09 August 2017 - Post by:
Financial institutions engaged in cross-border business are increasingly at risk of being caught in the middle of a complex web of internal, regulatory and criminal investigations as well as civil litigation and employment claims when something has gone wrong. These may be conducted simultaneously or at different times, but they will often arise out of essentially the same underlying facts. Managing investigations and claims effectively and in a way which minimises risk, whilst at the same time carrying out any necessary remediation, can be extremely challenging. One such challenge can arise when financial institutions are trying to gather information to establish the underlying facts, with a view to obtaining legal advice.
In the past year, a series of significant judgments by the English courts have shone a spotlight on the limits of the protection provided by legal professional privilege when gathering factual information, particularly in the context of an internal, criminal or regulator-driven investigation. In this article, we consider the reasons for the recent flurry of decisions and what they mean for commercial parties carrying out an investigation when something has gone wrong.
It is a well-established principle of English law that a person should be able to communicate freely with a lawyer without fear that those communications may later be disclosed to a court. The protection afforded by this principle of legal professional privilege has been described by the English courts as a fundamental human and substantive law right.
The recent increase in English court decisions on legal privilege appears in part to have been driven by the increasingly combative approach being taken by claimants in litigation following regulatory or criminal investigations and by enforcement authorities involved in the conduct of those investigations.
Follow-on claimants and enforcement authorities will know that an internal investigation is likely to have taken place and will often anticipate that documents created during that investigation will be helpful to their cause. They therefore have a clear incentive to challenge claims to privilege in relation to those documents. The fact that a number of recent challenges have been successful means that these parties are likely to bring more of them in future and with increasing confidence. We may also see this approach spilling over into more mainstream litigation.
All of this means that investigations and factual enquiries being carried out today, whether purely for internal purposes or in the context of criminal or regulatory investigations, must be structured and conducted with these most recent judicial lessons in mind.
Legal advice privilege
Under English law, two categories of legal professional privilege are available: legal advice privilege and litigation privilege. Legal advice privilege attaches to confidential communications between a client and its lawyers, acting in their professional capacity, in connection with the provision of legal advice.
A number of aspects of the test for legal advice privilege have received recent attention in the first instance courts and the overarching approach of High Court judges has been to apply the test narrowly:
- Narrow definition of “client”: Legal advice privilege can only attach to communications between a lawyer and those individuals within a client entity authorised to obtain legal advice on that entity’s behalf (the true client). In The RBS Rights Issue Litigation, (and even more recently in a case involving a company called ENRC, discussed below) this narrow definition was applied to deny privilege claims over lawyers’ notes of interviews with client employees on the basis that the individuals in question were not the true client. This was so even though the interviews were undertaken with the authority of the true client and to enable the true client to seek or receive legal advice. The decision follows the much criticised 2003 English Court of Appeal decision in Three Rivers, which has not been followed in Australia, Singapore and Hong Kong. Permission to appeal on a leap-frog basis to the UK Supreme Court was granted but the parties settled the case before it was heard.
- Limited protection for lawyers’ working papers: No protection is extended to lawyers’ notes of interviews as so-called “lawyers’ working papers” where they simply record factual information provided by individuals other than the true client. These notes will only benefit from protection if they betray the trend of the legal advice. Evidentially this is a high hurdle to overcome. Therefore, a note of what a solicitor is told by a client employee (other than the true client) is not, without more, a privileged document.
- Strong protection remains for communications with the true client: Protection of communications between a lawyer and the true client remains intact, even if the subject matter is non privileged information. In Property Alliance Ltd v Royal Bank of Scotland Plc, factual non-privileged information communicated by a lawyer to his client to enable the client to take a fully informed decision as to what to do and what further advice to obtain, was considered privileged. On the facts, this included memoranda drafted by lawyers to update and inform the steering group within the bank charged with overseeing a series of regulatory investigations and related litigation on the progress of those investigations and claims. It also included summary minutes of discussions within the steering group. This protection would not, however, extend to factual material prepared by a third party that is simply sent by the lawyer to the client.
- Privilege position under foreign law irrelevant: When questions of privilege arise before the English court, it is English law on privilege that is determinative and not foreign law. So, where interview notes are taken by U.S. lawyers in circumstances where they would properly be considered privileged under U.S. law, the fact that they are privileged under U.S. law is irrelevant. The relevant question for the English court is whether those documents are within the control of a party to the English proceedings and would be considered privileged as a matter of English law.
Litigation privilege protects communications between clients or their lawyers and third parties for the purpose of obtaining information or advice in connection with existing or contemplated litigation when, at the time of the communication in question:
- litigation is in progress or reasonably in contemplation;
- the communications are made with the sole or dominant purpose of conducting that anticipated litigation; and
- the litigation is adversarial, not investigative or inquisitorial.
The English court has recently considered a claim to litigation privilege in proceedings between the UK Serious Fraud Office (SFO) and a company called ENRC in the context of a criminal investigation by the SFO. The key lessons from that decision are that:
- A criminal investigation by the SFO is not adversarial litigation for privilege purposes: An SFO investigation is a preliminary step taken, and generally completed, before any decision to prosecute is taken. In practice this means that a claim to privilege can only be made out where a prosecution is in reasonable contemplation. Prosecution only becomes a real prospect once it is discovered that there is some truth in the accusations or at least some material to support the underlying allegations. This is problematic from the perspective of companies seeking to claim litigation privilege, who are generally undertaking such investigations in order to assess these very factors.
- Documents created in an internal investigation may not meet the dominant purpose test: The primary purpose of the internal investigation in the ENRC case was found to be to establish if there was any truth to whistleblower allegations and prepare for a potential future SFO investigation. In that context, notes of interviews with employees were found not to meet the dominant purpose test. It may be possible for documents created in a fact-finding investigation to have a dual purpose (eg avoidance of litigation plus, if prosecuted, mounting a defence). However, it must be shown that the purpose for which the documents were generated in the internal investigation relates to the conduct of future criminal or civil proceedings. In addition, where a party produces documents to share with an adversary (such as the SFO), litigation privilege cannot apply.
- Avoiding litigation not sufficient: Litigation privilege does not extend to documents created in order to obtain legal advice as to how to best avoid contemplated litigation, or a future regulatory or criminal investigation (although it can cover communications created with a view to settling litigation).
These decisions do not mean that parties are now unable to obtain legal advice in the context of an internal investigation. Communications between a lawyer and a true client for the purposes of legal advice continue to be protected – even if those communications cover factual matters.
However, it will be difficult for parties to claim that legal advice privilege protects records of factual enquiries necessary to allow that advice to be given, as those facts will often be known only to individuals other than the true client.
This is clearly an issue for investigations into potential regulatory breaches or criminal wrongdoing, but it can also be problematic for other fact gathering exercises that could potentially become contentious. The case of Astex Therapeutics Limited v Astrazeneca AB is a good example in the life sciences sphere (notes taken by lawyers of interviews with Astrazenaca employees to assess whether certain chemicals fell within the scope of a Collaboration Agreement were found not to be protected by legal advice privilege). Similar issues could arise in the financial services context when assessing performance of ongoing obligations under a contract, for example in relation to the carrying out of valuations.
It will also be difficult in many cases for parties to meet the test for litigation privilege in the context of an investigation into potential criminal conduct.
The procedures and decision making processes in regulatory investigations (eg UK Financial Conduct Authority (FCA) or UK Competition and Markets Authority investigations) are not the same as those in SFO investigations. The rationale for refusing a claim to privilege in an SFO context does not necessarily apply in the context of a regulatory investigation. For example, the fact that the FCA has a lower burden of proof to meet in order to make findings against an entity and the broad nature of the FCA Principles for Businesses may be distinguishing factors. Ultimately, each case will need to be considered on its facts to determine whether a claim to privilege might succeed, including (a) when the regulatory process in question can be said to become adversarial and (b) when that adversarial process can be said to have been in contemplation in that particular case.
Parties considering whether and how to conduct any internal investigation in the meantime will need to think very carefully about their strategy and approach.