Legal Privilege in Regulatory Investigations: analysis of recent decisions

The Court of Appeal decision in SFO V ENRC, which reversed the first instance decision, restored the original position and clarified the law on legal privilege.

This article analyses the original ENRC decision, the decisions which followed it, and the Court of Appeal’s views on each area to help you to understand the challenges to privilege and the approach adopted by the courts.

We have also prepared an article setting out sixteen tips to ensure that you maximise the prospect of successfully claiming privilege: for the best practice guide, please see 'Legal Privilege in Regulatory Investigations: best practice tips following ENRC'.

The first ENRC decision

ENRC saw the High Court decide that an investigation carried out by external lawyers was not legally privileged. Privilege is often of crucial importance in such investigations because many regulators have the power to seize material that is not privileged. It is also important because such cases often lead to parallel civil litigation in which there is an obligation to disclose all relevant material that is not privileged. 

Internal investigations are damaging in both of these scenarios because of their "warts and all" nature and tendency to be self-critical given their objective is to uncover deficiencies in organisational processes and culture.

The difficulty with such an investigation is that, by its very nature, it involves establishing facts in order to enable legal advice to be given. However, to benefit from litigation privilege the "dominant purpose" test must be satisfied. This is a significant bar due to the difficulty in pointing to precisely what litigation is being contemplated and because there are often many competing reasons for an investigation to be carried out, not all of them relating to litigation. 

Judgment and analysis

In ENRC, the company commenced an investigation whilst engaged in a self-reporting process to the SFO.  The court considered that the documents were created as part of that process and so could not have been for the dominant purpose of litigation. In addition, the early stage of the SFO's investigation meant a prosecution was not in reasonable contemplation. It also meant that, as the company was unaware of whether it had committed a crime or not, the investigation could not be privileged. Similarly, as the documents were generated in relation to advice about SFO's investigation, rather than a contemplated prosecution, the dominant purpose test was not met.

The claim for legal advice privilege failed because the documents were prepared to compile presentations to the SFO, not ENRC. Even if they were prepared for legal advice, the underlying materials were not privileged simply because lawyers had compiled them. The court emphasised that for such background papers to be privileged they had to "betray the trend of legal advice". A factual record is not privileged, although documents that form part of the continuum of confidential information between lawyer and client for the purposes of legal advice are privileged. 

It will be immediately apparent that this is not an easy distinction to draw. It is unclear why a lawyer preparing a note to inform advice is not privileged, but a client preparing and sending the same note to a solicitor could be. That approach suggests that legal advice and litigation privilege are mutually exclusive, which is not the position in previous case law.

Stepping back, it will also be apparent how difficult this position is for a defendant. Creating an investigation without knowing if an offence has been committed is not privileged. This means that only once the commission of an offence has been identified can privilege apply – by which time the damage is done and a non-privileged document containing damaging revelations exists.

A further issue arose in respect of a senior employee at ENRC who was said to be acting as a lawyer throughout his time in that role (he was legally qualified). The court examined internal descriptions of his role and the separate responsibilities of General Counsel. The court concluded that he was acting, not as a lawyer, but as a "man of business", the emphasis being on whether his professional duty was to act as a legal adviser. 

Finally the judge considered that ENRC was not able to mount a claim to litigation privilege for obtaining advice on how to avoid litigation, considering that:-

"Equipping yourself with evidence to enable you to conduct your defence free from the risk that your opponent will discover how you are preparing yourself, and to decide what evidence you are planning to call if the case goes to court, and what tactics to employ, is something entirely different from equipping yourself with evidence that you hope may enable you (or your legal advisers) to persuade him not to commence proceedings against you in the first place." 

This, again, is controversial and does not sit well with previous case law.

The Bilta Decision

The case of Bilta (UK) Ltd v RBS, by contrast, involved similar facts but the opposite finding, despite post-dating the ENRC decision. A civil claimant applied for access to materials prepared by RBS in connection with a HMRC investigation over alleged VAT liabilities. RBS asserted privilege – it is worth noting that once a document is privileged it is privileged for all purposes, not just for the litigation in respect of which it was prepared.

RBS' lawyers had prepared a report and had disclosed factual content to HMRC. Similar arguments were made as to why the underlying materials were not privileged, including reliance on the ENRC decision. There was evidence in support of that proposition:

• Formal proceedings had not been commenced or intimated;
• A voluntary process had been followed prior to the lawyers' involvement;
• Some ambiguous statements had been made as to the rationale for the lawyers' report; and
• The document was initially produced by the lawyers sought to dissuade HMRC from pursuing further action, rather than being prepared explicitly for litigation. 

When the report was first commissioned, it was to identify whether RBS should have known about alleged fraud which tainted the VAT transactions in question. The lawyers were therefore involved to determine RBS' knowledge with a view to assessing prospects for defending litigation. This included seeking to dissuade HMRC from pursuing litigation (effectively by putting forward a robust response pre-issue). The claim to privilege also included underlying materials created as part of the investigation, including witness interviews.

Judgment and analysis

The court cited Highgrade Traders which states that assembling evidence to ascertain the strength of your position is a part of litigation and not a distinct purpose (which would otherwise undermine the dominant purpose test in practice).  That decision is also helpful as investigating factual background (in that case the cause of a fire) and taking advice on it were both part of a dominant purpose of anticipated litigation. Investigative reports were prepared in that case for advice to be given on whether an insurance claim should be resisted. That advice would then determine whether anticipated litigation (the insurance claimant suing to enforce the policy) would or would not be likely to take place. 

The Bilta case is distinguishable in a number of ways. Firstly, there was clear evidence before the court that RBS anticipated litigation. Despite the lack of intimated proceedings, the court accepted RBS and its legal advisers' evidence that they were convinced litigation would inevitably ensue from HMRC's correspondence. It was also clear that the documents in question were never intended to be shown to HMRC. When they were disclosed to HMRC, an explicit reservation was included that privilege was not waived in the underlying material. 

While the judge in ENRC felt that the intention of disclosing material undermined the claim to privilege from the outset, the judge in Bilta disagreed. He specifically stated that cooperation with a regulator does not "preclude the investigation being conducted for the dominant purpose of litigation". Similarly, he indicated that the fact that documents were prepared to seek to dissuade a third party from litigating did not undermine privilege. He stated that:-

"An intention to dissuade a counterparty from pursuing a claim or, in this case, issuing an assessment, is inseparable from the wider purpose of conducting litigation", which contradicts the Judge's reasoning in ENRC." 

The Jukes Decision

The decision in HSE v Paul Jukes created further confusion. A defendant to criminal proceedings had given a statement to his employer's lawyers at the investigative stage. He was subsequently prosecuted and HSE were in possession of the statement which contradicted his interview under caution. HSE's reliance on this document was challenged on the grounds that the statement was privileged (either the defendant's or that of his employer) and that privilege had not been waived.

Judgment and analysis

The court gave the argument that the document was privileged short shrift; it was not privileged as "matters were still at the investigatory stage. An investigation is not adversarial litigation",citing ENRC. That, again, does not sit well with Highgrade Traders or Bilta. The court went on to add that:-

"there is no evidence…that at the time that these investigations by the company were taking place in February 2011, any of them had enough knowledge as to what the investigation would unearth or had unearthed when the Health and Safety Executive concluded its investigations, that it could be said that they appreciated that it was realistic to expect the Health and Safety Executive to be satisfied that it had enough material to stand a good chance of securing convictions".  The court added that:-

"One critical difference between civil proceedings and a criminal prosecution is that there is no inhibition on the commencement of civil proceedings where there is no foundation for them, other than the prospect of sanctions being imposed after the event. A person may well have reasonable grounds to believe they are going to be subjected to a civil suit at the hands of a disgruntled neighbour, or a commercial competitor, even where there is no properly arguable cause of action, or where the evidence that would support the claim has not yet been gathered. Criminal proceedings, on the other hand, cannot be started unless and until the prosecutor is satisfied that there is a sufficient evidential basis for prosecution and the public interest test is also met. Criminal proceedings cannot be reasonably contemplated 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". 

The court went on to add that:-

"It does not seem to us that it is any answer to that point … that … where there is a death and on the face of it a breach of duty, the Health and Safety Executive normally prosecutes. There is, as we have said, no evidence as to the state of mind of any of the people who were subsequently prosecuted, nor any evidence from the Health and Safety Executive as to the stage of their investigation as at 9 February 2011"

Health and safety prosecutions are generally reverse burden offences and in the wake of a serious incident it is the norm for a prosecution to follow. It is therefore unclear how a prosecution could not be in reasonable contemplation from the outset of such an investigation. It is also unclear why the regulator’s state of mind would be relevant as to whether a prospective defendant reasonably anticipated criminal litigation.

All the prosecution has to demonstrate in such cases is the existence of a material foreseeable risk. The mere fact of an accident will be prima facie evidence of this. It is then for the Defendant to demonstrate that reasonably practicable control measures were in place to eliminate or minimise that risk. Evidence of the Defendant's control measures will often only be presented at the interview under caution stage so the court's logic left significant doubt as to when criminal proceedings can be anticipated in such cases. 

The case implied a curious situation where a civil claim can be anticipated more easily than a criminal prosecution, the logic that a criminal case must satisfy a prosecutor seems flawed – in effect it requires a Defendant to consider himself guilty in order to anticipate a prosecution, meaning privilege could only arise after an investigation has concluded. 

Given that there are procedures for dismissing unmeritorious criminal prosecutions and prosecutions that constitute an abuse of the court's process, the court's deference to the hurdle of the public interest test appears flawed.  In any event, this case created uncertainty about when the "watershed moment" occurs in criminal, particularly regulatory, investigations. Such uncertainty is particularly unwelcome in the wake of ENRC.

The Court of Appeal ENRC decision

The Court of Appeal considered the judge’s reasoning from the original ENRC decision: 

• It reviewed the evidence and concluded that ENRC were aware that they were on the SFO’s “radar” and reasonably anticipated a prosecution if a civil settlement could not be agreed.The simple possibility of an investigation did not necessarily give rise to “reasonable contemplation” of litigation. However, SFO had intimated the prospect of a prosecution and ENRC had engaged legal advisors, creating clear grounds for contending that litigation was being contemplated.
• The Court of Appeal concluded that the need for a company to carry out further investigations to determine if a prosecution is likely to be successful, does not prevent privilege arising (its reasoning is similar to the Bilta decision above).
• It also disapproved of the judge’s suggestion that criminal and civil investigations differed as to when privileged could arise, stating that:-

  “It would be wrong for it to be thought that, in a criminal context, a potential defendant is likely to be denied the benefit of litigation privilege when he asks his solicitor to investigate the circumstances of any alleged offence”. This is of crucial importance to those dealing with regulatory investigations.

• The Court of Appeal commented on the Jukes decision, effectively saying it was a decision on its own facts and that, at the time the document was created, prosecution was not in reasonable contemplation (some 18 months before an interview under caution).

  It seems unlikely that the Court of Appeal's comments in the Jukes decision in relation to the distinction between civil and criminal proceedings will be applied more widely given the above remarks. Again, this is good news for prospective defendants carrying out investigations.

• The Court of Appeal considered that the underlying intention to show the documents prepared by ENRC’s solicitors to the SFO as part of the self-reporting process did not preclude privilege applying; it explicitly endorsed the concept that legal advice given to prevent or settle proceedings attracts privilege.

  This is clearly the most sensible approach as otherwise prospective defendants who prudently engage in settlement negotiations would face the real risk; that if negotiations collapse they would then face satellite litigation for disclosure of non-privileged documents created to support their attempts at settlement.

• The Court of Appeal also rejected the idea that the investigation of facts dealing with compliance and governance and used for fact-finding precluded privilege applying, even going so far as to add that “even if litigation was not the dominant purpose of the investigation at its very inception, it is clear from the evidence that it swiftly became the dominant purpose”. In doing so, again, it closely followed the logic of the Bilta decision above that as the situation evolves reasons change and that the court must look at the broader context.
• The Court of Appeal effectively reversed all of the judge’s findings in relation to privilege and recognised that, in whistle-blower investigations and where self-reporting is available, it is important to avoid construing privilege too narrowly so as not to discourage investigations.

A final area, left undecided by the Court of Appeal, was the question of who, with large and group corporate entities is “the client”. If that is defined too narrowly then these organisations are disadvantaged due to their sheer size and the need to speak to many individuals to get a clear picture of events. 

The Court of Appeal declined to change the current narrow way this is interpreted but expressed its disagreement with the narrow interpretation and its disparity with other common law countries.  This issue can only be resolved by the Supreme Court.

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