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Legal privilege upheld in internal investigation, but no retreat from ENRC

Back in May 2017, the decision in Serious Fraud Office v Eurasian Natural Resources Corporation Limited (ENRC) caused consternation in the investigations world.

The decision, by Mrs Justice Andrews, concluded that various documents created in an internal investigation (against the backdrop of an SFO investigation) were not privileged. These included evidential notes taken by lawyers and forensic accountant's materials.

Her decision also concluded, more controversially, that documents prepared for the dominant purpose of avoiding contemplated litigation were not privileged, on the basis that equipping yourself to fight a claim is "entirely different" from capturing evidence you hope to use to persuade your opponent not to commence litigation. That created a tension with the existing Court of Appeal decision in Re Highgrade Traders [1984] where the Court found that a report had been prepared with  "a duality of purpose because…. the Insurers wanted not only to obtain the advice of their solicitors, but also wanted to ascertain the cause of the fire. Now, for my part, I find these two quite inseparable.”

ENRC is being appealed and is due before the Court of Appeal later in 2018 and this latter point will doubtless be a key part of that appeal.

Bilta : A different decision on the facts

The recent High Court decision in Bilta (UK) Limited & Ors –v- Royal Bank of Scotland plc & Anor (Bilta) has upheld a claim to litigation privilege on similar facts. At first glance, this case appears to clash with ENRC, and there is certainly a theme in the Bilta judgment that questions whether ENRC is "determinative" in all cases.

However in Bilta, Sir Geoffrey Vos Chancellor of the High Court, was careful to navigate the reasoning in ENRC, and to distinguish it on the facts. Bilta is not, therefore, a conflicting authority and it remains the case that the Court of Appeal decision in ENRC will be the one to watch.

Evidence of the purpose of creation of documents

The evidential burden of establishing a claim to privilege lies on the party claiming the privilege. They must show "a real prospect of litigation. Where it is neither pending nor threatened, it must be in the active contemplation of the party…." - Plummers v Debenhams [1986]

On that basis, the party claiming privilege must "show that he was aware of circumstances which rendered litigation between himself and the particular person or class of persons a real likelihood rather than a mere possibility" - USA v Philip Morris [2003] The relevant evidence must be "specific" and show something of the analysis to show that the purpose for which documents were created was the anticipated litigation, preferably "by reference to such contemporaneous material as it is possible for him to refer without disclosing the very matters which the claim to privilege is designed to protect".

In ENRC, the Court noted that whilst that evidence was not (in any event) conclusive, the evidence deployed by ENRC was "not of the highest quality" because ENRC had been unable to obtain direct witness evidence from those whose motivation and state of mind was in question, partly because of changes in the investigative team and partly because of some "falling out" which led those people to refuse to cooperate with them.

Given this, the Court faced some challenges in determining what the people who created the documents viewed as the purpose behind their creation.

In Bilta, the Judge noted:

"the exercise of determining the sole or dominant purpose in each case is a determination of fact. Although both cases, that is ENRC and this case, 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. I have to focus then on the facts of the present case" [emphasis added]

In Bilta, the Court was assisted by direct evidence from RBS's UK Head of indirect tax, the internal RBS managing counsel leading the investigation, and evidence from the external lawyers who had taken the relevant evidence. This was quoted as solid evidence of the purpose behind the creation of the relevant material.

Is it an Investigation or Litigation that is contemplated?

In ENRC, the Court rejected the idea that the existence of an SFO criminal investigation was the equivalent of adversarial litigation. An investigation was "a preliminary step" taken before any decision to prosecute was made, after consideration of the results of the investigation. So whilst the Court accepted that that ENRC anticipated that an SFO investigation was imminent, it was not adversarial litigation. Thus, documents that had been generated when there had been only a "general apprehension of future litigation" were not protected by litigation privilege because "The reasonable contemplation of a criminal investigation does not necessarily equate to the reasonable contemplation of a prosecution".

The conclusion that "The investigation and the inception of a prosecution cannot be characterised as part and parcel of one continuous amorphous process" leading to litigation, was one made on the facts. The Court acknowledged that "There may be cases in which an expectation of an investigation can be equated with a reasonable contemplation that the person with that expectation will be prosecuted, but that will depend on the facts". [emphasis added]

Key to that is whether the person who anticipates the investigation "is aware of circumstances that, once discovered, make a prosecution [litigation] likely", and that "must therefore be considered on a case by case basis".

By contrast, in Bilta, the Court was able to highlight an exact moment when RBS would reasonably have contemplated litigation, by reference to a specific letter from HMRC, describing it as a "watershed moment". The Court looked at the letter carefully, concluding that:

"That letter stated for the first time that HMRC it considered that it had sufficient grounds to deny RBS nearly £90 million by way of input VAT. The HMRC letter analysed the relevant law and applied the law to the facts as they understood them before asking for RBS's comments on those facts. It was, therefore, similar in nature……to a letter before claim."

It was also recognised that as a matter of "business and revenue reality" an HMRC assessment would follow. The evidence on the RBS side all corroborated that.

The Chancellor thus concluded that "I do not think that the facts that arise in this case arose in the case with which Andrews J was dealing." (ENRC).

The issue of whether an investigation is part of "the continuum that formed the road to the litigation" (as per Bilta) seems likely to be an issue that will continue to be fact driven, but it can be hoped that the Court of Appeal will adopt a similar view of "business…reality" when it hears the ENRC appeal later this year, and provide guidance on it.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions

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