SFO's challenge to litigation and legal advice privilege succeeds

In the decision of Mrs Justice Andrews in The Director of  The Serious Fraud Office v Eurasian Natural Resources Corporation Limited, the Serious Fraud Office successfully challenged claims to both litigation privilege and legal advice privilege in relation to a number of categories of documents created by ENRC's lawyers.

Given the lack of authority on the issue of when the litigation privilege line is crossed in the context of regulatory investigations, the Court's findings on the requirements that need to be satisfied in the context of an SFO investigation and potential criminal prosecution will be of interest. The decision also highlights the difficulties faced in any investigation in satisfying the Court that the fact finding was for the dominant purpose of the contemplated proceedings.

Key points to note include:

1. It is the prospect of criminal proceedings that matter for the purposes of determining whether litigation privilege applies. An SFO investigation is not adversarial litigation; it is only a preliminary step taken before any decision to prosecute is taken. Therefore, a party reasonably contemplating that such an investigation will be launched does not start the litigation privilege clock running.
2. There is a critical difference in determining whether a criminal prosecution is a real likelihood, compared to the threat of civil litigation in a commercial dispute. Criminal proceedings cannot be started unless and until the prosecutor is satisfied that a sufficient evidential basis had been established. There is no such inhibition on the commencement of civil proceedings and the bar is therefore higher for defendants trying to satisfy the court that they thought criminal proceedings were a real likelihood.
3. Even if both of the above points are incorrect and litigation privilege could attach much earlier, it must be proven that the documents were created for the dominant purpose of the conduct of the litigation (in this case the criminal proceedings). This test will rarely be satisfied in investigations. The primary purposes of internal investigations are usually to fact find, to prepare for a possible external investigation and to address other compliance and regulatory issues. They may also be intended to persuade a prosecutor not to prosecute, but such documents likewise may not satisfy the test.

Factual background

The Director of the SFO sought a declaration that certain documents generated during investigations undertaken between 2011 and 2013 by solicitors and forensic accountants into the activities of the defendant (ENRC) and its subsidiaries (collectively, "the Disputed Documents") were not subject to legal professional privilege.

An ongoing criminal investigation by the SFO began in late April 2013 relating to the activities of ENRC. The criminal investigation focused on allegations of fraud, bribery and corruption in two foreign jurisdictions. This followed a lengthy period of dialogue between ENRC and the SFO commencing in August 2011 which the SFO characterised as being (or becoming by no later than the end of November 2011) engagement in a self-reporting process in accordance with the SFO’s 2009 Self-Reporting Guidelines.

The SFO terminated the discussions in the wake of ENRC’s decision to dispense with the services of its then solicitors, Dechert LLP, which had been representing it in its dealings with the SFO, and which was also responsible for the relevant investigations.

The disputed documents

Category 1

This category comprised notes taken by Dechert of the evidence given to them by individuals (including employees and former employees or officers of ENRC and its subsidiary companies; their suppliers; and other third parties with whom they had dealings) when asked about the events being investigated. They were created between 10 August 2011 and 25 March 2013. ENRC claimed that these documents were subject to litigation privilege or, alternatively, legal advice privilege. Its case was that the dominant purpose of the interviews was to enable Dechert to obtain relevant information and instructions, and to provide ENRC with advice in connection with anticipated adversarial (criminal) litigation. In the context of the claim for legal advice privilege, ENRC submitted that the documents could be characterised as lawyers’ work product, and that (if it was necessary to establish this), disclosure of Dechert’s notes of the interviews would reveal the trend of the legal advice they were providing to ENRC.

Category 2

This category comprised materials generated by forensic accountants as part of "books and records" reviews between 12 May 2011 until at least 11 January 2013. The claim in relation to Category 2 was concerned only with ENRC’s claim to litigation privilege in respect of that class of documents. ENRC’s case on litigation privilege in relation to Category 2 was that "the dominant purpose of the reports was to identify issues which could likely give rise to intervention and prosecution by law enforcement agencies (specifically the SFO), with a particular focus on books and records offences, and to enable ENRC to obtain advice and assistance in connection with such anticipated litigation".

Category 3

This category comprises documents indicating or containing the factual evidence presented by Dechert to ENRC’s Nomination and Corporate Governance Committee and/or the ENRC Board on 14 and 15 March 2013. ENRC’s primary case was that these documents were subject to legal advice privilege, but it asserted litigation privilege in the alternative.

Category 4

This comprised 17 documents referred to in a letter dated 22 August 2014 sent to the SFO by Fulcrum Chambers (who succeeded Dechert as ENRC’s legal advisers), which independent counsel had determined did not attract LPP. Most comprised forensic accountants' reports or related correspondence and the claim to privilege stood or fell with that of the category 2 documents. It also included correspondence from one of ENRC's employees, a qualified lawyer, who at that time was ENRC's Head of M&A, over which legal advice privilege was claimed.

The judgment

We highlight certain key points arising from the 49 page judgment.

Legal advice privilege

1. In considering the question of who constitutes the "client" for the purposes of legal advice privilege, the judgment is in line with the reasoning of Hildyard J in the RBS Rights Issue litigation (see our earlier briefing Legal advice privilege: Restrictive interpretation of the Three Rivers client test applied by the English courts). In other words, Three Rivers (No 5) was followed in its most restrictive sense.
2. The Court was prepared to accept that in the context of a large corporate, the person instructing the lawyers may not be the same as the person or persons receiving the advice, and in that context gave the example of the in house lawyer who is specifically authorised to instruct external lawyers (and in doing so effectively acts as the Board's agent). However, that concept did not extend to communications of relevant facts by an employee authorised by the company to provide that information.
3. The Court rejected the controversial suggestion made by the editors of the leading textbook on privilege The Law of Privilege (Thanki, Goodall et al) that the concept of "instructions" to the lawyer is broad enough to encapsulate the communication of the relevant facts by any employee authorised by the company to do so, as much as any formal request for advice. The submission was both contrary to authority and wrong in principle. If the client had been an individual, and the solicitor carried out evidence-gathering or fact-finding investigations by speaking to that individual’s current employees, his communications with those employees would not be subject to legal advice privilege simply because he was obtaining the information from them for the purpose of giving legal advice to their employer. It made no difference whether the employees had been authorised to speak to him or not. It was wholly artificial to treat the employees as "instructing" the solicitor on the client’s behalf in that situation, when they were plainly not standing in the shoes of the client for the purpose of obtaining the legal advice.
4. As to the question of whether certain documents constituted lawyers' working papers, the Judge held that the protection afforded to those papers was justified if, and only if, they would betray the tenor of the legal advice. Whether that test was satisfied was ultimately an evidential question. A verbatim note of what the solicitor was told by a prospective witness was not, without more, a privileged document just because the solicitor has interviewed the witness with a view to using the information that the witness provides as a basis for advising his client. In other words, the client could not obtain the protection of legal advice privilege over interview notes that would not be privileged if he interviewed the witness himself, simply because he procured his lawyer to interview the witness instead.
5. Applying the above, the Judge held that the Category 1 interview notes were not covered by legal advice privilege. First, the persons interviewed were not the "client". Second, ENRC failed to satisfy the Judge that, on the balance of probabilities, the external lawyers' notes would give a clue as to legal advice given to ENRC. The documents merely comprised notes of what the lawyers were told by the witnesses; the fact that they were taken by a lawyer did not mean that they represented the work of the lawyer's mind and his selection so that, taken as a whole, these matters inevitably gave a clue to the trend of legal advice. The Judge then referred to examples of what may qualify as betraying the trend of legal advice, namely: the lawyers' qualitative assessment of the evidence, thoughts about its importance or relevance to the inquiry, or indications of further areas of investigation that might be fruitful in light of what the witness had said (although the latter on its own would not have been sufficient).
6. In contrast the Court held that the slides prepared by Dechert for the purposes of giving legal advice to ENRC were privileged even if they made reference to factual information.

Litigation Privilege

1. A critical issue in determining whether litigation privilege applied in the particular case was whether litigation was reasonably in prospect. The Court adopted the test in USA v Phillip Morris; namely that litigation was a real likelihood rather than a mere possibility.
2. But what was the litigation that needed to be contemplated in the context of a criminal investigation and potential prosecution? ENRC submitted that a criminal investigation should be treated as adversarial litigation for these purposes. The Judge disagreed. In her view, an SFO investigation was a preliminary step taken, and generally completed, before any decision to prosecute is taken. It is the objective prospect of criminal proceedings that matter for the purposes of determining whether litigation privilege applies.
   Consequently, although the Judge accepted that ENRC anticipated that an SFO investigation was imminent, and that such an investigation was reasonably in contemplation by no later than August 2011 following ENRC's receipt of a particular letter from the SFO, that was not enough to make out a claim for litigation privilege. Such an investigation was not adversarial litigation. The policy that justified litigation privilege did not extend to enabling a party to protect itself from having to disclose documents to an investigator.
3. The Judge also rejected the submission that once a criminal investigation by the SFO was reasonably contemplated, then so too was a criminal prosecution. ENRC relied upon the fact that in order to obtain a warrant, the SFO must persuade the magistrates that there were reasonable grounds to believe that an indictable criminal offence has been committed. The Court held, however, that this threshold existed to protect the suspect from an arbitrary invasion of privacy and was not particularly high to surmount. It was far lower than a threshold for prosecution. Reasonable contemplation of a criminal investigation did not necessarily equate to reasonable contemplation of a prosecution - it would be dependent upon the facts.
4. On the issue of ENRC's state of mind regarding whether a criminal prosecution was a real likelihood, the Judge drew a distinction between criminal proceedings and the threat of civil litigation in a commercial dispute. A critical difference between civil proceedings and a criminal prosecution was that there was no inhibition on commencement of civil proceedings where there was no foundation for them other than the prospect of sanctions. A person may well have reasonable grounds to believe they are going to be sued by a disgruntled neighbour, or a commercial competitor, even where there is no properly arguable cause of action, or where the evidence that would support the claim has not yet been gathered. In contrast, criminal proceedings could not be started unless and until the prosecutor was satisfied that a sufficient evidential basis had been established. The bar is therefore higher for defendants trying to satisfy the court that they thought criminal proceedings were a real likelihood.
5. ENRC also contended that a party did not need to have carried out a detailed investigation in order to appreciate that there was a problem which made a criminal prosecution a realistic proposition. While that was undoubtedly correct, the Court held that it would still be necessary to show that the party knew that there was a problem regardless of what the investigation might uncover, or alternatively that the problem emerged in the course of the investigation. On the facts, ENRC had failed to establish that. The prospect of criminal proceedings was never anything more than speculative.
6. Even if the Court was wrong about whether criminal proceedings were in reasonable contemplation at the material time, the Court held that none of the documents attracted litigation privilege in any event. None of the Disputed Documents were created for the dominant purpose of deployment in, or obtaining legal advice relating to the conduct of, such anticipated criminal proceedings. At the time that external lawyers were instructed, the primary purpose of the investigation was fact finding, namely to find out if there was any truth in the whistleblower's allegations. ENRC's focus was on preparing for an investigation and to address compliance and regulatory issues. Even if the documents created in the internal investigation had been for the purpose of advising ENRC on how it should deal with the SFO, they would still not have been created for the dominant purpose of conducting the litigation. The Court was not satisfied that taking legal advice in relation to the conduct of future contemplated criminal litigation was even a subsidiary purpose for the creation of the documents, let alone the dominant purpose. They were not being gathered to form part of a defence brief.
7. The Court also rejected ENRC’s submission that litigation privilege extended to third party documents created in order to obtain legal advice as to how best to avoid contemplated litigation (even if that entails seeking to settle the dispute before proceedings are issued). Being equipped with evidence to enable a party to conduct its defence free from the risk that the opponent will discover how that party is preparing itself, and to decide what evidence it is planning to call if the case goes to court, and what tactics to employ, was something entirely different from being equipped with evidence that the party hoped may enable it (or its legal advisers) to persuade the other party not to commence proceedings against it in the first place.
8. So far as Category 2 and the forensic documents in Category 4 were concerned, the dominant purpose of the documents generated was plainly to meet compliance requirements or to obtain accountancy advice on remedial steps as part and parcel of the comprehensive books and records review. There was little or nothing to do with the preparation of a defence to, or obtaining legal advice in respect of, prospective criminal litigation and was primarily focused upon compliance and remediation.

Comment

The decision on legal advice privilege is very much in line with that of Hildyard J in the RBS Rights Issue Litigation, and so the findings will not surprise practitioners. Until the Supreme Court tackles the "client" question, we are stuck with Three Rivers (No 5) in its most restrictive sense. Press reports suggest that the matter will be appealed so we may not have to wait long.

The more interesting aspect of the decision relates to the comments on litigation privilege. The fact that, in the context of criminal investigations at least, it is the perceived likelihood of a criminal prosecution, rather than investigation or dawn raid that is key, will be of interest. The comments on dominant purpose will also be likely to trouble many as, in most situations such as these, potential defendants will be looking to reach some kind of settlement and prepare their defence in case settlement negotiations fail at the same time. Careful thought will need to be given as to how this is managed.

On a separate point, this decision highlights yet again the considerable risk that documents produced for the purposes of regulatory investigations in the US, whilst privileged in that jurisdiction, may well become disclosable in criminal or civil proceedings in the UK.

Cases referred to:

The Director of The Serious Fraud Office v Eurasian Natural Resources Corporation Limited [2017] EWHC 1017 (QB)

RBS Rights Issue Litigation [2016] EWHC 3161 (Ch)

Three Rivers District Council & Others v The Governor and Company of the Bank of England [2003] EWCA Civ 474

USA v Phillip Morris [2003] EWHC 3028 (Comm)