No litigation privilege for controller of litigation under conduct of claims clause

The claimants (the Buyers) had bought a company (the target), which owned a mining project in Peru, from the defendants (the Sellers) under a share purchase agreement (the SPA).

The Peruvian tax authority (SUNAT) issued a tax assessment against the target, resulting in an increased tax liability. The target then issued proceedings against SUNAT to challenge the tax assessment (the Peruvian Proceedings). The SPA contained a provision entitling the Sellers to control part of the proceedings against SUNAT (the conduct of claims clause).

The Buyers then sued the Sellers in England claiming under a tax indemnity in the SPA for the increased Peruvian tax liability.  In the English proceedings, the Buyers sought disclosure from the Sellers of certain documents relating to the Peruvian tax litigation. The judgment does not give any detail about the documents.

Sellers try to claim litigation privilege 

The Sellers asserted litigation privilege over the documents on the basis that they were produced for the dominant purpose of the Peruvian proceedings.  

They relied on previous Court of Appeal authority in Guinness Peat Properties Ltd & anr v Fitzroy Robinson Partnership [1987] 1 WLR 1027. The Sellers contended that Guinness Peat was binding authority for the proposition that where a person is “in all but name” a party to proceedings, then that person may assert privilege over documents created for the dominant purpose of such proceedings.

In Guinness Peat, the Court of Appeal had allowed the defendants, a firm of architects to assert litigation privilege in a claim against them by their clients, over a notification of claim sent to the architects’ insurers. The notification expressed the architects’ views as to the merits of the claims against them. The claimants had argued that the dominant purpose test failed, as the firm’s prime purposes in making the notification was to comply with the terms of its insurance policy.  However, in allowing the firm to assert litigation privilege, the Court of Appeal had considered the question of purpose from the perspective of the insurer (ie the non-party to the litigation), as the relationship between an insurer and the insured is such that “the insurers will in all but name be the effective defendants to any proceedings”.

The implication of the Sellers’ argument (although not expressly stated) was that, in exercising its rights under the conduct of claims clause, the Sellers were “in all but name” party to the Peruvian Proceedings and therefore entitled to assert litigation privilege over the documents in question.

The Buyers argued that any such privilege belonged to the target, not the Sellers.

Non-party cannot claim privilege

Moulder J rejected the Sellers’ submission. Guinness Peat was concerned with the application of the dominant purpose test; it was not authority for the proposition that a non-party to proceedings can claim litigation privilege arising out of those proceedings.

Moulder J held that the rationale for litigation privilege, namely that a party should be free to seek evidence without being obliged to disclose the results to the other side, did not extend to a non-party. Therefore as the Sellers were not parties to the Peruvian proceedings, they could not claim litigation privilege over the documents as against the Buyers. Moulder J noted that any right to assert litigation privilege over documents arising out of the Peruvian Proceedings belonged to the Buyers.

Joint or Common Interest Privilege

As a result of the above, Moulder J did not find it necessary to address the Buyers’ alternative argument that their joint or common interest in the documents relating to the Peruvian Proceedings meant that the Sellers could not withhold inspection.

Had the point been discussed in the judgment, the Buyers would have been relying on the Court of Appeal decision in CIA Barca de Panama v George Wimpey & Co [1980] 1 Lloyd’s Rep 598. In that case, CIA Barca de Panama (Barca) and George Wimpey & Co (Wimpey) each owned 50% of a joint venture company (JV). When the JV became subject to claims against it, Barca and Wimpey agreed to provide assistance to each other and the JV. Barca subsequently brought an action against Wimpey for settling claims against the JV without authorisation. Barca successfully pleaded for the disclosure of privileged material held by Wimpey.  The Court of Appeal held that where two parties (A and B) have a common interest in litigation against a third party (C) and subsequently A and B litigate between themselves, neither A nor B can claim legal professional privilege for documents which came into existence in relation to the earlier litigation against C.

The common interest between the Buyers and Sellers in the current case was not exactly the same as the equal JV partners in CIA Barca, but it was similar. Here, the common interest in the Peruvian Proceedings was a result of the tax indemnity; it was in the economic self-interest of both the Buyers and Sellers to obtain a positive result. This would also have been true of the JV partners in CIA Barca. As the court did not discuss the point, we do not know whether the judge would have accepted the Buyers’ submission.

COMMENT 

It is common for the purchaser of a target company to receive indemnities from the seller. As a result, it is often in the interest of the seller to be able to influence proceedings against the target where an adverse finding would lead to a significant liability for the purchaser (and, via the indemnity, the seller). The frequent inclusion of conduct of claims clauses in SPAs acknowledges this commercial reality. They are often subject to negotiation over such features as whether the purchaser is in fact obligated to act in accordance with the seller’s views, or whether any indemnity claim is made conditional upon the purchaser acting in compliance with the conduct of claims clause. The purchaser will seek to make its duties under the clause as flexible as possible, or even argue that the clause is unnecessary given the common law duty for the purchaser to mitigate its losses. The seller, on the other hand, will aim to maximise its control through eg preventing the purchaser from compromising a third party claim and obtaining veto rights over any proposed settlement of a third party claim. The degree of control which a seller has over third party claims can therefore vary widely.

Although a seller’s precise contractual position will vary, this ruling on litigation privilege means that a seller under an SPA will need to be aware that documents (e.g. advice or evidence from third parties) generated during litigation controlled under a conduct of claims clause may end up having to be disclosed to the purchaser in any subsequent, separate litigation under a sale and purchase agreement. 

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.​