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SFO v ENRC update: Privilege in internal investigations after the Court of Appeal
We have written previously for this publication about the importance of legal professional privilege for the administration of justice and for lawyers' ability to act in clients' best interests.
We commented on the state of flux in the law on privilege following recent cases including, most notably, the May 2017 decision of Mrs Justice Andrews in SFO v ENRC.
That decision caused dismay in the legal and business communities. Corporate clients felt that it unduly curtailed their ability to conduct effective internal investigations, a critical risk management tool. Lawyers were concerned that they would not have access to the full facts, and that they could no longer advise such clients with confidence as to when privilege would apply. The Court of Appeal's determination of the case on appeal was therefore eagerly anticipated.
There has been a collective sigh of relief following the Court's judgment. It has overturned Andrews J's controversial conclusion that litigation privilege did not apply to the products of ENRC's internal investigation and jettisoned the most controversial aspects of her reasoning.
However, there remains no room for complacency in this highly fact-sensitive area. We consider the implications of the Court of Appeal's judgment, the pitfalls that remain and the steps lawyers should take to best protect clients against the risk of unwanted disclosure.
Recap of SFO v ENRC
Global mining group ENRC carried out an internal investigation following a whistleblower's allegations of 'corruption and financial wrongdoing'. ENRC engaged in dialogue with the SFO which in time commenced a criminal investigation. The SFO sought disclosure of documents generated during ENRC's internal investigation.
At the heart of the dispute were notes of interviews with employees and ex-employees conducted by ENRC's lawyers, and documents produced during a 'books and records' review by forensic accountants. ENRC argued these documents attracted legal professional privilege.
Litigation privilege at first instance
In particular, ENRC asserted that both the interview notes and forensic accountants' documents attracted litigation privilege, one of two forms of legal professional privilege. Following the test for this type of privilege in Three Rivers (No 6), ENRC argued these documents were confidential communications prepared for the sole or dominant purpose of 'adversarial' litigation (here, SFO criminal litigation) which was, at the time, in 'reasonable contemplation'.
However, Andrews J held litigation privilege did not apply. She considered that an SFO investigation, as opposed to a prosecution, was not 'adversarial'. What therefore had to be in 'reasonable contemplation' was a prosecution. However, she held that at the relevant time a prosecution was only a possibility, which was insufficient.
She said that, given the criteria that must be satisfied before a criminal prosecution can be launched, a prosecution could only be reasonably contemplated once a potential defendant had sufficient knowledge of what its investigation would unearth to consider that the prosecutor would be satisfied of a reasonable chance of securing a conviction.
Andrews J also held that litigation was not the investigation's dominant purpose. Instead, she identified fact-finding, regulatory and compliance purposes, which she did not consider litigation purposes.
She also did not regard as a litigation purpose attempts to dissuade the SFO from commencing a prosecution, drawing a distinction between avoiding litigation (not, she said, a litigation purpose) and defending litigation (a litigation purpose).
Further, Andrews J found that ENRC had intended to share the products of its investigation with the SFO, and that in such circumstances litigation could not be their dominant purpose.
These conclusions were highly controversial. Many felt their consequence was to defer the point at which litigation would be 'reasonably in contemplation' until very late in the timeline of an investigation, particularly in the criminal context. The line drawn between avoidance and defence of litigation was considered a distinction without a difference. There was fear that corporates would be deterred from dialogue with regulators, or from conducting thorough investigations.
Litigation privilege - order restored
In a widely welcomed decision, the Court of Appeal has overturned Andrews J's conclusion on litigation privilege, holding that documents including the interview notes and forensic accountants' documents were indeed produced for the dominant purpose of reasonably contemplated adversarial criminal enforcement.
In essence, the Court has restored the position on litigation privilege as widely understood prior to ENRC, applying the Three Rivers (No 6) test in a pragmatic, commercial way.
On whether adversarial litigation was reasonably contemplated, the Court took a holistic view of the evidence. It observed that the 'whole sub-text' of the relationship between ENRC and the SFO was that, if the matter could not be resolved through the self-reporting process, a prosecution may follow. Other evidence included ENRC's lawyers' advice that there was a real and serious risk of criminal enforcement.
The Court sensibly recognised that it does not matter if investigations are only at an early stage, with matters still requiring exploration, if (as here) there is a clear risk of criminal enforcement.
The Court rejected the hard-line distinctions introduced by Andrews J. For example, rather than separating a criminal investigation (said by Andrews J to be non-adversarial) from a prosecution (adversarial), the Court held that while not every SFO manifestation of concern will be adversarial: 'when the SFO specifically makes clear ... the prospect of its criminal prosecution ... and legal advisers are engaged to deal with that situation ... there is clear ground for contending that criminal prosecution is in reasonable contemplation'.
Andrews J was wrong to 'suggest a general principle 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 would be 'one part of the factual matrix, but will not necessarily be determinative'.
There is similar pragmatism in the Court's decision on dominant purpose, continuing the recognition in cases like Bilta v RBS that courts must take 'a realistic, indeed commercial, view of the facts'. Investigations frequently serve multiple purposes. The Court recognised this but accepted that the dominant purpose here was litigation.
Whereas Andrews J regarded 'compliance' and 'governance' as distinct, non-litigation purposes, the Court observed that:
'Although a reputable company will wish to ensure high ethical standards in the conduct of its business for its own sake, it is undeniable that the "stick" used to enforce appropriate standards is the criminal law and, in some measure, the civil law also. Thus, where there is a clear threat of a criminal investigation ... the reason for the investigation of whistle-blower allegations must be brought into the zone where the dominant purpose may be to prevent or deal with litigation.'
The Court also unequivocally rejected any distinctions between avoiding, settling, resisting and defending litigation, with all being litigation purposes.
Finally, the Court considered that Andrews J had wrongly concluded, on the evidence, that ENRC created the relevant investigation documents for the purpose of showing them to the SFO. The Court also pointed out that the fact that a document (such as a final report or letter of response) is produced with the intention of providing it to an opposing party does not necessarily deprive of privilege the preparatory legal work underlying it.
Legal advice privilege - one to watch?
ENRC argued that the interview notes should also attract the other form of legal professional privilege: legal advice privilege. This applies to confidential communications in the 'continuum of communications' for the purpose of the giving or receiving of legal advice by a lawyer to his 'client'.
Andrews J held that the interview notes were not covered by this form of privilege because they were mere fact-gathering, albeit by lawyers, from employees and ex-employees who were not in the 'client team'. In reaching this conclusion she considered herself bound to follow the controversial Three Rivers (No 5) decision which is generally regarded as authority that the 'client' is only those individuals within a corporate specifically tasked with seeking and obtaining legal advice on its behalf.
On appeal, ENRC and the Law Society argued that legal advice privilege should also encompass the provision to a corporate's lawyers of factual information by employees and ex-employees not within the 'client team' but authorised to do so, if the purpose is to enable the lawyers to advise their corporate client.
The Court of Appeal was receptive in principle. One argument to which it referred was that English law is out of step with other common law jurisdictions on this point, a practical issue given multinational companies operate across borders.
However, the Court found that it too was bound by Three Rivers (No 5). Making change in this area would be for the Supreme Court. It remains to be seen whether they will have this opportunity.
Where are we now?
The current position therefore remains that legal advice privilege is of limited application in internal investigations. As a result it is important that litigation privilege has been broadened back to its proper scope. The Court of Appeal has cleared away the controversial obstacles introduced by Andrews J to claiming litigation privilege.
As a result, on appropriate facts litigation privilege can attach even in the early stages of an investigation, including before any regulator contact or allegations, although once these occur the claim to privilege will often become even stronger.
The position will be clearer still if there has been a 'watershed moment' of some kind. This was the term used in Bilta v RBS, in which RBS successfully asserted litigation privilege in the products of an internal investigation carried out after receipt of letter from HMRC alleging that RBS knew or should have known that it had participated in transactions connected with fraud (the letter being the 'watershed moment').
However, the Court's decision is fact-specific. Those conducting investigations should still expect assertions of privilege to be closely scrutinised.
Courts will examine the evidence as to what the organisation believed at the time about the risk of litigation. This will include what counterparties such as a regulator were saying and will likely include communications by the organisation internally and/or with its advisers.
The date of creation and the purpose of each document will be scrutinised. Third parties such as regulators may contend that documents were produced with the purpose of being shared with them and/or (although not the argument in ENRC) that there has been a waiver of privilege. The precise terms of any engagement with a third party will therefore be critical.
There remain some non-adversarial processes, such as pure fact-finding by a regulator or a public inquiry, contemplation of which will not attract litigation privilege.
There may also be cases where an investigation is at such an early stage or is so generic that litigation privilege will not apply. R v Jukes, which was distinguished by the Court of Appeal in ENRC, was arguably such a case. There, an alleged health and safety manager unsuccessfully asserted privilege over a statement he made to his employer's lawyers during initial enquiries following a death on site. The Court in ENRC pointed out that that statement was made as long as 16 months before the police or Health and Safety Executive interviewed him.
The practical steps that lawyers should take to maximise clients' chances of successfully asserting privilege over the products of an internal investigation remain much as they ever were.
The following points are worth particular emphasis in light of the ENRC appeal:
- This remains a complex area in which clients should be encouraged to instruct specialist lawyers to structure and lead any investigation.
In concluding that the forensic accountants' work in ENRC had litigation as its dominant purpose, the Court of Appeal referred to the fact that it was 'commissioned at around the same time as the Dechert investigation' (Dechert being the lawyers leading the investigation) and 'formed part of that investigation'. This highlights just one reason why other professionals such as forensic accountants should work within a lawyer-driven structure.
- Since Three Rivers (No 5) remains good law at present, it continues to be important for the 'client team' who may seek and receive privileged legal advice on behalf of a corporate to be defined in instructions, engagement letters and in protocols within the client organisation.
This needs to be kept under review during the course of the engagement. Internal protocols should also set out rules around the use of privileged materials, since privilege may be lost by, for example, disseminating documents in such a way that confidentiality is lost.
- It is essential to be clear as to the purpose of any investigation. If the purpose is for anticipated litigation, set that out clearly in, for example, the letter of engagement, letters inviting employees for interview, and instructions to forensic accountants. Detail should be included, for example as to why litigation is contemplated and as to the anticipated parties and issues. This must 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 risk management changes while preparing for an anticipated claim), but the latter is dominant, that should be made clear. The position should be kept under review: even where litigation is not the dominant purpose at the outset, if matters develop so that it becomes the dominant purpose (for example, because of indications received from a regulator), it is important not to forget to document this.
- Similarly, although as the law currently stands factual interviews with employees not in the 'client team' are unlikely to be privileged unless litigation privilege applies, if they are being interviewed for the purposes of the information gleaned being used by lawyers so that they can advise the corporate, it is worth setting that out clearly, to at least maximise the possibility of being able to claim that these fall within the 'continuum' of communications relating to legal advice (albeit this is a difficult argument on the current law).
- Particular caution should be exercised around conducting employee interviews. If the employees are not in the 'client team' and litigation privilege does not apply, verbatim notes and purely factual summaries of what has been said will not currently be protected from disclosure. Consideration may be given to whether it is possible to sufficiently interweave advice into the notes 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, accepting that the former may be disclosable but maintaining privilege in the advice. This requires specialist expertise.
- Effective self-reporting and cooperation with regulators and other agencies can be vital. However, while the Court of Appeal has confirmed that such engagement is not necessarily fatal to an assertion of privilege, detailed consideration must be given to the precise extent of any cooperation, including to the terms of any relevant guidelines or code of practice and what is said between the parties, and the potential impact of this on privilege.
- The Court of Appeal's judgment reminds us that rules on privilege vary between jurisdictions. In an investigation which has, or may develop, an international dimension, think carefully from the outset about the jurisdictions which are or may be involved, the law on privilege in each and how this impacts on the conduct of the investigation. Local law advice may well be needed.
About the authors
Alan Sheeley is partner and head of civil fraud and asset recovery at Pinsent Masons LLP.
Emilie Jones is a senior practice development lawyer at Pinsent Masons LLP.