Although a fundamental human right, the courts will override an innocent party’s legal professional privilege where there is a strong prima facie case of wrongdoing by another party to the relevant transaction.

In The Owners of the Kamal XXVI v The Owners of the Ariela insurers found themselves in this position.  

Background

The owner of the dredger Kamal XXVI (Kamal) claimed against the owner of the Ariela (Ariela) following a collision between their vessels. The damage alleged to have been sustained by the Kamal was held not to have been caused by contact with the Ariela and Burton J concluded that the claim was fraudulent from the outset.

Ariela incurred costs of more than US$1.25 million defending the fraudulent claim and these had not been paid by Kamal. Arelia sought an order under s51(3) of the Senior Courts Act 1981 that the costs should be paid by the underwriters who had indemnified Kamal and exercised subrogation rights in bringing the claim. Ariela argued that the underwriters failed to investigate the claim properly and were culpable in not having discovered at the outset that it was fraudulent.

Non-party costs orders

It was common ground that the court had jurisdiction to make an order for costs against a non-party if it was just and equitable to do so, following TGA Chapman Ltd v Christopher. The issues therefore were whether underwriters had:  

  • determined that the claim would be fought;
  • taken over the conduct of the litigation; and
  • fought the claim predominantly in their own interests.

To determine the above, Ariela sought disclosure by the underwriters of documents relating to the proceedings, including privileged communications with the latter’s solicitors, Ince & Co.

The judgment

The court held that it was at least arguable that whether underwriters could and should have discovered the fraud (and if so when) was a relevant factor in determining whether it was just and equitable to make a non-party costs order. It was therefore appropriate to order disclosure, even though it would increase the costs of determining the s51 application.

The fraud exception

As for Ince & Co’s reports to the underwriters, the fact that they had been referred to in the statements of case did not mean that privilege over them had been waived. However, in this case privilege had been lost because of the fraud exception. The fact that neither underwriters nor solicitors were implicated in the fraud was irrelevant – they had been used as the mechanism for achieving the client’s fraud and this was sufficient to preclude them from asserting both legal advice and litigation privilege.

A similar approach to privilege has been taken in two other cases this year. In Allied Surveyors plc v Newcastle Home Loans (in which Mills & Reeve acted for one of two defendant solicitors) the judge held that the fact that there was a strong prima facie case of fraud against some of the participants to a conspiracy to defraud mortgage lenders was enough to override the innocent borrowers’ privilege.

In BBGP Managing General Partner Ltd v Babcock & Brown Global Partners the judge held that fraud is used in a relatively wide sense in this context. Reviewing the case law, he concluded that what is required is that the wrongdoer has gone beyond conduct which merely amounts to a civil wrong – he has indulged in sharp practice, something of an underhand nature where the circumstances require good faith. It is not necessary for the underhand act to have been done to gain a personal advantage.