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Article: September 2018: SFO v. ENRC: Privilege Restored for Internal Investigation Documents

Business Litigation Reports

The English Court of Appeal has handed down its much-anticipated judgment in The Director of the Serious Fraud Office v. Eurasian Natural Resources Corporation Limited [2018] EWCA Civ 2006. At first instance, the High Court took a restrictive approach to both litigation privilege and legal advice privilege. The Court of Appeal has allowed the appeal, finding that the London-headquartered mining company Eurasian National Resources Corporation (ENRC) was entitled to claim litigation privilege over documents generated during an internal investigation following a whistleblower report because they had been created once criminal legal proceedings were sufficiently contemplated.

The Court has restored the orthodox position that subject to the particular facts at hand, documents created in the course of an internal investigation (including interview notes prepared by lawyers) are capable of being protected from disclosure to UK authorities by virtue of litigation privilege where their dominant purpose is to advise on, or obtain evidence in relation to, actual or contemplated litigation (including avoiding or settling such litigation).

The Court of Appeal dismissed the appeal on legal advice privilege, considering itself bound by the House of Lords decision in Three Rivers No 5 to find that legal advice privilege is limited to communications between a lawyer and those specifically tasked with seeking and receiving justice on behalf of the client company. However, the Court observed that the decision places large corporations at a disadvantage compared to small or medium sized enterprises, since for large corporations the information on which legal advice is sought will rarely be in the hands of the main board or those it appoints to seek and obtain the legal advice. According to the Court, the narrow definition of the “client” as established in Three Rivers No 5 is outdated, and it would have departed from the decision had the opportunity been available.

Background to the Case

In early 2011, ENRC instructed lawyers to conduct a fact-finding investigation into a whistleblower’s allegation of corruption and wrongdoing in relation to its Kazakh subsidiary. There followed a lengthy period of dialogue between ENRC and the UK Serious Fraud Office (SFO), including a series of meetings in which ENRC updated the SFO on the progress of its internal investigation. The SFO formally announced that it was commencing a criminal investigation in April 2013.

As part of its investigation, the SFO sought to compel ENRC to produce a range of documents, including interview notes taken by external lawyers, material associated with a review by forensic accountants, and presentations by external lawyers for the purpose of advising and receiving instructions from the ENRC internal team. When ENRC claimed legal professional privilege in respect of these documents, the SFO commenced proceedings in the High Court, seeking production on the basis that they were not privileged.

Litigation Privilege

The first instance decision – no litigation privilege

The test for when litigation privilege applies was set out by Lord Carswell in Three Rivers District Council v. Bank of England (No. 6) [2004] UKHL 48:

Communications between parties or their solicitors and third parties for the purpose of obtaining information or advice in connection with existing or contemplated litigation attracts litigation privilege when, at the time of the communication in question, the following conditions are satisfied:

(a) litigation is in progress or reasonably in contemplation;

(b) the communications are made with the sole or dominant purpose of conducting that anticipated litigation;

(c) the litigation must be adversarial, not

investigative or inquisitorial.

ENRC’s claim for litigation privilege fell at the first hurdle in the High Court before Mrs Justice Andrews.

The judge ruled that a criminal investigation by the SFO is not adversarial litigation for privilege purposes. According to the judge, an SFO investigation is a preliminary step taken before any decision to prosecute is made. In practice this means that a claim to privilege can only be made out where a prosecution is in “reasonable contemplation.” The judge took the view that ENRC did not contemplate a prosecution when the documents in question were produced, such that those documents were not protected by litigation privilege.

The judge also ruled that, even if a prosecution had been reasonably in contemplation, none of the documents in question were created with the “dominant purpose” of being used in the conduct of such litigation. In the judge’s view, the main purpose of the internal investigation was to establish whether there was any truth to the whistleblower allegations, and to prepare for any future SFO investigation. Against a background of cooperation and openness, fact-finding aimed at obtaining legal advice on how to avoid an investigation is not covered by litigation privilege.

The Court of Appeal decision – orthodoxy restored

On September 5, 2018, the Court of Appeal upheld ENRC’s claim to litigation privilege over the categories of documents described above. The Court considered two main issues:

  • Issue 1: Was the judge right to determine that, at no stage before all of the documents had been created, criminal legal proceedings against ENRC or its subsidiaries or their employees were reasonably in contemplation?
  • Issue 2: Was the judge right to determine that none of the documents were brought into existence for the dominant purpose of resisting contemplated criminal proceedings against ENRC or its subsidiaries or their employees?

As regards Issue 1, the Court of Appeal found that a criminal prosecution was reasonably in contemplation when the documents at the center of the SFO’s application were created. In the Court’s view, the whole sub-text of the relationship between ENRC and the SFO was the possibility, if not the likelihood, of prosecution if the self-reporting process did not result in a settlement.

The Court of Appeal held that while not “every SFO manifestation of concern would properly be regarded as adversarial litigation,” when the SFO specifically notifies a company of the prospect of prosecution and legal advisers are engaged to deal with that situation, “there is a clear ground for contending that criminal prosecution is in reasonable contemplation.”

Moreover, the Court of Appeal held that although a party anticipating a possible prosecution will often need to investigate before it can be certain that a prosecution is likely, uncertainty does not prevent proceedings from being in reasonable contemplation.

As regards Issue 2, the Court of Appeal disagreed with the judge that ENRC’s dominant purpose in launching the investigation was compliance and governance, finding that the need to investigate corruption allegations was just a “subset” of the dominant purpose of defending contemplated proceedings. According to the Court:

Legal advice given to head off, avoid, or even settle reasonably contemplated proceedings is as much protected by litigation privilege as advice given for the purpose of resisting or defending such contemplated proceedings.

In reaching this conclusion, the Court remarked that if corporates were not to benefit from legal privilege in these circumstances, “the temptation might well be not to investigate at all,” which would clearly work against good governance and best practice compliance considerations.

The SFO is understood to be considering an appeal to the Supreme Court.

Legal Advice Privilege

The judge at first instance rejected ENRC’s claims that interview notes taken by solicitors in the course of the investigation were subject to legal advice privilege, finding that there was no evidence that any of the persons interviewed were authorized to seek and receive legal advice on behalf of ENRC.

In reaching this decision, the judge endorsed the decision of Hildyard J in The RBS Rights Issue Litigation [2016] EWHC 3161 (Ch), which she said supports the proposition that:

legal advice privilege attaches only to communications between a lawyer and those individuals who are authorized to obtain legal advice on that entity’s behalf. Communications between the solicitors and employees or officers of the client, however senior in the corporate hierarchy, who do not fall within that description will not be subject to legal advice privilege.

The judge found that Hildyard J’s reasoning in RBS was consistent with Three Rivers No 5, and was also correct as a matter of principle.

ENRC and the Law Society of England and Wales, which intervened in the appeal, submitted that Three Rivers No 5 was wrong. To attract legal advice privilege, all that should be necessary is that the employee in question is authorized by the client to provide the information to the company’s lawyer.

The Court of Appeal saw “much force” in ENRC’s submission. It observed that confining legal advice privilege to communications between lawyer and “client,” in the narrow sense of those authorized to seek and receive legal advice on a corporation’s behalf, places large corporations at a disadvantage. For such organisations, it is unlikely that the information on which legal advice is sought will be in the hands of the main board or those it appoints to seek and obtain the legal advice. The Court also noted that English law is out of step with the international common law on this issue.

However, the Court of Appeal declined the appeal on grounds it was bound to follow the decision in Three Rivers No 5, which remains good law in England and Wales. The Court noted that if it had been open to it to depart from Three Rivers No 5, it would have been in favor of doing so, but that as things stand the matter will have to be considered by the Supreme Court in this or an appropriate future case.

Implications for Companies

The Court of Appeal’s ruling is significant for any company faced with undertaking an internal investigation in response to allegations of wrongdoing. The decision does away with a number of illogical distinctions, such as the judge’s conclusion that documents prepared with the purpose of warding off litigation in the first place, rather than defending it, are not covered by litigation privilege. The decision will mean that businesses can be more confident again about thoroughly investigating allegations of wrongdoing.

However, while the decision is being characterized in the legal press as a “resounding defeat” for the SFO, the Court of Appeal emphasized that whether litigation privilege applies is a question of fact and ENRC’s words and actions were scrutinized before the claim to privilege was upheld. Businesses and their legal advisers must therefore remain vigilant and expect assertions of privilege to be examined closely by third parties, regulators and law enforcement. It remains key to any claim for litigation privilege that litigation can be shown to have been both reasonably contemplated at the time of any investigation and to have been the sole or dominant purpose of any documents in question.

ENRC’s appeal succeeded on litigation privilege alone. The decision on legal advice privilege in Three Rivers No 5 continues to apply. It therefore remains the case that communications between an employee of a corporation and the corporation’s lawyers will not attract legal advice privilege unless that employee has been tasked with seeking and receiving such advice on behalf of the client.