Pre-action Investigations: A Cautionary Tale

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Explore:  Investigations KPMG SFO UK

When there is the suspicion of wrongdoing, it is common practice for companies to carry out an investigation by commissioning reports, whether internally or with the outside assistance of lawyers or other professionals. If litigation subsequently ensues a requirement to disclose such reports to the adverse party may be extremely damaging.
Two recent English judgments (one of which was upheld by the Court of Appeal on 20 February 2014) have highlighted the need for great care to be taken when commissioning reports that might later become relevant in litigation. In both cases the reports which had been commissioned were held not to be covered by privilege and so had to be disclosed in the litigation which ensued. This update summarises the relevant English law on privilege; the background to, and rationale for, the two decisions; and the implications of them for those carrying out, or commissioning, investigations.
Background

English law recognises two relevant heads of privilege: legal advice privilege and litigation privilege. Legal advice privilege protects communications between a lawyer and his client which are part of the process of seeking and receiving advice: that form of privilege is not dependent on whether litigation exists or is in reasonable contemplation.

Litigation privilege differs from legal advice privilege and is in one sense broader and in one sense narrower than legal advice privilege. It is broader in that the underlying communications need not involve a lawyer; but it is narrower in that, for litigation privilege to apply, adversarial proceedings must exist or be in reasonable contemplation and the relevant documents must come into existence for the dominant purpose of obtaining information or advice in connection with pending or contemplated litigation, or of assisting in the conduct of such litigation.

The two recent commercial court judgments involved reports commissioned by non-lawyers, with the result that the only claim for privilege that could subsequently be asserted to prevent their disclosure was litigation privilege and, in both cases, the claims failed for the reasons that are explained below.

Tchenguiz v Serious Fraud Office (“SFO”)

In this well-known litigation, the claimants had sued the SFO for substantial damages that they said had been caused by what they claimed to be unlawful raids, arrests and investigations. The claimants sought production of reports which had been prepared by a firm of accountants on the instructions of the liquidators of a separate company. The reports had previously been shown by the accountants to the SFO who, though not being permitted to take copies of the reports, had taken detailed notes of them.

The liquidators opposed the application made by the claimants for disclosure of the reports on two grounds: the relevant one for these purposes being that the reports were covered by litigation privilege. The judge rejected the claim to privilege and the Court of Appeal agreed with his assessment. The judge’s analysis is revealing.

The judge applied the dominant purpose test to decide whether litigation privilege would apply to the reports in question but made clear that dominant purpose was to be judged by a relatively high threshold.

Here, and as will not be uncommon, the analysis of the dominant purpose was complicated by the fact that the reports came into being on the instructions of liquidators who are subject to statutory duties with regards to the orderly collection of assets and settlement of liabilities. The proper performance of those statutory duties is likely to require liquidators to obtain information so as to identify what assets or liabilities exist or, perhaps, what legal proceedings might possibly be brought. However, the mere fact that legal proceedings might possibly be brought would not necessarily constitute the dominant purpose for the production of the relevant report. For example, an investigation of which “problem loans” were recoverable so as to establish the financial position of a company might well occur quite independently of consideration as to whether to bring recovery proceedings and so would be unlikely to attract litigation privilege.

On the evidence placed before the judge as to the purpose for which the reports came into being, the judge was not satisfied that the dominant purpose test was made out and so the reports had to be disclosed to the claimants.

Starbev v Interbrew

Following the first instance decision in the Tchenguiz case, a different commercial court judge faced a similar issue in the Starbev case in December 2013. This case related to the proper construction and application of an agreement under which the defendant was entitled to deferred consideration following its sale of a business to some investment funds through the medium of the claimant. The application before the court involved a claim by the defendant to litigation privilege over two reports, prepared by respectively Barclays and KPMG.

Having analysed the evidence presented to the judge as to the purpose behind the creation of the Barclays report, the judge considered that it showed no more than that the person commissioning it had had a suspicion concerning the sale of the business and had instructed Barclays to investigate to see if there was any substance to his suspicion. Accordingly, Barclays' role was investigatory and, unless and until they confirmed that there was any substance to the suspicion, there was no real reason to anticipate litigation. So, the judge was not satisfied on the evidence that litigation was reasonably anticipated at the time that Barclays was instructed to provide advice, still less that such litigation was the dominant purpose of instructing them (as it would have needed to be for the report to be covered by litigation privilege).

As for the KPMG report, the court was shown KPMG's engagement letter. That letter made no mention of litigation; to the contrary it showed that the next stage contemplated was discussion and agreement rather than litigation. Even if contemplated litigation had become a purpose for instructing KPMG, the judge was not satisfied that it had been established that it had become the dominant purpose so doing.

The result was that the claims to litigation privilege were both rejected and both reports had to be disclosed to the claimant.

Conclusions
  • Legal advice privilege does not apply to communications (including reports) between non-lawyers and a client.
  • Litigation privilege might apply to such documents but only:

    (a) at a point in time where it can be demonstrated that litigation was in reasonable prospect; and 

    (b) where it can be demonstrated that the dominant purpose behind having the report prepared was that litigation. 
  • The court's recent decisions show that the court is taking a strict approach both to the time when litigation was first in reasonable prospect and to whether the dominant purpose test has been met. The mere fact that a party is investigating a suspicion of wrongdoing is unlikely of itself to be sufficient. It is therefore safest for those who commission non-lawyers to prepare reports to assume that those reports (and possibly communications about, and working papers underlying, the reports), will later have to be produced in any litigation where their content falls within the disclosure test prescribed by the English civil procedure rules.
  • If lawyers are commissioned to undertake the investigatory work, the prospects of the report that is prepared (and documents relating to it) being privileged from publication are improved. This is because the work product is likely to be covered by legal advice privilege, on the assumption that it came into being as part of the process of the client first seeking, and then receiving, advice

Topics:  Investigations, KPMG, SFO, UK

Published In: Civil Procedure Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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