Internal investigations: when does privilege apply?

The Court of Appeal last week handed down an eagerly awaited decision¹ addressing, in particular, fundamental issues as to the ambit of litigation privilege in investigations.

The appeal sought to overturn the High Court’s decision that various communications connected with an internal investigation (including notes of interviews and forensic accounting materials) were not protected by litigation privilege. The High Court had held that litigation privilege did not apply because: a Serious Fraud Office (SFO) investigation was not sufficiently adversarial for the purposes of litigation privilege; it could not be said that litigation was in contemplation; and that even if litigation was in contemplation, the documents were not created for the dominant purpose of use in the litigation (see summary of the High Court’s decision here).

The Court of Appeal reversed the decision in relation to litigation privilege, holding that litigation was in reasonable contemplation from the outset of the investigation and that the materials in question (including interview notes and forensic accounting materials) were created for the dominant purpose of resisting or avoiding contemplated criminal proceedings, and so protected by litigation privilege. The Court of Appeal’s decision resets the boundaries of litigation privilege in investigations.

This article summarises the Court of Appeal’s decision and provides key practical takeaways in relation to the application of privilege to investigations.

Key takeaways

• Companies faced with allegations of wrongdoing can conduct investigations with greater confidence that documents relating to the investigation will be protected by litigation privilege under English law. The Court of Appeal stressed that it is in the public interest for companies to be able to investigate allegations prior to reporting to a prosecutor without losing the benefit of legal professional privilege.
• The decision does not mean there is blanket protection for internal investigations: the party asserting litigation privilege will still have to show that the dominant purpose of the communication in question related to adversarial litigation that is in progress or reasonably in contemplation (see Litigation Privilege below).
• Documenting the purpose and scope of an internal investigation and the justification for documents being covered by privilege is vitally important at the outset of and throughout an investigation. When assessing whether or not privilege applies, the court will consider carefully the nature, quality and content of the evidence supporting the claim for privilege.
• The narrow definition of “client” for the purposes of legal advice privilege still stands (although the Court made clear that it views this narrow definition as unworkable). Notes of interviews with witnesses who do not constitute “the client” will therefore only be privileged where litigation privilege applies.
• Lawyers’ working papers will only be covered by legal advice privilege to the extent that they betray the tenor of legal advice. As a result, notes taken by lawyers of investigation interviews will not automatically be privileged by virtue of the fact the notes were taken by a lawyer.

An internal investigation was launched following whistle-blower allegations of fraud, bribery and corruption. Lawyers were engaged in early 2011 to carry out a fact-finding investigation, followed by forensic accountants a few months later.

The SFO initiated discussions with the company in August 2011 following a press report. In April 2013 the SFO began a criminal investigation. As part of its investigation, the SFO sought disclosure of certain documents generated during the internal investigation, which had continued in the interim period. The company claimed that these documents were privileged, and the SFO sought a declaration from the English court that they were not.

By the time of the appeal, there were essentially three categories of documents in respect of which privilege was disputed

• Interview notes: notes taken by external lawyers of internal investigation interviews with employees, former employees and officers of the company and its subsidiaries, suppliers and other third parties. It was claimed that these documents were protected by litigation privilege on the basis that the dominant purpose of the interviews was to enable the company’s lawyers to obtain relevant information and instructions and to provide advice in connection with anticipated adversarial criminal litigation. Alternatively it was claimed that the notes were protected by legal advice privilege on the basis that they constituted lawyers’ work product and revealed the trend of the legal advice being provided. Legal advice privilege over the interview notes was not claimed on any other grounds, presumably recognising the difficulties in doing so given the narrow definition of the “client” following Three Rivers No. 5 as confirmed in December 2016 by the RBS Rights Issue Litigation case (the RBS Litigation).
• Accountants’ materials: materials generated by external accountants as part of “books and records” reviews carried out to identify controls and systems weaknesses and potential improvements. Litigation privilege was claimed in respect of these documents.
• Documents referred to in correspondence between the law firm and the SFO: 17 documents referred to in a letter sent to the SFO by the company’s lawyers. The majority of these documents were or reflected the accountants’ reports. Litigation privilege was claimed. Two of these documents were internal company communications between a senior executive and the then Head of Mergers and Acquisitions (a qualified lawyer who had previously acted as the company’s General Counsel); legal advice privilege was claimed in respect of these two documents.

It was common ground that communications between a party/their solicitors and third parties for the purpose of obtaining information or advice in connection with existing or contemplated litigation attract litigation privilege so long as

• The litigation is adversarial, not investigative or inquisitorial.
• Litigation is in progress or reasonably in contemplation.
• The communications are made with the sole or dominant purpose of conducting the litigation.

Litigation is adversarial

The High Court had held that criminal investigation by the SFO should not of itself be treated as adversarial litigation for litigation privilege purposes. The Court of Appeal did not specifically comment on this conclusion but it is clear from the judgment that it considers that adversarial litigation may - depending on the facts - be reasonably in prospect whether or not a formal SFO investigation has commenced or the SFO has been notified of the matter.

Litigation in contemplation

The High Court held that the reasonable contemplation or onset of a criminal investigation by the SFO did not necessarily equate to the reasonable contemplation of a prosecution. Further, the Judge took the view that even where allegations of criminal conduct were being investigated, prosecution only becomes a real possibility once it is discovered that there is some truth in the allegations.

The Court of Appeal rejected this approach, holding that the Judge had been wrong “to suggest a general principle that litigation privilege cannot attach until either a defendant knows the full details of what is likely to be unearthed or a decision to prosecute has been taken. The fact that a formal investigation has not commenced will be one part of the factual matrix, but will not necessarily be determinative”. While the Court of Appeal cautioned that not every SFO manifestation of concern would properly be regarded as adversarial litigation, when the SFO specifically makes clear to a company the prospect of its criminal prosecution, and legal advisers are engaged to deal with that situation (as in the present case), there are clear grounds for contending that criminal prosecution is in reasonable contemplation. Further, they considered 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 in itself prevent proceedings being in reasonable contemplation.

The Court of Appeal held that on the facts, litigation (i.e. an SFO prosecution) was in reasonable contemplation when the company initiated its internal investigation and certainly when it received a letter from the SFO in August 2011. Significantly, this was held to be so notwithstanding that the letter expressly stated that the SFO was not carrying out a criminal investigation at that stage but instead made reference to “recent intelligence & media reports concerning allegations of corruption and wrongdoing by [ENRC]” and urged the company to consider carefully the SFO’s 2009 Self-Reporting Guidelines whilst undertaking its internal investigations.

Dominant purpose test

At first instance, it was held that the primary purpose of the investigation was to find out if there was any truth in whistleblowing allegations and then to decide what to do if there was.

The Court of Appeal again rejected the High Court’s approach, holding that “where there is a clear threat of a criminal investigation, even at one remove from the specific risks posed by the SFO should it start an investigation, the reason for the investigation of…allegations must be brought into the zone where the dominant purpose may be to prevent or deal with litigation.” Indeed, the Court of Appeal stressed that nothing in the judgment should be taken to impact adversely on the operation of the Deferred Prosecution Agreements scheme set out in Schedule 17 of the Crime and Courts Act 2013, noting that it is obviously in the public interest that companies should be prepared to investigate allegations prior to going to a prosecutor without losing the benefit of legal professional privilege for the work product and consequences of their investigation. Were they to do so, the temptation might well be not to investigate at all.

Further, the Court commented that in both the civil and the criminal context, seeking to head off, avoid or even settle reasonably contemplated proceedings is as much protected by litigation privilege as resisting or defending such contemplated proceedings. This analysis reflects the approach in the earlier case of Bilta (in liquidation) v RBS [2017] EWHC 3535 (Ch).²

The High Court held the following to be correct

• The narrow definition of “client” per Three Rivers No. 5 , i.e. that only communications between lawyers and those individuals at the corporate client authorised to seek and receive legal advice on behalf of the corporate will be protected by legal advice privilege.
• The position taken in the RBS Litigation in relation to lawyers’ working papers, i.e. that legal advice privilege protection over lawyers’ working papers will only be justified if the working papers would betray the tenor of the legal advice.

Narrow definition of client

Notwithstanding extensive criticism of the Court of Appeal’s decision in Three Rivers (No.5), the Court of Appeal in ENRC considered it could not ignore the Court of Appeal’s previous determination and held that the matter was for the Supreme Court to decide. The Court noted that English law is out of kilter with other common law jurisdictions on this point and stated that “had it been open to us to depart from Three Rivers (No. 5), we would have been in favour of doing so.”

Lawyers’ working papers

The Court of Appeal took the view that the question of whether lawyers’ working papers should be protected generally by legal advice privilege was a matter for the Supreme Court. In the meantime, legal advice privilege will only be justified if the working papers would betray the tenor of the legal advice (although there may be greater scope to argue that litigation privilege applies to such papers in light of ENRC).

The decision in relation to litigation privilege in the context of investigations with a criminal or regulatory element is to be welcomed. Not only does it clarify the ambit of litigation privilege in investigations but it also removes the distinction created by the first instance decision between civil and criminal proceedings as to when litigation is in contemplation.

The main outstanding question in relation to legal advice privilege is whether Three Rivers will be overturned and if so, when. Adopting a broader definition of ‘client’ would give much greater protection to internal investigations and bring the English law position closer to that of other common law jurisdictions. However, the SFO decided not to appeal the decision, with the result that English law will be left with the narrow definition of client for the foreseeable future.