ENRC v SFO appeal: internal corporate investigation documents were protected by privilege
11 September 2018
Documents, including interview notes, generated by mining company ENRC during an internal corruption investigation were protected by privilege and therefore did not have to be disclosed to the Serious Fraud Office (SFO).
This unanimous Court of Appeal decision overturns the controversial High Court ruling last year which threw into question how businesses could investigate possible wrongdoing without creating material, including potentially incriminating documents, that would have to be handed over to investigators.
The decision will be welcomed by businesses and their lawyers as it increases the likelihood of a successful claim to litigation privilege in England when entities are facing the prospect of a criminal prosecution or regulatory enforcement action. The SFO has annouced that it will not be appealing to the Supreme Court.
The Court also expressed helpful, but non-binding, views on the question of who is the “client” for the purposes of legal advice privilege – ie which individuals within a corporation can communicate with the corporation’s lawyers on a privileged basis.
ENRC conducts internal investigation
In December 2010, ENRC received an email from an apparent whistleblower containing allegations of bribery and financial wrongdoing in relation to its Kazakh subsidiary. This led ENRC to instruct lawyers and carry out an internal fact-finding investigation. In April 2011, following press reports suggesting that the SFO had been asked to investigate ENRC on the matter, forensic accountants were also instructed.
In August 2011, the SFO became directly involved. It contacted ENRC, drew its attention to the SFO’s self-reporting guidelines and suggested a meeting. There followed a lengthy period of dialogue between ENRC and the SFO, including a series of meetings in which ENRC updated the SFO on the progress of its internal investigation.
SFO starts criminal investigation of ENRC and demands documents
The SFO formally commenced a criminal investigation in April 2013 and compelled ENRC to produce a range of documents including:
- notes taken by lawyers of the evidence given to them by ENRC's employees, former employees, subsidiaries, suppliers and other third parties; and
- materials generated by forensic accountants, as part of a “books and records” review, with a focus on identifying controls and systems weaknesses and potential improvements (together, the Documents).
The SFO cannot compel the production of documents which a corporation would be entitled to refuse to disclose on grounds of legal privilege in proceedings in the English court. ENRC claimed the Documents were privileged and refused to produce them. The SFO then commenced these proceedings disputing that claim and seeking production of the Documents.
Court of Appeal rules that litigation privilege applies
Litigation privilege applies to 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 reasonably in contemplation;
- the communications are made with the sole or dominant purpose of conducting that litigation or anticipated litigation; and
- the litigation is adversarial, not investigative or inquisitorial.
At first instance, Andrews J denied a claim for litigation privilege for the Documents. This was on the basis that:
- ENRC needed to have a criminal prosecution in contemplation at the time the Documents were created and, on the facts, Andrews J concluded that ENRC did not contemplate criminal prosecution at that time;
- even if a prosecution had been reasonably in contemplation, none of the documents had been created with the dominant purpose of being used in such litigation; and
- litigation privilege does not extend to documents created in order to obtain legal advice as to how to best avoid contemplated litigation, or a future regulatory or criminal investigation.
The Court unanimously disagreed with these conclusions and upheld ENRC's claim that the Documents were protected by litigation privilege.
Criminal proceedings against ENRC were reasonably in contemplation
The Court held that a criminal prosecution was reasonably in contemplation when ENRC initiated its investigation and was certainly in contemplation from when ENRC was contacted by the SFO.
Ultimately, this was a question of fact (and the Court noted that it was not sure that “every SFO manifestation of concern would properly be regarded as adversarial litigation”). However, the Court stated that, when the SFO specifically makes the prospect of its criminal prosecution clear to a corporation (over and above the general principles set out in the SFO’s Guidelines), and legal advisers are engaged to deal with that situation, there was “clear ground” to contend that a criminal prosecution was in reasonable contemplation. This was the case for ENRC.
Indeed, the Court held that “the whole sub-text of the relationship between ENRC and the SFO was the possibility, if not the likelihood, of prosecution if the self-reporting process did not result in a civil settlement”.
The Court diverged from the views of Andrews J on some important points of general principle, finding that:
- whilst a party anticipating possible prosecution will often need to make further investigations before it can say with certainty that proceedings are likely, that uncertainty does not of itself prevent proceedings being in reasonable contemplation;
- Andrews J was wrong that litigation privilege cannot attach until either; (a) the defendant knows the full details of what is likely to be unearthed; or (b) a decision to prosecute has been taken; and
- the fact that a formal criminal investigation has not yet been commenced will be a part of the factual matrix when determining whether litigation is reasonably in contemplation, but it will not necessarily be determinative.
Documents were generated by ENRC for dominant purpose of resisting or avoiding criminal proceedings
At first instance, Andrews J concluded that ENRC's dominant purpose was to investigate the facts to see what had happened and deal with compliance and governance, rather than defend contemplated criminal proceedings. Andrews J also concluded that there was overwhelming evidence that the interview notes were created for the specific purpose of being shown to the SFO.
The Court disagreed, taking a more pragmatic approach. The Court found that:
- the fact that solicitors prepare a document with the ultimate intention of showing it to the other side (which, in any event, the Court found was not supported by the evidence in this case) does not automatically deprive the preparatory legal work of litigation privilege;
- legal advice given to head off, avoid or even settle reasonably contemplated legal proceedings remains protected by litigation privilege as much as advice on defending or contesting such proceedings would be; and
- whilst reputable corporations will certainly want to ensure high ethical standards for their own sake in their business, realistically, the legal sanction used to enforce appropriate standards in business is the criminal or civil law. As such, where a corporation is facing a clear threat of criminal investigation and prosecution, the reason the corporation is investigating whistleblowing allegations must be “brought into the zone” where the dominant purpose is to prevent or deal with litigation.
In addition, the Court found on the facts that, whilst ENRC had indicated to the SFO it would make “full and frank disclosure”, it did not in fact do so and it had never gone so far as to agree to disclose all of the materials it created in the course of its investigation to the SFO.
The Court noted that, had it been asked to approve a deferred prosecution agreement between ENRC and the SFO, ENRC’s failure to make good on its promises to be full and frank would undoubtedly have counted against it. However, the Court was clear that this would not affect whether the Documents were covered by litigation privilege in the first place.
The Court found that the Documents were brought into existence for the dominant purpose of resisting or avoiding proceedings and so were protected by litigation privilege.
Legal advice privilege – Three Rivers 5 criticised
- Three Rivers 5 decided that communications between an employee of a corporation and the corporation's lawyers could not attract legal advice privilege unless that employee was tasked with seeking and receiving such advice on behalf of the client; and
- it would have departed from Three Rivers 5 if it had the choice.
Lower bar for reasonable contemplation of criminal prosecution
Decisions of the English court which narrowed the scope of legal professional privilege available to businesses involved in regulatory and criminal investigations had become the unfortunate norm. That trend is now starting to reverse.
The decision is positive news for those facing criminal or regulatory investigation and strikes a sensible balance on when litigation privilege should be available in those circumstances. The Court recognised a clear public interest in encouraging companies to investigate allegations from whistleblowers or investigative journalists under the protection of legal professional privilege before approaching the authorities: otherwise, companies might be tempted not to investigate such allegations at all.
Businesses are now in a position where, on the right facts, they can make a successful claim for litigation privilege at a much earlier stage than the first instance judgment suggested, and therefore obtain the benefit of protection for communications with third parties including external expert advisers and employees (or ex-employees) who are not specifically tasked with seeking legal advice. The impact resonates beyond criminal proceedings: the Court’s conclusions are relevant to internal investigations in anticipation of regulatory action by bodies such as the Financial Conduct Authority, Competition and Markets Authority or HMRC.
Businesses will still need to demonstrate, on the facts of each case, that civil litigation or criminal prosecution (or its equivalent) is reasonably in contemplation. But the fact that a corporation has not yet comprehensively established whether there is truth in claims of wrongdoing is no longer a bar to litigation being reasonably in contemplation.
Although the Court's conclusions of fact are specific to this case, they indicate the factors that might help in demonstrating a reasonable contemplation of adversarial litigation. The Court said that it was “not sure” that adversarial litigation would automatically be in contemplation whenever an entity is contacted by the SFO and noted that where an SFO investigation is reasonably in contemplation, it is not inevitable that an SFO prosecution can also be said to be reasonably in contemplation.
Here, however, ENRC was able to provide contemporaneous documents and witness evidence that the Court found pointed clearly towards contemplation of a criminal prosecution if the self-reporting process was not successful in heading it off. Being able to point to examples of similar evidence will be helpful in future cases when seeking to establish a claim to litigation privilege. Factors which the Court considered relevant included:
- ENRC's receipt of a whistleblower email and subsequent appointment of external lawyers to investigate the allegations;
- contemporaneous views of both ENRC's general counsel and head of compliance (expressed by email) that they expected an SFO investigation, and actions taken within the company which were consistent with this view (eg upgrading its dawn raid procedures);
- contemporaneous views of the firm's lawyers that privilege would attach to the documents and that litigation was reasonably in contemplation; and
- the fact that, when the SFO wrote to ENRC, it asked ENRC to consider the self-reporting guidelines carefully, which included express statements that “no prosecutor can ever give an unconditional guarantee that there will not be a prosecution”, and the SFO's expression of similar views in later meetings.
One other practical consequence of the decision is that the SFO (and regulators) will have to confront the question of how they will deal with privileged documents involuntarily produced under statutory compulsion based on the (now overturned) first instance decision. It also remains to be seen whether the SFO will modify the content of its communications with targets of new investigations in response to this decision.
Parties will also have to consider whether the Court of Appeal’s non-binding comments disagreeing with Three Rivers 5 should affect their approach in relation to legal advice privilege, including on the key issue of whether notes of interviews with employees are disclosable when created in circumstances which do not attract litigation privilege. The Court’s decision provides a strong indication that it believes Three Rivers 5 should be overturned, but a party may need to be willing to take that issue to the Supreme Court for resolution.
The SFO has announced that it will not be appealing.
This article, and any further developments in this area, will appear in the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. For more information on how to subscribe to this publication please contact Amy Edwards at firstname.lastname@example.org
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, email@example.com.