When will litigation privilege protect internal investigations?

12 minute read
29 March 2018

We look at two recent cases considering the principles of litigation privilege and when it will apply to protect documents from inspection by an opponent or investigator in litigation, inquests and criminal proceedings.

What is Litigation Privilege?

Litigation privilege protects the documents of a party to litigation such that they can be withheld from inspection by an opponent in that litigation.

For litigation privilege to apply, a document must be a communication between a lawyer and the client, or between either of them and a third party, and it will attract litigation privilege only if it satisfies three conditions:

  1. Litigation must be in progress or in contemplation;
  2. The communication must have been made for the sole or dominant purpose of conducting that litigation; and
  3. The litigation must be adversarial, not investigative or inquisitorial.

This test is often engaged in the context of documents which arise as a result of internal investigations by a company which is gearing up for actual or expected litigation. Here we look at two recent cases which considered different limbs of this test in that context.

Case One

The first case, Bilta (UK) Ltd (in Liquidation) & Ors v Royal Bank Of Scotland Plc & Anor [2017] EWHC 3535 (Ch) related to alleged "missing trader intra-community" fraud involving the trade in carbon credits. In such frauds, companies fail to account to HMRC for VAT, and instead pay their VAT receipts to third parties, before entering liquidation. The claimant companies (acting through their liquidators) alleged that in 2009 the companies' directors had engaged in such fraud, using the defendant, RBS to execute the relevant trades. The liquidators said that by executing these trades on behalf of the companies in liquidation, RBS had wilfully shut its eyes to what the liquidators said were obvious frauds by the company directors. The claimants sought compensation from RBS for dishonest assistance and alleged fraudulent trading.

Documents sought by the claimants

In 2009, HMRC became aware of the scale of missing trader fraud in carbon credit trading and began to investigate, including launching an investigation into RBS, which had significant involvement in the market. This prompted RBS to instruct solicitors to conduct its own internal investigation, which ultimately resulted in it providing a report to HMRC.

In support of the claim against RBS, the claimants sought disclosure by RBS of documents which it had created during the course of that internal investigation. The documents requested by the claimants included transcripts of interviews with key RBS employees and ex-employees involved in carbon credit trading.

RBS resisted disclosure in the Bilta litigation on the basis that the requested documents were subject to litigation privilege.

Were the documents created for the sole or dominant purpose of conducting litigation?

The documents were created at a time when HMRC had determined it had sufficient grounds to deny RBS nearly £90m of input VAT. The parties agreed that they had therefore been created at a time when litigation was in contemplation, so the first limb of the test for litigation privilege was satisfied.

The key question for the court was therefore whether RBS had also established that the requested documents were made for the sole or dominant purpose of conducting that litigation, such that they could attract litigation privilege.

In the High Court, Sir Geoffrey Vos concluded that:

"…the documents and interviews were brought into being by RBS and its solicitors for the sole or at least dominant purpose of expected litigation following an expected assessment in respect of overclaimed input VAT. The documents were, therefore, covered by litigation privilege."

The following points led him to that conclusion:

  • HMRC had notified RBS that it had grounds to deny input VAT. In response, RBS instructed external solicitors – that suggested that RBS was 'gearing up' to defend a claim.
  • The fact that RBS co-operated with HMRC's investigations did not preclude its own internal investigation being conducted for the dominant purpose of litigation.
  • The report prepared by RBS's external solicitors and provided to HMRC expressly stated it did not waive privilege in the underlying material (e.g. the content of employee interviews).
  • Although RBS may have been seeking to persuade HMRC not to make an assessment for VAT, such attempts to dissuade a party from litigation or to settle a claim are subsidiary to the dominant purpose of litigation. Fending off a claim is part of a continuum forming the road to litigation, and it cannot be considered a separate purpose.

RBS did not therefore have to disclose the requested documents from its internal investigations.

Case two

The second case, Health And Safety Executive, R. (On the application of) v Jukes [2018] EWCA Crim 176, arose in the context of criminal proceedings for failing to take reasonable care of employees under s.7 of the Health and Safety at Work etc Act 1974. The appellant had been convicted of the offence in the Crown Court, in relation to an incident where his colleague had been fatally injured in a baling machine used to compact paper and cardboard waste. He appealed against his conviction on the basis that the prosecution had relied upon a witness statement which he said was subject to litigation privilege and therefore should not have been admitted by the trial judge in evidence.

The document concerned

When first interviewed by the police and Health & Safety Executive about the incident, the appellant had given a prepared statement in which he denied being responsible for health and safety at the company. During the course of the investigation however, an earlier witness statement signed by the appellant came to light, in which he had said "…I took over formal responsibility for health and safety."

The appellant contended that this earlier witness statement had been provided by him to the company's solicitors, and so was subject to litigation privilege and inadmissible as evidence.

Was adversarial litigation in contemplation?

Giving judgment in the Court of Appeal, Lord Justice Flaux upheld the trial judge's finding that the earlier statement was not privileged. The key question in this case was whether litigation was in contemplation at the time the statement was made. Flaux LJ found:

  • At the time the appellant gave the earlier statement, HSE was still investigating the incident, and had not taken a decision to prosecute;
  • Such an investigation is not 'adversarial litigation';
  • "The reasonable contemplation of a criminal investigation does not necessarily equate to the reasonable contemplation of a prosecution"; and
  • Litigation was not therefore in contemplation so as to protect the witness statement from use.

What if the document had been privileged?

Further, the Court of Appeal found that, even had litigation been in contemplation such that the statement was potentially subject to litigation privilege:

  • Any privilege wasn't the appellant's to claim. The solicitors the appellant gave his statement to acted for the company and its managing director; they did not act for the appellant. Any privilege therefore belonged to the company and its managing director, neither of whom had claimed privilege. As the maker of a statement, the appellant was "at best a potential witness who cannot rely upon… [the company's] privilege for his own benefit".
  • If a privileged document falls into the hands of other party in criminal proceedings, it is admissible, subject to the power of the court to exclude it as unfair evidence under s.78 Police and Criminal Evidence Act 1984, and neither the trial judge nor the Court of Appeal found the admission of this evidence would be unfair to either the prosecution or defence.

Litigation privilege in the context of regulatory investigations

These two cases have both common threads and some interesting contrasts. Both cases were set against the background of an investigation by a government authority, and both referred to the decision last year in Serious Fraud Office v Eurasian Natural Resources Corporation Ltd [2017] EWHC 1017 (QB), in which the High Court granted a declaration that certain categories of documents generated during internal investigations were not privileged against disclosure to the SFO. However, each court treated the ENRC case differently:

  • In the RBS case, the court did not find ENRC of assistance. The court said "although both cases, that is ENRC and this case, involve internal investigations by corporates in the face of scrutiny by government authorities, one cannot simply apply conclusions that were reached on one company's interactions with the Serious Fraud Office in the very different context of another company's interactions with HMRC". The court did not agree with Andrews J's conclusion in ENRC that documents created with the purpose of showing them to an adversary in litigation (so as to prompt settlement discussions) served a different purpose from documents created for the dominant purpose of defending oneself in litigation.
  • In the HSE case meanwhile, the court agreed with Andrews J's assessment in ENRC of when litigation is in contemplation, and how (and why) this assessment can differ between civil and criminal proceedings:

"one critical difference between civil proceedings and a criminal prosecution is that… A person may well have reasonable grounds to believe they are going to be subjected to civil suit at the hands of a disgruntled neighbour… even where there is no properly arguable cause of action…Criminal proceedings, on the other hand, cannot be started unless and until the prosecutor is satisfied that there is a sufficient evidential basis for prosecution… Criminal proceedings cannot be reasonably contemplated unless the prospective defendant knows enough about what the investigation… has unearthed, to appreciate that it is realistic to expect a prosecutor to be satisfied that it has enough material to stand a good chance of securing a conviction…"

The decision in ENRC is itself currently subject to appeal, so it will be interesting to see how these treatments impact on any appeal, in either case, if at all.

Points to remember

While each regulatory investigation will throw up its own particular issues and it may not be appropriate to apply conclusions from one case in another context, we can draw the following points from these cases:

  • Litigation will not generally be in contemplation (such that litigation privilege applies) simply because a regulatory investigation has been commenced; an investigation will not necessarily lead to litigation or a prosecution.
  • Litigation may properly be in a party's contemplation sooner in the case of civil proceedings than criminal proceedings, because a criminal prosecutor needs to meet a certain evidential threshold before bringing a prosecution.
  • If those proceedings are inquisitorial rather than adversarial in nature (for example inquests) then documents prepared for them will not necessarily be protected by litigation privilege.
  • Litigation need not be the sole purpose of a document in order for it to be protected by litigation privilege, just the dominant one.
  • A document may be prepared for the dominant purpose of conducting litigation even if it is also deployed for a subsidiary purpose, e.g. avoiding that litigation, or possibly due to a company policy of investigating all incidents (see for example discussion of this in the context of the fire at the Buncefield Oil Terminal in West London Pipeline and Storage Limited v Total UK Limited).

You may also be interested in our article "When will internal investigations be protected by legal advice privilege?" which considers whether the separate head of legal advice privilege may provide protection in similar circumstances.

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