Litigation privilege and investigations by an expert

The decision in Kyla Shipping Co Ltd & Anor v Freight Trading Ltd & Ors [2022] EWHC 376 (Comm) has highlighted that where a party decides to investigate an issue, documents produced in connection with the investigation will only be protected by litigation privilege if it can be shown that they were produced for the dominant purpose of litigation that was reasonably in prospect.

Background

The case arises out of a number of forward freight agreements (FFAs) that were entered into in 2007 and 2008 between Kyla Shipping Co Ltd (Kyla), and the first defendant (Freight Trading Ltd) and second defendant (C Transport Panamax Ltd). Kyla alleged that these FFAs were entered into at off market rates, in order to enrich the first and second defendants (the Mispricing Claim).

Separately to that claim, Kyla was also involved in a dispute with its shareholders in 2018 regarding the payment of a dividend, following receipt of monies from insurers (the YPA Dispute).

In late 2018 an expert was instructed by Kyla to audit the FFAs. According to a witness statement provided by Kyla’s solicitors, the expert was instructed “for the sake of providing ballast in the correspondence with YPA/[Peter Livanos]”.

It was also claimed by Kyla that it believed that there was a basis for bringing a counterclaim in the YPA Dispute, as a result of alleged ‘mismanagement’ by Freight Trading, and that the audit exercise would support such a counterclaim.

The initial expert audit raised additional questions about the FFAs and, following further investigations, ultimately led Kyla to initiate the Mispricing Claim against Freight Trading and the other defendants. While the court accepted that any documents created for the dominant purpose of the YPA Dispute would be covered by litigation privilege, a question mark arose on whether litigation privilege could be claimed over the ‘ballast exercise’, prior to the crystallisation and discovery of the Mispricing Claim.

Decision

The court held that the initial audit exercise was not for the dominant purpose of litigation in reasonable prospect. Charles Hollander QC, sitting as a deputy judge, referred to the ‘ballast exercise’ basis upon which the expert audit was instructed and stated that such a purpose was difficult to square with a claim for litigation privilege.

In reaching its decision, the court also considered the basis upon which litigation could be said to be “reasonably in prospect”. It found that, while the instruction of an expert appeared to be for the purpose of trying to support an allegation of mismanagement against Freight Trading, events had not reached a stage where it was possible to say that litigation in relation to any claim for mismanagement was reasonably in prospect. As result of the court’s findings, Kyla was ordered to reconsider its claim for litigation privilege over the initial audit exercise.

As part of the court’s decision, it also had to consider whether Kyla had waived privilege over the expert report relating to the audit and underlying documents as a result of the references in the witness statement from Kyla’s solicitors. The court held that privilege had not been waived. The references in the witness statement were for the purpose of explaining the circumstances surrounding the instruction of the expert, and there was no reliance on, or reference to, any particular document.

Comment

As this case demonstrates, parties should tread carefully when investigating issues. If a party cannot demonstrate that documents produced (whether by themselves or a third party) in connection with an investigation were for the dominant purpose of litigation that was reasonably in prospect, it will be unable to claim litigation privilege over those documents.