Introducing a healthy dose of common sense, the Hong Kong courts have rejected the English Court of Appeal's restrictive approach to legal advice privilege in Three Rivers (No5) and adopted a broader and more practical "dominant purpose" test. 

This development should be welcomed by GCs and their in-house legal teams working with Hong Kong law, but will be envied by those who continue to struggle with the uncertain and impractical situation in England and Wales. The Hong Kong decision is also a good reminder of the fact that in-house counsel must be careful when engaging in cross-border work to understand how privilege may vary as a matter of both law and practice between jurisdictions.

Legal advice privilege is, of course, fundamentally important to in-house counsel who carry a current practising certificate as it provides the protection to their clients of being able to seek and to receive legal advice without risk of sensitive material having to be disclosed in legal proceedings or be provided to regulators.  This common law extension of the concept of litigation privilege stemmed from the recognition that proper legal advice is only possible if there is full and open communication between client and lawyer.  It is now very much recognised as a fundamental human right (in Hong Kong it is entrenched in the Basic Law).  

Broadly, legal advice privilege covers: (i) confidential communications; (ii) which pass between a client and its lawyer (including in-house lawyers in England and Wales, Hong Kong and certain other, principally common law, jurisdictions); and (iii) which have come into existence for the purpose of giving or receiving legal advice about what should sensibly be done in a relevant legal context. 

So far, so straightforward.  However, in 2003 the English Court of Appeal (in Three Rivers(No.5)) introduced significant uncertainty around the scope of the "client" for these purposes.  The court took a restrictive view of who, from within a client organisation, constitutes the “client” whose communications can benefit from legal advice privilege. The court held that, on the specific facts of that case, the “client” did not encompass all employees of an organisation (in this particular  case, the Bank of England), but was limited to a particular group of just three individuals who had specific responsibility for coordinating communications with the Bank of England’s external lawyers. 

This gives rise to the very real concern that, under English law, not all employees of a company or organisation  will be considered part of the “client”.   This approach has been the subject of much criticism, but, unfortunately, was not addressed directly by the House of Lords, nor has there been a subsequent English decision on the point, leading to ongoing uncertainty.  

As a consequence, corporate clients, in-house counsel and external lawyers often tie themselves in knots when trying to obtain the benefit of legal advice privilege for their corporate clients, particularly in relation to how best to identify the "client".  This exercise often relies more on form than substance and is undertaken with only limited confidence that such measures will be wholly effective. That position is far from satisfactory. 

In any event, whatever the correct definition of "client" under English law, legal advice privilege is currently only available in relation to communications between a lawyer and the client.  This means that confidential communications between non-lawyer employees of an organisation, or an employee and a third party, will not be protected by legal advice privilege, even if they relate to the very matters upon which legal advice is being sought.   This contrasts with the scenario where such communications will be protected (by litigation privilege) where litigation is in reasonable prospect and are created for the dominant purpose of obtaining advice or evidence.   

All of this means that this is an area riddled with potential practical issues which GCs are required to navigate –especially when a commercial matter becomes litigious.

Take, for example, an internal investigation, where external lawyers are instructed to examine what went wrong in a sensitive matter so they can advise the Board on any action that should sensibly be taken.   The lawyers obviously need to understand the factual position, which normally can only be obtained from the relevant employees.  But there exists a risk that some or all of those employees will not be considered the "client" and the communications between them and the lawyers (including, for example, the content of witness interviews) will not be privileged.  To complicate this scenario, what if one of the organisation's employees decides to enlist the help of another employee in collating relevant information to provide to the lawyers by sending a lengthy email outlining all of the issues to explain what is required?  That email will not be covered by legal advice privilege.  

The challenge that in-house lawyers have to manage is the real risk that highly sensitive and potentially damaging material is created which would be disclosable to the other side or to a regulator if litigation or regulatory proceedings were to follow (and litigation privilege was not available).

Where the English courts giveth uncertainty, the Hong Kong courts have recently taketh it away – at least in Hong Kong. In 2011, it was the Hong Kong Court of First Instance's judgment in Citic Pacific Limited v Secretary for Justice and Commissioner of Police that was the first (and only) common law decision to endorse the English courts' restrictive definition of "client".  The Hong Kong Court of Appeal has made amends on appeal, not only by rejecting the narrow approach to the meaning of the "client" (which is now simply the corporate), but also by deciding that the proper test to establish the parameters of legal advice privilege is a "dominant purpose" test. 

This is no doubt a welcome move for in-house lawyers operating in the Asian financial centre. Under this test, legal advice privilege will apply to confidential communications created for the sole or dominant purpose of seeking legal advice. In determining this, the focus should be on the substance of the communication and the context in which it was created.  Crucially, this means that communications between employees may attract privilege if they meet the test.   

For the in-house lawyer, this is a practical and pragmatic approach that better reflects the realities of the provision of legal advice in a corporate context.  In particular, it recognises that the right to confidential legal advice is severely undermined if an organisation is limited in gathering the necessary information and materials required for its lawyers to be in a position to provide that advice.

Like most things, the approach is not without potential challenges; a "dominant purpose" can be difficult to evidence (as we have seen in the context of litigation privilege). It also raises questions as to why communications between the client and / or lawyer and third parties are not protected in the context of the new dominant purpose test (leaving aside litigation privilege).   The Hong Kong Court of Appeal specifically stated that this was a matter for consideration on another occasion, but it does leave the door ajar on the point. 

It also acts as a reminder that GCs must tread carefully when dealing with cross-border transactions, investigations and litigation.  Until now, one could very much treat England and Hong Kong as the same for the purposes of privilege.  That is no longer the case.  GCs should be aware of the similarities and differences between the major jurisdictions and, where possible, use them to their advantage. 

Only time will tell if England follows the lead of Hong Kong (and other major common law jurisdictions) in this area.   Certainly, the Hong Court of Appeal's decision adds substantial weight to the view that a review is required to lift the clouds of uncertainty surrounding this area of English law.