Corporates undertaking an internal investigation into potential wrongdoing will welcome a recent decision of the English Court of Appeal.

The Court confirmed that, provided all other criteria are met, documents generated during the course of an internal investigation in anticipation of regulatory action or criminal prosecution may be protected by litigation privilege. In other words, the documents may not have to be disclosed to the regulator or prosecutor.

The Court said that it is in the public interest that corporates should be able to investigate allegations of wrongdoing, prior to going to a regulator or prosecutor, without losing the benefit of privilege. Otherwise corporates might not investigate at all for fear of being forced to reveal what their investigations uncovered.

While not binding before the Irish courts, the decision could be of persuasive value should a similar case arise here.

WHAT IS LITIGATION PRIVILEGE? Communications which are privileged do not have to be disclosed to the court or to the other side in legal proceedings.

Litigation privilege applies to:

» confidential communications between a lawyer and a client, or between either of them and a third party;

» where the communication was for the dominant purpose of litigation; and

» at the time the communication was made, the litigation was in being or reasonably contemplated.

Litigation privilege may also apply in the context of regulatory investigations. (Read our previous article here).

WHAT HAPPENED IN SFO V ENRC? The English Court of Appeal decision was delivered in The Director of the Serious Fraud Office v Eurasian Natural Resources Corporation Ltd.

ENRC conducted an investigation into practices at its Kazakhstan subsidiary following allegations by a whistleblower of corruption and financial wrongdoing. The UK Serious Fraud Office (SFO) became aware of these allegations and for a period of two years engaged in a dialogue with ENRC with a view to getting it to self-report. However, the SFO subsequently initiated a criminal investigation and sought various documents generated during ENRC’s internal investigation, including notes made by ENRC’s solicitors of 184 employee interviews. ENRC asserted that these documents were privileged.

WHAT WAS THE DOMINANT PURPOSE OF THESE DOCUMENTS?

For litigation privilege to apply, the communication must have been for the dominant purpose of litigation.Somewhat controversially, the English High Court found that none of ENRC’s documents were created for the dominant purpose of defending anticipated criminal proceedings, but rather to avoid the instigation of criminal proceedings. The High Court said that litigation privilege could not apply in these circumstances.

However, the English Court of Appeal helpfully clarified that legal advice given so as to head off, avoid or even settle reasonably contemplated proceedings is as much protected by litigation privilege as advice given for the purpose of resisting or defending contemplated proceedings.

It said that where there is a clear threat of a criminal investigation, the dominant purpose of the internal investigation is likely to be preventing or dealing with litigation. 

WAS A CRIMINAL INVESTIGATION IN REASONABLE CONTEMPLATION?

It is not enough that documents are created for the dominant purpose of litigation. The party claiming privilege must also be able to show that at the time the documents were created, litigation was in being or was reasonably contemplated.

The English Court of Appeal in ENRC found that while a party anticipating possible prosecution will often need to make further investigations before it can say with certainty that proceedings are likely, that uncertainty does not prevent proceedings being in ‘reasonable contemplation’.

The Court disagreed with the High Court’s finding that litigation privilege cannot attach until either a defendant knows the full details of what is likely to be unearthed or a decision to prosecute has been taken. The fact that a formal investigation has not been commenced is only one part of the factual matrix and is not necessarily determinative.

The party claiming privilege will need to be able to point to contemporaneous evidence to show that it had a regulatory investigation or a criminal investigation in mind at the early stages of its internal investigation. The chronology of events and the structure of the internal investigation may prove crucial here. In the ENRC case, for example, the Court of Appeal had regard to the fact that, as soon as it received the whistleblower allegation, ENRC instructed external counsel to set up and conduct its internal investigation. The Court also referred to emails that showed that ENRC’s general counsel had a “sense” from discussions with the general counsel of other large companies that ENRC was firmly on the SFO’s radar, and that he upgraded ENRC’s dawn raid procedures in anticipation of a raid. This showed that even at the very early stages, ENRC anticipated a possible criminal investigation.

VIEWS ON LEGAL ADVICE PRIVILEGE

The ENRC case also involved a consideration by the Court of Appeal of legal advice privilege.

Legal advice privilege applies to:

» Confidential communications

» Between a lawyer and a client

» For the purposes of giving or receiving legal advice.

A decision of the English Court of Appeal in 2003 in what is known as ‘the Three Rivers case’ found that in a corporate context, the ‘client’ for the purposes of legal advice privilege is not the entire corporate entity but rather only those employees who are specifically authorised to seek and obtain legal advice from the company’s external lawyers. To take an extreme example, this could mean that communications between the CEO of a company and its lawyers, setting out legal advices, may not be privileged unless the CEO has been authorised to deal with the external lawyers.

The decision has been much criticised as being entirely impractical for large corporates.

The Court of Appeal in ENRC added its voice to the criticism, noting that the English position is entirely out of step with the rest of the common law world and that it is unsatisfactory given the cross-border nature of multinational operations. However, the Court said that only the UK Supreme Court could overrule the decision.

For now, Three Rivers remains good law in England. Although never considered in detail in an Irish context, the Irish courts appear to have shown some support for the rationale, but the position here remains unclear. As such, corporates should adopt a cautious approach and should have a clear policy on who within their organisations has authority to seek and obtain legal advice.

KEY TAKEAWAYS

1. Do not assume that litigation privilege will automatically apply to documents prepared for an internal investigation. Each case will depend on its own facts.

2. Before embarking on an internal investigation, seek legal advice as to how best to structure the investigation so that appropriate steps can be taken to maximise privilege.

3. Be prepared for challenges to claims of privilege and be ready to robustly defend these. Keep a written record of any privilege calls made at the different stages of an internal investigation so that you are in a position to show that the dominant purpose of any documents created was for anticipated litigation or regulatory action.