Privilege - when will a regulator's powers override legal professional privilege?

8 minute read
21 February 2020

In the latest in a string of important recent decisions on legal professional privilege ("LPP"), the Court of Appeal has considered the scope of LPP in the context of statutory regulatory investigations. We look at the decision in Sports Direct International Plc The Financial Reporting Council.

Background to the case

The FRC is a statutory regulator responsible for the public oversight of statutory auditors. Under the Statutory Auditors and Third Country Auditors Regulations 2016 ("SATCAR") it is empowered to inspect and conduct investigations into statutory auditors and audit work. Where the FRC investigates a statutory auditor or audit work, it can give a notice requiring certain persons to provide information relating to the statutory audit of any public interest entity. Those persons include anyone involved in the audit firm or in the audited entity. Crucially for this case, SATCAR provides that such a notice "does not require a person to provide any information… which the person would be entitled to refuse to provide or produce in any proceedings in the High Court on the grounds of [LPP]".

The FRC launched an investigation into the auditors of Sports Direct International Plc ("Sports Direct"), in particular relating to their audit of the financial statements of Sports Direct and its subsidiaries for 2015 / 2016. The FRC served notice on Sports Direct requiring it to disclose certain emails and attachments in Sports Direct's possession relating to the audit. Sports Direct disclosed about 2000 responsive documents, but withheld 40 more on the grounds that they were emails and attachments sent to or by Sports Direct's legal advisers, and so were covered by LPP.

The key question for the court was whether, despite the apparently clear statutory wording in SATCAR, there was an exception which required Sports Direct nonetheless to disclose documents subject to LPP to the FRC.

Exceptions to LPP

Although the courts have often recognised LPP as "a fundamental human right", they have also recognised limited exceptions to it. First, there is the iniquity exception - LPP cannot be used to shield a communication between lawyer and client made for a criminal purpose. Secondly, the courts have recognised that LPP can be modified or abrogated by legislation. It must however be clear that parliament intended to curtail LPP. As Lord Hoffmann said in R (Morgan Grenfell & Co Ltd) v Special Commissioner of Income Tax and another "[a]n intention to override such rights must be expressly stated or appear by necessary implication". In the Morgan Grenfell case, the House of Lords found that there was nothing (whether express or necessary implication) in the Taxes Management Act 1970 to suggest the Revenue's powers of information gathering overrode LPP. The Privy Council came to a similar decision in B and others v Auckland District Law Society.

In this case though, the FRC argued for a further exception to LPP, relying on an observation made by Lord Hoffmann in the Morgan Grenfell case. In that case, trying to rationalise an earlier judgment in Parry-Jones v The Law Society & Others (in which the court found a solicitor under investigation by his regulator was bound to disclose his client's privileged documents), Lord Hoffmann said:

"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…. 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."

The FRC argued that, even if their investigatory powers in SATCAR did not expressly or impliedly override LPP, the disclosure fell within the further exception suggested by Lord Hoffmann in Morgan Grenfell - disclosure by Sports Direct would not infringe its LPP; (alternatively any such infringement would be merely 'technical'), as the FRC would be bound to treat any such disclosed documents confidentially.

In the High Court, the judge accepted the FRC's argument and ordered Sports Direct to disclose the withheld documents. Sports Direct appealed.

Court of Appeal decision

Is there a "no-infringement" exception to LPP?

After reviewing Morgan Grenfell, Parry-Jones and subsequent cases, the court found:

  • Lord Hoffmann's comments in Morgan Grenfell did not create a further "no-infringement" exception to LPP. The other Lords in that case did not rely on this point, nor has it been expanded in the case law since.
  • Nor is there a lower threshold for overriding LPP where any infringement would be only technical.
  • The task for the court is to see, by looking at the relevant legislation, whether Parliament must have intended the statutory powers to override LPP.
  • In this case the wording of SATCAR precluded any such intention - the FRC's powers did not override LPP and the recipient of a FRC notice is not required to hand over privileged documents, whether the privilege belongs to the auditor or the auditor's client.
  • Although it did not therefore need to decide whether the exceptions would have applied in this case, having heard submissions from the parties on this point fortified it in its conclusion - the difficulty of applying a "no-infringement" exception showed that it was not principled or clear.

LPP in emails and attachments

As in the recent case of CAA v, the Court of Appeal was also asked to consider the approach to assessing LPP in emails and their attachments.

Some of the withheld documents were emails which met the disclosure criteria in the FRC's notice (but were subject to LPP). Some of the attachments to those emails were pre-existing documents which were not, viewed alone, subject to LPP, but also did not themselves respond to the criteria in the FRC's notice. The court was asked to confirm the approach to disclosure in respect of these emails and attachments. It concluded:

  • Pre-existing documents which are not in themselves privileged do not become privileged by being sent to a lawyer - the email to the lawyer may be privileged but the pre-existing attachment is not.
  • Nor is the mere fact that a non-privileged document has been sent to a lawyer for advice (as opposed to the advice given) in itself privileged information.
  • It was overly technical to disclose the attachments only if they themselves met the FRC criteria. If the email met the criteria, then its attachments should be disclosed, unless they are themselves privileged.

The court noted that this point arose because the FRC notice required disclosure of "emails and attachments". In civil litigation the disclosure obligation applies to standalone documents and so emails and attachments are considered separately.

Key Points

  • A regulator's investigatory powers will not override LPP unless it is clear that was Parliament's intention.
  • In the absence of such an intention, a regulator cannot compel disclosure of privileged documents either from the party under investigation or from third parties.
  • There is no further exception where LPP would not be infringed or any infringement would be only technical.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.