Posted: 13/12/2018
The spectre of legal professional privilege looms large in many a judgment these days. Following the recent apparition in the Court of Appeal in Director of the Serious Fraud Office v Eurasian Natural Resources Corp Ltd [2018] EWCA Civ 2006, the High Court has found itself haunted by the question of privilege as against a professional adviser’s regulatory body.
In The Financial Reporting Council Ltd v Sports Direct International plc [2018] EWHC 2284 (Ch), the applicant (FRC), a regulatory body responsible for statutory auditors and audit work, applied for an order requiring the respondent (SDIP) to provide certain documents. The FRC was investigating the conduct of SDIP’s auditor, Grant Thornton LLP (GT), and an individual at GT, in relation to GT’s audit of SDIP’s financial statements (the investigation). In a move guaranteed to put the frighteners on, the FRC issued notices under its statutory powers requiring SDIP to produce documents for the investigation. In response, SDIP claimed entitlement to withhold certain documents on grounds of legal advice privilege. And so the macabre dance began.
The main dispute concerned a class of documents comprising emails and email attachments. It was common ground that SDIP would not be required to produce any documents which were indeed subject to privilege which would be infringed by being produced to the FRC. It was also common ground that there were three issues of principle for the High Court to determine:
Although SDIP claimed legal advice privilege over some 19 emails and 21 attachments, a letter by its lawyers indicated that: “… certain of the 21 attachments… are not privileged in and of themselves, but are withheld on the grounds that they form part of a lawyer-client communication.”
The question was therefore whether (as SDIP argued) legal advice privilege can be claimed in respect of a document not privileged in itself, merely because it is attached to an email sent by a client to a lawyer seeking advice, or by a lawyer to a client giving advice. The answer, perhaps unsurprisingly, was an emphatic ‘no’.
In considering SDIP’s arguments, Arnold J observed that (paragraph 31): “Counsel for the respondent did not shrink from submitting that [SDIP’s proposition] would found a valid claim to privilege in respect of a scanned copy of the front page of The Times attached to such an email, at least if the contents of the front page were relevant to the advice sought from or given by the lawyer…” – a proposition which he described, in a bloodcurdling moment for SDIP, as “startling”.
Reviewing the authorities, Arnold J gave particular weight to the orthodox view set out in Thanki’s The Law of Privilege (third edition, paragraph 2.46): “… privilege does not extend to pre-existing documents. The intention to communicate with the lawyer or the client for the purposes of obtaining legal advice must account for the existence of the document. The privilege is not intended to apply to documents which would have been created independently of the relevant lawyer-client communications in any event.”
SDIP was off to a gruesome start.
The second issue highlights the terrors that can be unleashed by a limited waiver of privilege. SDIP accepted that by sending certain emails to GT, it had granted a selective and limited waiver, which, it contended, did not extend beyond GT, or beyond the use of the documents for audit purposes. The FRC contended that any waiver as against GT, even if only for audit purposes, necessarily entailed a waiver as against the FRC as GT’s regulator.
Having reviewed the authorities, Arnold J agreed with SDIP, finding that the regulatory process is indeed distinct from the process of audit, and the two are not in any sense part of a single process. This meant that SDIP’s limited waiver did not extend to the FRC’s regulatory process and accordingly, privilege had not been waived as against the FRC. SDIP thus succeeded on this point, leaving the FRC rather spooked.
Finally, the FRC contended that even if all 40 documents were covered by legal advice privilege, and even if SDIP had not waived privilege in any of those documents by sending them to GT, the production of the documents to the FRC would not infringe SDIP’s privilege in any event. Arnold J described this as “the most important and far-reaching issue raised by the present application, and the most difficult” (paragraph 57), and it certainly proved to be the most trick(-or-treat)y point.
The starting point for considering the issue was that privilege is a fundamental human right, which can only be abrogated or overridden by primary legislation which so provides, either expressly or by necessary implication.
Nonetheless, there is a line of cases in which it has been held that privilege cannot be relied upon as an objection to the production of documents to a regulatory body. The main spine-chiller for proponents of privilege remains the House of Lords decision in R (Morgan Grenfell & Co Ltd) v Special Commissioner of Income Tax [2002] UKHL 21, in which Lord Hoffman dissected earlier authorities in detail.
Lord Hoffman drove the stake into the heart of Parry-Jones v The Law Society [1969] 1 Ch 1 in particular. In this case, the Court of Appeal had held that a solicitor could not withhold documents from inspection by the Law Society (the solicitors’ regulatory body at the time) on grounds that they were subject to his clients’ legal professional privilege. Lord Denning reasoned that the rule relied on by the Law Society was a valid rule which overrode any privilege or confidence which otherwise might subsist between solicitor and client. Lord Diplock’s reasoning was that privilege: “… is irrelevant when one is not concerned with judicial or quasi-judicial proceedings because, strictly speaking, privilege refers to a right to withhold from a court, or a tribunal exercising judicial functions, material which would otherwise be admissible in evidence.”
Arnold J quoted Lord Hoffman at paragraph 73: “One could hardly imagine a stronger Court of Appeal, but… I have difficulty with the reasoning. It is not the case that [legal professional privilege (LPP)] does no more than entitle the client to require his lawyer to withhold privileged documents in judicial or quasi-judicial proceedings, leaving the question of whether he may disclose them on other occasions to the implied duty of confidence. The policy of LPP requires that the client should be secure in the knowledge that protected documents and information will not be disclosed at all. The reasoning in the Parry-Jones case suggests that any statutory obligation to disclose documents will be construed as overriding the duty of confidence which constitutes the client’s only protection. In the present proceedings, however, it is accepted that the client is protected by LPP and that this can be overridden only by primary legislation containing express words or necessary implication… This is not to say that on its facts the Parry-Jones case was wrongly decided. But I think that the true justification for the decision was not that Mr Parry-Jones’s clients had no LPP, or that their LPP had been overridden by the Law Society’s rules, but that the clients’ LPP was not being infringed. The Law Society were not entitled to use information disclosed by the solicitor for any purpose other than the investigation. Otherwise the confidentiality of the clients had to be maintained. In my opinion, this limited disclosure did not breach the clients’ LPP or, to the extent that it technically did, was authorised by the Law Society’s statutory powers.”
It was clear, said Arnold J, that Lord Hoffman had disapproved Diplock LJ’s reasoning for rejecting the privilege claim in Parry-Jones, primarily because there was no infringement of the clients’ legal professional privilege. His alternative reason was, as propounded by Lord Denning, that it was authorised by statute.
Arnold J acknowledged that Lord Hoffman’s statements, that the clients’ LPP was not infringed by limited disclosure to the Law Society or Inland Revenue for the purposes of those investigations, have since been trenchantly criticised (see Hollander’s Documentary Evidence, Phipson on Evidence and Passmore’s Privilege). However, he also observed that Morgan Grenfell has cast its shadow over several subsequent cases (Simms v The Law Society [2005] EWHC 408 (Admin); McE v Prison Service of Northern Ireland [2009] UKHL 15; R (Lumsdon) & ors v Legal Services Board [2014] EWHC 28 (Admin)).
Against that background, Arnold J concluded that there is no authority to the contrary, and Morgan Grenfell must therefore be taken to represent the current state of the law. Although, as SDIP pointed out, Lord Hoffman’s primary reason for supporting the decision in Parry-Jones was obiter, it was nevertheless an important point in his reasoning and had the persuasive force of a unanimous House of Lords. Thus, sending shivers down the spines of regulated entities and their clients, Arnold J ruled that (paragraph 84): “… the production of documents to a regulator by a regulated person solely for the purposes of a confidential investigation by the regulator into the conduct of the regulated person is not an infringement of any legal professional privilege of clients of the regulated person in respect of those documents. That being so, in my judgment the same must be true of the production of documents to the regulator by a client.”
Applying that principle to the present case, it followed that the production of the 40 documents in question to the FRC for the purposes of the investigation would not infringe any legal advice privilege of the SDIP in respect of those documents.
Further, in case he was wrong in concluding that Lord Hoffman’s argument represents the law, and there was in fact a technical infringement of SDIP’s LPP, Arnold J turned to Lord Hoffman’s alternative reason – that the infringement was authorised by statute – and concluded with some hesitation that this was correct: the final nail in SDIP’s coffin.
In addition to the main dispute, Arnold J also ruled on whether SDIP could withhold a separate class of documents, relating to advice previously given to SDIP on its VAT affairs by Deloitte LLP (Deloitte). The issue was a narrow one, centred on whether or not a statutory notice served on SDIP required SDIP to produce a group of ‘potentially responsive’ documents which it had collated.
The relevant notice required the production of: “… any document(s) disclosed to [GT] in 2015, which record the advice Deloitte provided to the respondent in or around 2015 regarding any of the following…”
It was common ground that these words covered both documents provided to GT and documents which were merely shown to GT. The GT employee in question recalled being shown an advice document from Deloitte in the form of a report with a number of pages.
SDIP informed the FRC that although it had collated a number of “potentially responsive” documents, it was unable to identify any of these as the particular document shown to the GT employee. The FRC asked SDIP to provide any documents in the pool fitting the description given by the GT employee, but, dicing with the devil, SDIP refused. Consequently, the FRC contended that SDIP had failed to comply with its statutory notice and sought an order that SDIP produce any documents in the pool fitting the description.
Arnold J agreed with the FRC, identifying the issue as being what it was reasonable for SDIP to do to comply with the statutory notice. He considered it a reasonable response for SDIP to produce any documents in the pool capable of fitting the GT employee’s description. However, SDIP had elected to produce no documents at all, which was clearly an inadequate response.
An order was therefore made for SDIP to produce:
With the exception of its success on the communication issue, the case has so far proved something of a house of horrors for SDIP, with the FRC winning a comprehensive order for disclosure of the documents sought. Nonetheless, SDIP has been granted permission to appeal, so the question of claims of privilege as against a regulator in the course of an investigation of a professional adviser is not yet dead and buried.
There is a significant school of thought that the Morgan Grenfell line of cases is wrong to hold that privilege is not infringed by disclosure to a regulator. Moreover, the decision in FRC does not sit easily with paragraph 1(8)(a) of Schedule 2 to the Statutory Auditors and Third Country Auditors Regulations 2016 (SI 2016/649) (the Regulations under which the FRC’s statutory notices were issued) which provides that a notice does not require a person to provide any information which that person: “… would be entitled to refuse to provide or produce in proceedings in the High Court on the grounds of legal professional privilege.”
It will therefore be interesting to see how the Court of Appeal decides the case and many will be watching closely (albeit possibly from behind the sofa). In the meantime, clients should be aware of the risk in certain circumstances that privileged documents may be disclosable to a regulatory body.
A version of this article was first published in the November / December 2018 edition of the Commercial Litigation Journal.
© 2024 Penningtons Manches Cooper LLP.
All rights reserved.
Website design by Frontmedia / Dynamic Pear
Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority under number 419867.
Return to news headlines 