Litigation privilege: applying the law post-ENRC

Litigation privilege after ENRC v SFO

Litigation privilege protects communications between clients or their lawyers and third parties for the purpose of obtaining information or advice in connection with existing or contemplated litigation when, at the time of the communication in question:

• litigation is in progress or in contemplation;
• the communications are made for the sole or dominant purpose of conducting that litigation; and
• the litigation is adversarial, not investigative or inquisitorial.

In SFO v ENRC, Andrews J denied a claim for litigation privilege for documents that were produced by lawyers and forensic accountants during an internal investigation into allegations of bribery and corruption. This was because adversarial litigation was not reasonably in contemplation because a criminal investigation by the SFO was not, in Andrews J's view, adversarial litigation for privilege purposes. In addition, even if prosecution had been reasonably in contemplation, none of the documents had been created with the dominant purpose of being used in such litigation. The appeal against the decision is being heard in July this year.

Bilta seeks RBS's internal tax investigation documents

Bilta sought internal investigation documents generated by RBS and its lawyers after a threatened adverse tax assessment by HMRC. These documents included, as in the SFO v ENRC case, transcripts of interviews with employees and ex-employees. The documents were relevant to Bilta's subsequent claim against RBS alleging dishonest assistance in executing some of the trades which were the subject of the internal investigation.

Bilta argued that the documents were not generated with litigation as their sole or dominant purpose. Rather, it said, they were generated as an essential part of the preparation of a report promised to HMRC to assist it in its assessment, and pursuant to RBS's general duties and obligations as a taxpayer and under its own Codes of Practice to provide HMRC with a full and detailed account of the relevant facts concerning its deductions of VAT. Bilta referred to the finding in ENRC that against a background of co-operation and openness, fact-finding aimed at obtaining legal advice on how to avoid an investigation would not be covered by litigation privilege.

A little bit more about the RBS tax investigation

In 2010, HMRC wrote to RBS to confirm it was investigating "missing trader" or carousel intra-community fraud in the UK European Union Allowances (EUAs) market. The fraud involved companies trading in EUAs failing to account to HMRC for the value added tax which accrued and, instead, paying their VAT receipts to third parties before going into liquidation. HMRC notified RBS that its investigation might put at risk input tax which had, in accordance with ordinary principles, been claimed by RBS from HMRC. RBS co-operated with HMRC's investigation throughout 2010 and 2011.

In March 2012, HMRC notified RBS by letter (the HMRC Letter) of its view that there were sufficient grounds to deny RBS GBP86m of input tax on the basis that it knew or should have known that EUAs’ transactions were connected with fraud. At this point, RBS instructed external counsel to provide legal advice in relation to the dispute with HMRC. RBS met with HMRC, and RBS agreed to provide a full written report (the Report) on the facts to HMRC before HMRC would decide whether to issue its assessment. To avoid its claim being time barred, HMRC issued an adverse assessment to RBS for GBP86m in late September 2012, but emphasised that it did not intend to "close the door on further discussions" and that it would give "full consideration" to the written report to be provided by RBS.

In January 2014, RBS produced the Report to HMRC. HMRC did not withdraw its assessment, and in October 2014 RBS appealed it to the First Tier Tribunal (Tax Chamber).

Adversarial litigation in contemplation

In terms of the test for litigation privilege, Bilta accepted that adversarial litigation against HMRC was in RBS's contemplation. So the issue before the court was whether the documents were made for the sole or dominant purpose of conducting that litigation.

Wider view adopted – investigation can have dual purpose

The Chancellor held that the documents and interview notes were covered by litigation privilege, having been brought into being by RBS and its litigation solicitors for the sole or at least the dominant purpose of the expected litigation against HMRC following the expected assessment in respect of over-claimed input VAT.

Although the Chancellor was urged by Bilta to follow ENRC, he emphasised that the exercise of determining the sole or dominant purpose in each case is a determination of fact. In a passage likely to be of comfort to corporates facing investigation, he noted that although both the case at hand and ENRC "involve internal investigations by corporates in the face of scrutiny by government authorities, one cannot simply apply conclusions that were reached on one company's interactions with the Serious Fraud Office in the very different context of another company's interactions with HMRC."

A continuum forming the road to litigation

The Chancellor emphasised the need to take a realistic and commercial view of the facts: fending off the assessment was part of the continuum forming the road to the litigation. This was supported by:

• evidence that HMRC would proceed to issue an assessment against RBS following the HMRC Letter, and it was unlikely that the promised external solicitor's report would dissuade HMRC from doing so;
  
• the wider context with HMRC attempting to recover input tax from other participants in the EUA market; and
  
• RBS's actions in appointing external lawyers within weeks of receipt of the HMRC letter "strongly suggest" RBS anticipated a claim and was gearing up to defend it.

Dissuading HRMC from issuing an assessment could therefore not be said to be the sole or dominant purpose of the investigation – it was the wider purpose of preparing for litigation that was the purpose behind the generation of the documents. The HMRC Letter should be regarded as equivalent to a letter before action in a litigation context.

Co-operation did not affect dominant purpose analysis

Importantly, the Chancellor found that the ostensible collaborative and co-operative nature of RBS's interactions with HMRC did not change the position on litigation privilege. He noted that it was commonplace for HMRC to canvas views of large taxpayers prior to a formal assessment, and it was unsurprising that RBS met with HMRC and updated it on the investigation. He rejected the argument that such co-operation precluded the internal investigation being conducted for the dominant purpose of litigation. Instead, he found that even if one purpose in generating the documents at the time had been to attempt to persuade HMRC to change its mind, this was subsumed under the dominant purpose of preparation for the litigation that RBS expected to be necessary to contest the assessment it expected from HMRC.

Duties as taxpayer subsidiary to dominant purpose

Similarly, the Chancellor was not persuaded that RBS was conducting the investigation solely or dominantly in accordance with its duties as a taxpayer or its Codes of Practice: again, these purposes were effectively subsumed under the purpose of defeating the expected assessment.

R (for and on behalf of the Health and Safety Executive) v Jukes – no adversarial litigation

In this second recent case on privilege, we find the Criminal Court of Appeal following the ENRC v SFO decision.

Mr Jukes had been convicted of failing to discharge the duty to take reasonable care of the health and safety of employees. His defence was broadly that he was not responsible for the health and safety of employees at the relevant time.

In support of its case, the prosecution (on behalf of the Health & Safety Executive) sought to admit into evidence a witness statement Mr Jukes had provided to his company's solicitor, in which he admitted that he was responsible for workplace health and safety. The witness statement had been generated while his employer-company was investigating, in conjunction with external solicitors, the underlying health and safety incident. Mr Jukes argued that his statement was a privileged document, provided to the company's external solicitors at the time when he was an employee of the company. He argued those solicitors acted for both the employees and the company in relation to the investigation of the health and safety incident.

No privilege – just an “investigatory stage”

The Court of Criminal Appeal agreed with the trial judge that the witness statement did not attract litigation privilege. At the time it had been created, no decision to prosecute had been taken by the Health and Safety Executive, and matters were still at the "investigatory stage", which could not be considered adversarial litigation. The Court expressly cited SFO v ENRC, agreeing with the analysis that criminal proceedings cannot be reasonably contemplated (for the purpose of litigation privilege) "unless the prospective 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".

Comment

With two decisions pulling in opposite directions post-ENRC, it remains essential for the Court of Appeal to resolve the correct position on litigation privilege: the appeal in SFO v ENRC is due to be heard in July 2018.

Until that time, the decision in Bilta provides some assistance to corporates seeking to assert litigation privilege in the context of an internal investigation. The Chancellor clearly decided to confine Andrews J's ENRC decision on the purpose of an internal investigation at the instigation of a government authority to the facts of that case, rather than applying it as a precedent for similar factual scenarios. Regardless, the onus of establishing privilege lies with the party asserting it, and being in a position to put forward evidence (such as engagement letters, internal emails and attendance notes) showing the dominant purpose to be litigation will remain determinative.

More importantly, the Chancellor disapproved of the notion that co-operation with a government authority should preclude an internal investigation from ever being found to be conducted for the dominant purpose of litigation. This should assist when seeking to establish litigation privilege in internal investigations conducted after notification of potential litigious action on the part of bodies such as HMRC, the Health and Safety Executive or the FCA.

On the other hand, the Court of Appeal's endorsement of ENRC on the non-adversarial nature of a criminal investigation in Jukes is troubling for clients asserting litigation privilege in the context of an internal investigation into potential criminal offences. It highlights again the incongruous result that a company threatened with civil proceedings in relation to allegations of misconduct may conduct an internal investigation protected by litigation privilege (provided the dominant purpose test is met), but a company under criminal investigation for those same allegations cannot, unless it knew enough to be satisfied that a prosecutor could realistically consider themselves to have a good chance of securing a conviction.

That said, the claim for litigation privilege in Jukes appears to have been particularly weak: it was clear that Mr Jukes (as a mere employee of the company) was not himself the client of the external solicitor, and the company did not assert privilege or offer any evidence supporting his claim for privilege. It is therefore perhaps of limited application in other cases.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. If you wish to receive this publication, please contact Amy Edwards, amy.edwards@allenovery.com.