Court of Appeal overturns first instance decision in SFO v ENRC

While some of the facts of the case are unusual, the decision is of general importance because the previous High Court decision made it difficult for large businesses to investigate allegations of criminal activity on a privileged basis and meant that litigation privilege could only be claimed relatively late in the process.

In particular, the Court of Appeal ([2018] EWCA Civ 2006) rejected the notions that:

• In a criminal context, litigation privilege can only be claimed after a prosecuting authority has decided to bring criminal proceedings, or evidence has been uncovered which renders prosecution likely.
• The fact that a business intends to provide a prosecuting authority with copies of documents created during an internal investigation prevents those documents from being covered by litigation privilege.

Factual background

These issues arose in the context of a Serious Fraud Office (SFO) investigation into allegations that Eurasian Natural Resources Corporation Limited (ENRC) (and its subsidiaries, officers and employees) had committed various acts of fraud, bribery and corruption in Kazakhstan and an unnamed country in Africa. Using its powers to compel the production of documents, the SFO sought to require ENRC to provide it with documents created during the course of ENRC’s own internal investigation into these issues. ENRC refused to provide the documents on the basis that they were covered by legal advice privilege and/or litigation privilege.

The disputed documents included the following:
(i) Notes made by ENRC’s external solicitors of 184 interviews with individuals (including current and former employees).
(ii) A review of ENRC’s accounting records by forensic accounts.

The SFO successfully applied to the High Court for a declaration that the documents were not privileged. ENRC appealed.

Litigation privilege

Litigation privilege applies to communications between a client or its lawyer and a third party made in connection with adversarial litigation, provided that:

• The litigation is in progress or in reasonable prospect.
• The document is created for the sole or dominant purpose of conducting that litigation.

When is litigation in reasonable prospect?

For litigation to be “in reasonable prospect”, it need not be more likely than not. However, it must be a “real likelihood” rather than “mere possibility”. It is not enough that litigation is a “distinct possibility” or that there is a “general apprehension” of litigation.

At first instance, Andrews J took the view that a distinction could be drawn between civil litigation and criminal proceedings. In civil litigation, it is open to a claimant to issue proceedings irrespective of the merits of its case. In the criminal context, on the other hand, there is a two stage first process. First there will be an investigation (which is not adversarial litigation) but, second, a decision will have to be taken as to whether to prosecute (which is adversarial litigation). For a decision to prosecute to be taken, the prosecutor must be satisfied that there is a sufficient evidential basis for prosecution and the public interest is also met.

This prompted Andrews J to conclude that “[c]riminal proceedings cannot be reasonably contemplated unless the prospective defendant knows enough about what the investigation is likely to unearth, or 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 difficulty with this approach is that a corporate entity cannot know whether this test is likely to be satisfied until after it has conducted an investigation, by which stage it will be too late to claim litigation privilege in any documents created during the course of that investigation. The Court of Appeal recognised this conundrum and described the distinction drawn by Andrews J (between civil and criminal proceedings) as “illusory”. The Court of Appeal said that it would be wrong to think that a potential defendant to criminal proceedings is likely to be denied the benefit of litigation privilege when it asks its solicitor to investigate the circumstances of an offence.

The Court of Appeal said that not every “manifestation of concern” by a prosecuting authority would amount to adversarial litigation. Nor will the fact that a party expects to be investigated by a prosecuting authority necessarily mean that a prosecution is also in reasonable prospect. However, where (as happened in this case) a prosecuting authority writes to a potential defendant and specifically draws attention to the “prospect” that it could be prosecuted, and legal advisers are instructed to deal with the situation, there is a “clear ground for contending that criminal prosecution is in reasonable contemplation”.

Were the documents created for the dominant purpose of litigation?

At first instance, Andrews J placed considerable emphasis on the fact that ENRC had repeatedly stated its intention to cooperate with the SFO and to share the findings from its internal investigations with the SFO. This led the judge to conclude that the specific purpose behind the creation of the disputed documents was to share those documents with SFO rather than to use them in litigation against the SFO. In other words, the purpose behind the creation of the documents was to avoid litigation (by persuading the SFO not to prosecute) rather than to conduct litigation.

The Court of Appeal disagreed with this approach, which it described as “an error of law”. It said that the fact that solicitors prepare a document with the ultimate intention of showing it to the opposing party does not automatically mean that the document is not privileged. Documents created for the purpose of heading off, avoiding or settling litigation are as much protected by litigation privilege as documents created for the purpose of resisting litigation. The question of whether there is a subsequent waiver of privilege is a different one.

Legal advice privilege

Legal advice privilege applies to confidential communications passing between lawyer and client in connection with the giving or receiving of legal advice. It covers not only documents containing or requesting legal advice but also other documents which form part of the continuum of communications between lawyer and client as part of the process of giving and receiving legal advice.

The difficulty for corporate entities is that, 15 years ago in Three Rivers (No5), the Court of Appeal held that the definition of “client” does not include all employees of a corporate entity. Communications between an employee of a corporate entity and the lawyers of that corporate entity will only be privileged if the relevant employee was within the group of employees specifically authorised to seek legal advice.  Other employees will be treated as third parties and their communications with their employer’s lawyers will not be privileged. This makes it very difficult for large corporate entities to provide their lawyers with relevant factual information in a way that will attract legal advice privilege.

For this reason, Three Rivers (No5) has been much criticised and the Court of Appeal in this case was asked to hold that it was wrongly decided, or at least to confine it to its own facts. The Court of Appeal rejected that invitation, holding that it was bound by the decision and it should not engage in an “unseemly disagreement” with its predecessor. It said that, if the law is to be revised, this should be done by the Supreme Court. Interestingly, however, the Court of Appeal said that, if it had been entitled to consider matters afresh, it would have reached a different decision from the one reached in Three Rivers (No5). It said that the 19th century cases, on which the decision in Three Rivers (No5) was based, had been superseded by subsequent developments in the law and had been made in a different era when large national and multinational corporations did not exist in the way they do today. 

Furthermore, the Court of Appeal acknowledged that the employees who constitute the “client” in a large corporation (as defined under the current rules) are unlikely to have first-hand knowledge of the facts on which legal advice is sought. This places large corporations at a disadvantage to individuals and small businesses where the people instructing lawyers are much more likely to know the relevant facts. The Court of Appeal clearly did not think that this was justifiable, saying that “whatever the rule is, it should be equally applicable to all clients, whatever their size or reach”. It will be interesting to see if the Supreme Court takes a similar view if this (or a similar) case reaches that stage.

Impact

This case means that, when a business suspects that a criminal offence has occurred, there is greater scope for it to investigate the relevant events and to claim litigation privilege in the fruits of that investigation. This is to be welcomed as the previous rule might be said to have acted as a disincentive to investigate criminal activity.

However, the test for litigation privilege is a fact sensitive one. A party claiming litigation privilege must be able to show that documents were created for the dominant purpose of adversarial litigation and that the litigation was in reasonable prospect. The most reliable and effective way to do this is to produce contemporaneous documentary evidence showing that these tests are satisfied. Therefore, it is important that, before investigating a “problem”, businesses consider the purpose of the investigation, identify any potential litigation and make an appropriate record.

Appointing external lawyers will not of itself prove that litigation was in reasonable prospect, or that documents were created for the dominant purpose of that litigation. However, it will point in that direction.

Given that the scope of legal advice privilege remains narrow, it is even more important that businesses maximise any claims they may have to litigation privilege (in the way described above). Where litigation is not in reasonable prospect, care should be taken to ensure (wherever possible) that sensitive communications with a company’s lawyers are made by the individuals who have been tasked with instructing those lawyers. Communications from other employees should be made in the knowledge that they are likely to be disclosable in any future proceedings.