RBS Rights Issue Litigation and legal advice privilege

The article first appear in the Tax Journal, Issue 1342, 12

In The RBS Rights Issue Litigation, the High Court has held that notes of investigation interviews with current and former employees by in-house and external lawyers were not privileged and protected from disclosure in litigation as the employees were not the 'client' and the notes did not reveal the trend of legal advice. The fact that the interview notes were taken in the US and were likely to have been privileged as a matter of US law made no difference. The case provides an important reminder of the need to consider carefully the identity of the 'client' when creating or disclosing documents for the purposes of a tax-related investigations. It also highlights some complexities surrounding privilege in cross-border disputes and investigations.

Both when creating documents for the purposes of a tax-related investigation and when reviewing documents for the purposes of producing documents to HMRC, the extent to which material is protected by legal privilege may be important. Investigators will want to ensure that material is protected where appropriate and disclosers will want to ensure that protected material is not inadvertently disclosed. Over the years, there have been a number of cases in which claims to privilege have not been upheld and the recent decision in the RBS Rights Issue Litigation [2016] EWHC 3161 illustrates some of the difficulties in determining when the privilege umbrella is available.

As part of the RBS Rights Issue Litigation, the claimants sought disclosure of notes of interviews with current and former bank employees by in-house and external lawyers, undertaken as part of two internal investigations. At the time of the interviews, litigation was not in contemplation and it was accepted that litigation privilege (which can extend to communications with third parties produced for the dominant purpose of the litigation) was not available. Similarly, litigation privilege will also frequently be unavailable when investigations are initiated or HMRC information requests received.

RBS raised four arguments that the interview notes were privileged on other grounds:

1. the interview notes were subject to legal advice privilege;
2. the interview notes were ‘lawyers privileged working papers’ (in accordance with the decision in Balabel v Air India [1988] 1 Ch 317);
3. the English court should apply US federal law, under which the interview notes were said to be privileged; and
4. even if the question of privilege was governed by English law, the court should exercise its discretion to withhold the documents on the basis that they were privileged under US federal law.

The High Court rejected these arguments and held that the notes of interviews were not privileged under any of the grounds.

Legal advice privilege

Legal advice privilege can only apply to communications between lawyers and clients and the definition of ‘client’ is not as straightforward as it might seem, particularly where corporates are concerned. It should not be assumed that the ‘client’ will necessarily extend to all of the company’s management and employees, however senior.

In the leading case, Three Rivers District Council and others v Governor and Company of the Bank of England (No. 5) [2003] EWCA Civ 474 (‘Three Rivers’), the Court of Appeal construed the definition of client narrowly, finding that the ‘client’ was a three-man inquiry unit set up within the bank. Information gathered from bank employees outside this unit was no different from information obtained from third parties and was not privileged.

This decision has been widely criticised as applying too narrow a view of ‘client’ and has not been followed in Australia or Hong Kong (although it was followed in Astex Therapeutics v Astrazeneca AB [2016] EWHC 2759, handed down on the second day of the RBS Rights Issue case).

In arguing that the interview notes were protected by legal advice privilege, RBS sought to distinguish Three Rivers on the following grounds:

In Three Rivers, a specific committee had been set up with the express responsibility of obtaining legal advice. When considering Three Rivers, the Singapore Court of Appeal had decided that Three Rivers ‘should be read in the context of the court’s finding that [a special unit set up within the bank] (and no one else) was authorised to communicate with the bank’s solicitors’. In contrast, the RBS interviewees were authorised by RBS to communicate factual information to the lawyers specifically in order to enable RBS to obtain legal advice. On the basis of that express authority, RBS argued, the employees should be treated as an emanation of the client.

Three Rivers concerned ‘purely internal’ documents, whereas the RBS interview notes had been taken by external lawyers and so should not be viewed as preparatory to communication with its legal advisers.

The court acknowledged that Three Rivers was a controversial decision but considered itself bound by it nevertheless. Importantly, although the interview notes recorded direct communications with external lawyers, they constituted information gathered from employees in preparation for obtaining advice. The employees did not fall within the definition of ‘client’ and the communications were not therefore protected by legal advice privilege. Further, the authority given to the employees to provide information to the lawyers did not bring them into the ambit of the ‘client’.

Lawyers privileged working papers

After considering relevant case law, the relevant test in relation to ‘lawyer’s privileged working papers’ was described as being that the documents should ‘give a clue as to the trend of advice being given to the client by its lawyer’. Verbatim transcripts of interviews taken by lawyers would not be privileged on this basis; however, where the lawyer’s own thoughts and comments were included with a view to advising the client, the note of interview would almost certainly be privileged.

The court concluded that RBS had not provided sufficient evidence to substantiate a claim to privilege. It is not sufficient that the documents reveal a lawyer’s ‘train of enquiry’: the document must give at least a clue as to the actual advice given. Although the notes were not verbatim, it did not necessarily follow that they therefore contain legal input or selection: more is required to establish the extent and nature of the selection undertaken. Likewise, an annotation that the notes reflect the ‘mental impressions’ of the lawyers must be backed up by evidence that they do in fact, upon careful review, contain material that would or could reveal the trend of advice in order to justify privilege.

Applicable law for privilege

Significantly for cross-border investigations and litigation, RBS also argued that the issue of privilege should be determined on the basis of US federal law, because the US was the jurisdiction most closely connected with the engagement or instructions pursuant to which the interview notes came into existence (unless this was contrary to English public policy). The court described this as a ‘bold submission’. Under US federal law, it was submitted, and the court was prepared to assume, the documents would be privileged on the US principle of attorneyclient privilege (pursuant to the decision of the US Supreme Court in Upjohn Co. v United States (1981) 449 US 383).

The court held that only English privilege laws should be applied. The fact that notes of interviews which took place in the US were likely to be privileged as a matter of US federal law was not relevant. Although the court was not unsympathetic to the submissions, it held that there was insufficient basis for disturbing the well-established convention or practice of the English courts of applying the law of the forum in which the case is being heard (i.e. English law).

Discretion

Finally, although it was accepted that the court retains a discretion not to order disclosure or inspection of an otherwise disclosable document, the court declined to exercise such discretion on the facts. It was ‘not inconceivable’ that the private rights of an individual, relying on a legitimate expectation that documents would be privileged, might displace general public policy considerations. However, whilst it was unclear whether the possibility of any legal action in England was actively envisaged at the time of the interviews, on the facts, including the use of English law for the prospectus which was the subject matter of the dispute, it could not have been thought altogether unlikely.

Although RBS had been granted a certificate allowing an application for permission to appeal directly to the Supreme Court (bypassing the Court of Appeal), no such application will now be made due to amendments to the claimants’ case which rendered the documents in question irrelevant. It is perhaps unfortunate that the first opportunity in over a decade for the Three Rivers decision to be overturned and a wider definition of ‘client’ for the purposes of legal advice privilege to prevail will no longer arise.

Practical points

In the context of any tax-related investigation, whether or not prompted by an HMRC enquiry, it therefore remains vital to consider the identity of the ‘client’ and the means by which the fact gathering process is conducted from the outset and to scrutinise the position on an ongoing basis. Further, any production should only be made following a careful review of potentially relevant material to ensure that disclosure is appropriate both in terms of excluding privileged material and avoiding inappropriate claims to privilege.

The decision is also an important reminder in relation to cross-border matters that what is privileged in one jurisdiction will not necessarily be held to be privileged in another; and that privileged status will ultimately depend on the law of the forum where the question of privilege arises. Those advising will need to give consideration to the rules of privilege in any jurisdictions where proceedings may subsequently be commenced.