Alan Sheeley, partner and head of civil fraud and asset recovery, and Emilie Jones, senior practice development lawyer at Pinsent Masons LLP, examine how firms can best protect clients against the risk of unwanted disclosure.
Legal professional privilege is a fundamental human right. It encourages clients to be open and frank to their lawyers and enables lawyers to act in the best interests of clients. It allows the administration of justice to take place.
The law on legal professional privilege is, however, in flux, in light of the SFO v ENRC decision ( EWHC 1017 (QB)) and other recent cases. A particular concern of corporate clients relates to privilege in material produced during internal investigations. Particularly as self-reporting becomes an increasingly important feature of the criminal and regulatory landscape, the ability to conduct an effective internal investigation into issues is a key risk management tool. Lawyers are often – and should remain - clients' first port of call when looking to conduct such an investigation.
An appeal is forthcoming in ENRC. The Law Society is looking to intervene to represent the widely-held concerns of the profession about the erosion of clients' rights to privilege, which are so fundamental to lawyers' ability to act in clients' best interests, the administration of justice and the integrity of the rule of law. It is hoped that the appeal will resolve some of the concerns of lawyers and businesses alike. In the meantime, how can firms best protect clients against the risk of unwanted disclosure, in subsequent civil or criminal proceedings, of documents generated during an internal investigation? And (allied to this) how can firms avoid making damaging errors in relation to privilege? The recent decision in Bilta v RBS  EWHC 3535 (Ch) offers some comfort that the products of a carefully conducted investigation may still be privileged, but caution is needed.
Legal advice privilege
Legal professional privilege takes two forms: legal advice privilege and litigation privilege.
Legal advice privilege attaches to confidential communications between a lawyer and his client for the purpose of giving or receiving legal advice. It is this type of privilege which sets lawyers apart from other professionals, whose advice does not attract such privilege.
Legal advice privilege is, however, of limited application in internal investigations. What a third party often wants is notes of interviews with employees or ex-employees. However, even where interviews are conducted by lawyers, the documents generated may well not be 'advice' and the other participant may not be 'the client', defined in the RBS Rights Issue Litigation  EWHC 3161 (Ch) and SFO v ENRC as comprising only individuals authorised to seek and receive legal advice. The fact that information is gathered by or to be placed before lawyers to enable them to advise is, on the current case law, insufficient.
Given the challenges in claiming legal advice privilege, litigation privilege is sometimes considered the more readily available form of privilege in this context. However, claims to such privilege have failed in a number of recent decisions, underlining the dangers of making assumptions in this area.
As set out in Three Rivers (No.6)  4 All ER 948, for litigation privilege to apply, adversarial litigation must be in progress or 'in reasonable contemplation', and the communications over which privilege is claimed must be made for the sole or dominant purpose of conducting that litigation. Each of these components has come under intense scrutiny in the last 12 months.
One of the key controversies about the ENRC decision is its confirmation that an SFO criminal investigation is not 'adversarial' litigation. ENRC instructed lawyers to carry out an internal investigation following a whistleblower's allegations of 'corruption and financial wrongdoing'. The SFO became involved and in time began a criminal investigation. ENRC contended that interview notes, forensic accountants’ reports and factual updates prepared during its internal investigation were covered by litigation privilege as their dominant purpose was to enable ENRC to obtain advice or evidence in connection with anticipated adversarial criminal litigation. This failed. The court drew a distinction between a criminal investigation, which it held was not adversarial, and a criminal prosecution, which was. There is fertile ground for dispute as to the nature of other types of regulatory investigative and enforcement action.
'In reasonable contemplation'
For litigation to be in reasonable contemplation, it does not need to be more likely than not, but does need to be more than a mere possibility.
In ENRC, given the finding that the SFO investigation was non-adversarial, what had to be in reasonable contemplation was a prosecution. However, the court found that at the time of the documents' creation, a prosecution was only a possibility, and not therefore in 'reasonable contemplation'. It observed that the commencement of criminal proceedings requires a sufficient evidential basis and a public interest test to be met, unlike civil proceedings which can be issued without any basis (albeit they will be liable to be struck out). As a result, criminal proceedings could not be in reasonable contemplation unless the potential defendant 'knows enough about what the investigation is likely to unearth, or has unearthed, to appreciate that it is realistic to expect a prosecutor to be satisfied that it has enough material to stand a good chance of securing a conviction'. In this case, there was 'no evidence that anyone within ENRC actively turned their mind to what the investigators might discover'.
Similarly, in R v Jukes  EWCA Crim 176, a statement made by a company's alleged health and safety manager to the company's lawyers, during internal enquiries about another employee's death, was held disclosable in a later Health and Safety Executive (HSE) prosecution. There was no evidence that, at the time the statement was given, anyone involved had enough knowledge as to what the investigation would unearth to appreciate it was realistic that the HSE would be satisfied of a good chance of securing convictions. To many, this is a surprising finding, given the likelihood that HSE would prosecute in such circumstances.
The 'sole or dominant purpose' test
The final ingredient of litigation privilege is the sole or dominant purpose of the document's creation. Was it created for the deployment in, or for the obtaining of advice on the conduct of, the prosecution or defence of the contemplated (adversarial) litigation?
In ENRC the court considered that the relevant documents were not created for the dominant purpose of conducting a defence to any prosecution. On the evidence, the investigation's initial purpose was fact-finding, to prepare for a possible regulatory investigation, and to address compliance or regulatory issues. ENRC later began to try to ward off SFO intervention. However, the court distinguished between (a) documents created for the purposes of persuading the SFO not to commence a prosecution, and (b) the conduct of a defence to such a prosecution, with the former not being a litigation purpose. Such a distinction may be difficult to draw in practice. It is also at odds with the advice which might otherwise be given to corporates to investigate issues early and explore how to minimise the risk of litigation ensuing. The court also considered the fact that ENRC had indicated it would share the results of its investigation with the SFO. It held that a document created with the intention or understanding that it will be shown to the 'other side' cannot be subject to litigation privilege.
In contrast, in Bilta v RBS, RBS conducted an investigation after receiving a letter from HMRC alleging that RBS had participated in transactions connected with fraud and asserting that HMRC had grounds to deny RBS's claim for VAT input tax. The claimants sought (amongst other things) notes of employee interviews carried out by the bank's solicitors. An issue arose as to whether these had been created for the sole or dominant purpose of conducting a defence to tax assessment proceedings. The claimants argued that they had been created for (amongst other things) the non-litigation purpose (following ENRC) of persuading HMRC not to issue an assessment at all. However, the court considered that was at most a subsidiary purpose which was 'part of the continuum that formed the road to the litigation'. In finding this, it had regard to RBS's instruction of specialist tax disputes solicitors to lead the investigation. The solicitors' retainer letter described the scope of work as 'to provide legal advice in respect of a dispute with HMRC regarding the recoverability of income tax relating to purchases of carbon credits by RBS SEE'. The fact that the bank adopted a cooperative approach towards HMRC did not alter the fact it was preparing for litigation, as shown by the report provided in response to HMRC, containing a detailed legal and factual analysis as to why HMRC was not entitled to deny RBS's input tax claim.
Similarly, in FM Capital Partners v Marino  EWHC 3700 (Comm), the court accepted the claim, supported by evidence from lawyers instructed contemporaneously, that documents produced during an internal investigation, following complaints from a client, had litigation as their dominant purpose. This is despite the documents also being used in a related disciplinary process against the company's CEO.
Navigating troubled waters
Claims to legal professional privilege are now more likely than ever to be scrutinised. Lawyers instructed in relation to corporate investigations must therefore take great care as to how they advise upon, design and record those investigations.
Some key practical points to keep in mind are as follows:
- Do not assume that your involvement will clothe all products of the investigation with privilege, or make overstated claims about this to clients. Clients must be made aware of the risks in this area, particularly while the law remains in flux. These are particularly acute when the backdrop is a criminal investigation, where difficulty in establishing the prospect of a prosecution may make litigation privilege unavailable.
- Ensure all communications giving or relating to the giving of legal advice are only with the 'client team' authorised to seek and receive that advice. The members of this team should be clearly set out from the outset in both the letter of instruction and letter of engagement. Questions received from others at the client, however senior, should be treated with caution and raised with the client team.
- Ensure you are clear as to the purpose of any investigation. If the purpose is to pursue or defend litigation, set that out clearly in the letter of engagement and any other appropriate documents, such as letters inviting employees for interview. This should include detail, for example as to the anticipated parties and issues, but will also need to be in terms the client would be content to deploy in support of a claim to privilege. If the investigation has more than one purpose (for example, considering whether to self-report to a regulator while preparing for an anticipated civil claim), but the latter is the dominant one, that should be made clear. Consider all possible exposures and causes of action against the organisation: for example, even if purely a regulatory matter at present, is a civil claim also likely?
- Carefully structure and resource the investigation. Forensic accountants and others can play an important role in an investigation, but lawyers should design and drive it. There will then be at least the chance that some documents will attract legal advice privilege. In addition, lawyers will frequently be best placed to implement the types of measure discussed here to maximise the client's chances of successfully claiming litigation privilege.
- Avoid creating unnecessary documents, and advise the client to do the same. Label documents which are created appropriately, such as with the words 'Privileged and confidential – created for the purpose of obtaining legal advice / in contemplation of litigation' (as applicable). Such headers are not conclusive, but help evidence the purpose and may serve as a reminder to those involved to preserve confidentiality.
- Taking notes of interviews with individuals not within the 'client team' is a skill. Verbatim notes and purely factual summaries will not be protected from disclosure unless litigation privilege applies. Unless absolutely confident that this is the case, consideration should be given to how to sufficiently interweave advice into the notes in order to maximise the chances that they will attract legal advice privilege. Conversely, a decision may be taken to keep factual accounts and advice entirely separate, recognising that the former may fall to be handed to the other side but protecting the advice.
- Think carefully about document control within both the firm and the client organisation. Confidentiality is an essential ingredient of privilege, so must be preserved, and dissemination of information should therefore be on a 'need to know' basis. The use of project names and password protection should be considered and unnecessary copying-in to emails avoided. Consider also how information is stored, ideally segregating privileged and non-privileged material.
- While effective self-reporting and cooperation with regulators and other agencies is vital, detailed consideration should be given to the precise extent of that cooperation. While Bilta shows that a cooperative approach is not fatal to a claim to privilege, in light of the ENRC decision offers to share the products of an internal investigation should be carefully controlled, taking into consideration the requirements of the relevant regulatory or enforcement agency and the client's ultimate objectives.
- For matters with an international dimension, consider whether local law advice is needed on the operation of privilege or equivalent rules in the relevant jurisdictions.
Ultimately, it is of vital importance that lawyers really understand this area before embarking on an investigation if they are going to act in their client's best interest.