Written by Shail Patel of 4 New Square

The Chancellor's decision in Bilta v RBS [2017] EWHC 3535 sits uneasily with that of Andrews J in SFO v ENRC [2017] EWHC 1017, on a point which is short, but of critical importance to those acting for the subjects of enforcement action and investigations.

The Issue

Internal investigations create documents. Civil claims lead to an obligation to disclose documents. The events triggering internal investigations can often wind up, many years later, giving rise to litigation.

The question of when documents created in internal investigations can be withheld on grounds of litigation privilege has long been a battleground between parties in commercial disputes.

A novel distinction: Is the dominant purpose to conduct, or to avoid, litigation?

Limb 2 of the the three limb test for litigation privilege in Three Rivers v Bank of England (No 6) [2005] 1 AC 610 requires that the documents "must have been made for the sole or dominant purpose of conducting litigation".

Limb 1 requires litigation to have been in reasonable contemplation, and limb 3 that the litigation is adversarial, and not investigative or inquisitorial. However the tension between the two cases under consideration really centres on limb 2 .

SFO v ENRC

In SFO v ENRC the defendant asserted privilege in notes of interviews with employees. The internal investigation followed a whistle-blower report into alleged corruption and financial wrongdoing. Andrews J held that an SFO criminal investigation was not in reasonable contemplation on the facts, and so that claim to litigation privilege failed.

However if she was wrong about that Andrews J held:-

"However, I reject ENRC's submission that by parity of reasoning, litigation privilege extends to third party documents created in order to obtain legal advice as to how best to avoid contemplated litigation (even if that entails seeking to settle the dispute before proceedings are issued). There is no authority cited in support of that proposition, and it self-evidently contradicts the underlying rationale for the privilege. Equipping yourself with evidence to enable you to conduct your defence free from the risk that your opponent will discover how you are preparing yourself, and to decide what evidence you are planning to call if the case goes to court, and what tactics to employ, is something entirely different from equipping yourself with evidence that you hope may enable you (or your legal advisers) to persuade him not to commence proceedings against you in the first place."

This passage makes unwelcome reading for companies and firms facing a potential investigation or enforcement action. The notion that seeking to dissuade a regulator from bringing enforcement proceedings is fundamentally different to defending those proceedings is not at all easy to grasp. It might depend on a quirk of timing. It might depend on the merits of the case and the prospects of deflecting it entirely. It will put the precise trigger for the internal investigation under the spotlight; for instance, was it whistle-blowing, a letter from the FCA, or an enforcement notice? What difference does it make?

Bilta v RBS

In Bilta the internal investigation was prompted by correspondence from HMRC alleging that RBS had participated in a tax fraud. The claimant (Bilta) in later fraud litigation against the bank sought disclosure of investigation documents, including transcripts of interviews.

Unsurprisingly Bilta argued that the purpose of RBS' investigation and the documents produced was (amongst other things) to avoid, rather than defend. litigation with HMRC. Thus, per ENRC decision, no privilege should attach.

Chanceller Vos was keen to determine the issue on the facts. He found that the HMRC letter was a "watershed moment" and was akin to a Letter of Claim. It was also highly likely, on the facts, that a tax assessment would follow. An investigation carried out against that backdrop was for the dominant purpose of litigation.

What about the distinction of Andrews J in ENRC? The Chancellor had two answers.

First, there is an unmistakable suggestion that it is simply incorrect:-

I think, there is something of a tension between Andrews J's decision and the decision of the Court of Appeal in  Highgrade, a case which does not appear to have been directly cited to her.

In Re Highgrade Traders [1984] BCLC 151 the CA held that a document could be prepared in contemplation of litigation even if one purpose was to enable a party to receive advice on whether to resist the claim. However Highgrade is not squarely in point, and does not deal expressly with the key "defend/dissuade" distinction made in ENRC.

Second the Chancellor found that Andrews J's distinction did not help Bilta on the facts:-

Andrews J's dicta concerning the situation where a party is mounting an investigation in order to settle a dispute or to persuade the opposing party not to initiate a claim has given me pause for thought but, ultimately, I do not think that that was the commercial reality of the present position.

The Future

By both distinguishing and hinting at the error in the "defend/dissuade" distinction, Bilta v RBS puts wind in the sails of both claimants and defendants. Claimants will argue that distinction remains good law and on the right facts, claims to privilege must fail. Defendants will argue that the distinction is wrong in principle and in any event will rarely apply on the facts.

This is an unhappy place for those representing firms and companies who are instigating internal investigations. The highest care will be needed to maximise the prospects of maintaining privilege later on; the early instruction of litigation counsel, clear procedures for distribution, use and storage of documentation, a clear audit trail evidencing the purpose for the steps taken, and so on. Representatives must also of course bear in mind the complex and different requirements for maintaining legal advice privilege, as opposed to litigation privilege.

ENRC is on its way to the Court of Appeal in July 2018, but there can be no safe assumptions about what will result, if anything. Leave was refused by the Chancellor in Bilta, but again it is early days. Advisers will need to keep their collective ears to the ground.