A High Court Master has found that documents held by a firm of solicitors on behalf of a former client were not protected by legal professional privilege, as there was a strong prima facie case that the firm had been instructed for the purpose of furthering the client’s fraudulent investment scheme: Addlesee v Dentons Europe LLP  EWHC 238 (Ch).
It is well established that privilege does not attach to communications between lawyer and client if the lawyer is instructed for the purpose of furthering crime, fraud or iniquity. This is referred to as the fraud exception, or sometimes the iniquity principle. It is also well established that, to apply the fraud exception, the alleged fraud need not be established on the balance of probabilities. What is required is sufficient prima facie evidence.
The present decision is of interest for the Master’s discussion of the standard of evidence that applies where the existence of fraud is in issue in the underlying claim, and in particular whether the test is a “strong” or a “very strong” prima facie case. The Master’s conclusion, having analysed previous authorities, is that all the circumstances of the case must be taken into account in determining the appropriate standard, bearing in mind the principle that the court will be very slow to deprive a defendant of the protection of privilege on an interim application.
So while, on the facts of this case, the Master concluded that the appropriate threshold was a “strong” (rather than “very strong”) prima facie case, the decision leaves open the possibility of the higher standard being applicable in other circumstances. The relevant factors here included that the evidence before the Master regarding fraud was likely to be substantially identical to the evidence that would be before the trial judge, that the defendant did not deny the fraud but rather did not admit it, and that the relevant fraud was that of the client company (which had been dissolved) rather than the lawyer.
The claimants are about 240 investors in an investment scheme operated by Anabus Holdings Limited, a Cypriot company which has since been dissolved. The scheme involved the investors being invited to invest in gold dust.
The defendant, which previously operated as Salans LLP, acted for Anabus during the life of the scheme. The claimants say the scheme was fraudulent and that they lost (collectively) over €6.5 million. They allege that the defendant recklessly and/or negligently enabled the scheme and induced the claimants to invest by endorsing it as Anabus’s legal adviser. The defendant does not admit that the scheme was fraudulent, but does not deny any of the primary facts as to the scheme alleged by the claimants.
In a previous decision in this case, the Court of Appeal held that documents in the defendant’s client files relating to Anabus did not cease to be covered by any applicable privilege as a result of the company’s dissolution (see our blog post on that decision).
In the present application, the claimants sought an order that such documents were not privileged because the defendant was instructed for the purpose of furthering a fraud.
The court (Master Clark) held that the fraud exception applied and therefore the documents were not privileged.
The legal principles
The Master noted that there was a substantial measure of agreement as to the applicable legal principles. These included the following:
- Privilege does not attach to communications between lawyer and client if the lawyer is instructed for the purpose of furthering crime, fraud or iniquity (“the fraud exception”).
- Instructions given for such a purpose fall outside the ordinary scope of a lawyer/client relationship, and are an abuse of that relationship.
- The fraud exception applies whether or not the solicitor is aware of the wrongful purpose, and also where the client is unaware of the wrongful purpose if the client is being used as an unwitting tool to further a third party’s fraud.
- For the court to apply the fraud exception, it is not necessary for the alleged wrongdoing to be established on the balance of probabilities. What is required is sufficient prima facie evidence of the wrongdoing.
- Where the allegation of wrongdoing is not in issue in the claim, a lower quality of prima facie evidence may be sufficient.
The standard of proof
The claimants argued that, because the defendant did not positively deny that the scheme was fraudulent, the standard of proof required to establish the fraud exception was merely a prima facie case, rather than a “strong” or “very strong” prima facie case. The Master rejected that submission. As the defendant had not admitted that the scheme was fraudulent, the claimants would be required to prove fraud. The standard of proof was therefore the higher one applicable where fraud is in issue in the claim.
As for whether the threshold was a “strong” or “very strong” prima facie case, the defendant relied on the following passage from Kuwait Airways Corpn v Iraqi Airways Co (No 6)  EWCA Civ 286 in arguing in favour of “very strong”:
“the fraud exception …can only be used in cases in which the issue of fraud is one of the issues in the action where there is a strong (I would myself use the words “very strong”) prima facie case of fraud…”
It submitted that there was a clear and strong policy in favour of maintaining privilege, and therefore a need for considerable care in determining whether the fraud exception applied particularly given the interim nature of the application.
The Master concluded as follows:
- The distinction between a strong and very strong prima facie case is not readily discernible in their practical application.
- On the facts of Kuwait Airways, the higher test was satisfied so the passage quoted above was obiter, albeit of a very persuasive kind.
- In Dubai Aluminium Co Ltd v Al-Alawi  1 WLR 1964, the test applied was “strong prima facie case”, and that decision was approved in Kuwait Airways.
- Kuwait Airways was not inconsistent with the analysis of Vinelott J in Derby v Weldon  1 WLR 1156 that no clear line can be drawn and that: “All that can be said is that all the circumstances must be taken into account and that the court will be very slow to deprive a defendant of the important protection of legal professional privilege on an interlocutory application.”
Taking into account all the circumstances of this case, the Master concluded that the standard of proof to be satisfied in this case was a strong prima facie case. The relevant circumstances included that: although the application was made at the interim stage, the material before the Master as to the fraudulent nature of the scheme was substantially identical to the material that would be before the trial judge; the defendant did not deny that the scheme was fraudulent, though it did not admit it; the relevant fraud was not that of the defendant. It was also relevant that Anabus had been dissolved and so the notion of the invasion of its rights had a degree of artificiality.
Application to the facts
Following a review of the evidence before the court, the Master concluded that the claimants had shown a strong prima facie case that the scheme was fraudulent. In fact she considered that a very strong and compelling case had been set out.
The Master was also satisfied that the claimants had a strong prima facie case (and again a very strong and compelling case) that the defendant was instructed for the purpose of furthering the scheme.
Accordingly, the fraud exception applied to documents held by the defendant for Anabus which would otherwise have been privileged.