key stages, then litigation privilege will continue to be available, because it will become that much easier to demonstrate it was in reasonable anticipation of prosecution.’

Nevertheless, he did warn that companies will have to be more cautious and considered in self-reporting given potentially major limits on privilege, arguing that the environment may end up discouraging honesty. He concluded: ‘I do not think the SFO will have got what it wanted in the end. It had reached a stage where it had co-operation from companies, and now firms will step back and think very carefully as to at what stage they want to self-report.’

The client view

Allen & Overy’s Sarah Garvey noted greater interest and concern from foreign clients in the tough line from the English courts on privilege, reflecting: ‘If you are a GC sitting in New York, you are suddenly much more alive to these dangers.’

Barclays’ David Owen picked up the debate from a perspective of a client that has faced a number of regulatory issues, citing the confrontational attitude of watchdogs. ‘There is a real idea among regulators that lawyers are misusing privilege to try to hide information and keep the difficult information to themselves. This goes to a fundamental point in the guidance note that the Law Society produced earlier this year, where the privilege belongs to the client but it is up to the lawyers to make sure that it is properly used and properly asserted.’

Citing concerns that narrow definitions of clients do not reflect the reality of many companies, Owen agreed there was a danger that the hard line on privilege will be counter-productive for enforcement, noting: ‘I see a real danger in a situation where people are no longer going to be open and co-operative in interviews and having discussions, where they are aware that this information could go much further. You end up with situations where you do not get to the nub of the issue as quickly as you would have done if you had a confidential conversation.’

Citing again the lack of clarity over when privilege kicks in on litigation, he said: ‘I wonder whether the law around privilege is not fit for purpose for investigations and whether we need a new law of privilege that applies directly to investigations. We are trying to put facts and situations into an existing law around litigation privilege, and they are not really on all fours with investigations.’

Until the appeal decision on the ENRC ruling from the Supreme Court emerges, clients and lawyers are stuck with the most challenging environment ever seen in terms of privilege and confidentiality. And it may get worse before it gets better. LB

alex.novarese@legalease.co.uk