Shearman & Sterling LLP | FinReg | UK Court of Appeal Grants ENRC Permission to Appeal Widely Criticised Privilege Ruling - and Law Society Seeks to Intervene
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  • UK Court of Appeal Grants ENRC Permission to Appeal Widely Criticised Privilege Ruling - and Law Society Seeks to Intervene

    10/11/2017
    On October 11, 2017, Eurasian Natural Resources Corporation was granted permission by the Court of Appeal to appeal the High Court's ruling articulating a significant restriction on the scope of legal professional privilege (in particular, litigation privilege). The Law Society of England & Wales – which has expressed concern about the High Court's ruling and its implication for when and how companies and their employees are protected by privilege – has since announced that it has applied to the Court for permission to intervene in the appeal.

    Although the ENRC case was brought by the UK Serious Fraud Office, the High Court's ruling – and the future decision by the Court of Appeal – will impact upon the way investigations are conducted in the context of (prospective) criminal prosecutions by the UK Financial Conduct Authority as well.

    Background
    Under English law, litigation privilege protects from disclosure confidential communications between lawyers or clients and third parties when, at the time of the communication litigation is in progress or in reasonable contemplation and the communications are made with the sole or dominant purpose of conducting that litigation. The limited protection afforded by English law litigation privilege in the context of investigations was highlighted ENRC, in which the SFO successfully applied to the High Court for a declaration that documents generated during an investigation, by solicitors and forensic accountants, into allegations of criminal activity, were not subject to privilege.

    Why does the English law of privilege matter in other jurisdictions?
    Many scenarios which originate in or involve a different jurisdiction also involve litigation or investigations in England. The English court has made clear that it will apply the English law of privilege to the question of whether a particular document is protected, regardless of the protection afforded by privilege under other connected laws.

    What does "litigation" mean and when is it in reasonable prospect?
    Litigation means an adversarial and not an inquisitorial proceeding. Litigation privilege does not necessarily extend to an internal investigation into mere allegations of criminality. A criminal investigation by the SFO (an investigator and a prosecutor) is not in itself adversarial such as to justify a claim to litigation privilege.

    The issue in ENRC was therefore whether a criminal prosecution was in reasonable prospect. At stake were four categories of documents, including notes of interviews conducted by lawyers retained to investigate allegations and forensic accountants' work product. The test as to whether litigation is in reasonable prospect is an objective one, although the actual state of mind of the party claiming privilege is relevant. In this regard, the Court emphasized that it is the client's and not the lawyers' evidence that is key.

    The Court found no evidence that, at the relevant time, facts were known (as opposed to unverified allegations) that would have made prosecution a reasonable prospect, nor that ENRC had been concerned about such a development: "objectively, criminal proceedings were…at most,…one of a range of hypothetical outcomes from a hypothetical future SFO criminal investigation". The Court recognized that there may be cases where an expectation of an investigation may be equated with a reasonable contemplation of a prosecution but this will depend on the facts. Where the proceedings in question are criminal, the Court noted, these cannot be started "until the prosecutor is satisfied that there is a sufficient evidential basis for prosecution and the public interest test is also met". The Court recognized how different the assessment of "litigation in reasonable prospect" was from a situation where civil litigation is concerned: "…there is no inhibition on the commencement of civil proceedings where there is no foundation for them, other than the prospect of sanctions being imposed after the event. A person may well have reasonable grounds to believe they are going to be subjected to a civil suit at the hands of a disgruntled neighbour, or a commercial competitor, even where there is no properly arguable cause of action, or where the evidence that would support the claim has not yet been gathered."

    Similarly, the thresholds and processes in the context of an FCA investigation are not the same as those to which the SFO was subject.

    A distinction between the conduct and the avoidance of litigation
    Even had the Court found that a criminal prosecution had been in reasonable prospect, it would have dismissed the claim to litigation privilege on the basis that the documents in question were not created "with the dominant purpose of being used in the conduct of" that prosecution. There was no evidence that this – as opposed to a fact finding exercise – was the purpose of the work undertaken by the solicitors involved. The Court also made a distinction between material produced for the purpose of "avoidance" as opposed to the "conduct" of litigation. This distinction is likely to be difficult to apply in many cases.

    Conclusion
    If the Court of Appeal upholds the ruling, lawyers and clients will indeed need to rethink how investigations are conducted, which may require a considerable overhaul of current practice. There are also likely to be further challenges to privilege claims by the SFO (and other regulators) bolstered by the ENRC decision.

    View the High Court decision.

    View the Law Society's announcement.