Dechert LLP

07/03/2020 | Press release | Distributed by Public on 07/03/2020 10:13

Privilege Update: Protecting the limits of limited waivers

The courts have recently sent contrasting signals in respect of the scope of legal professional privilege ('LPP'). In A v B and Financial Reporting Council1, Mr Justice Trower restated and applied the law on legal advice privilege. The case also provides useful guidance on how to address a dispute about LPP between parties to a limited waiver agreement.

The role and powers of the FRC

The Financial Reporting Council ('FRC') is a semi-governmental supervisory body whose role includes investigating the statutory audit work carried out by auditors. The UK government is set to replace the FRC with a new statutory regulator with enhanced powers, yet for the time being the FRC remains the supervisory body for auditors in the UK and in the Republic of Ireland.2 The Statutory Auditors and Third Country Auditors Regulations 2016 ('SATCAR')3 provide for the FRC's investigative powers in relation to the statutory audit or annual accounts of any 'public interest entity', i.e. an issuer whose transferable securities are admitted to trading on a regulated market.4 Under SATCAR, the FRC may give notice to an auditor subject to its supervision, and to any public interest entity, requiring the provision of information, production and creation of documents for such an investigation.5 However, SATCAR expressly exempts privileged material from compelled disclosure.6 In Sports Direct v Financial Reporting Council, the Court of Appeal recently held that this exemption covered material over which the auditor or the auditor's client could claim LPP. The Court did not accede to the argument that the client would suffer no prejudice if its privileged material were disclosed to the FRC, and firmly rejected a special exception for such regulatory proceedings. Our previous OnPoint on the topic can be found here.

The facts of A v B & FRC

A (the Claimant) is a retailer who engaged auditor B (the Defendant), to carry out a statutory audit in 2018. As part of this audit, A provided B with a number of documents under a limited waiver of LPP. The FRC subsequently commenced an investigation into B's audit work and served a statutory notice under SATCAR compelling the production of material relating to B's audit of A. This led to disagreement between the parties in respect of some of the documents which had been shared under the express limited waiver: A maintained a claim to LPP over six documents which B contended were not privileged and should be disclosed to the FRC. Accordingly, A brought a claim for declaratory relief against B.

The proceedings

The declaration sought by A raised an abstract point of principle: was B obliged to refuse disclosure whenever A made a claim to LPP, or should B undertake its own, independent assessment? Separately, B also counterclaimed against A, seeking guidance from the court as to whether the six disputed documents were actually privileged or not. The claim and counter-claim were heard in private, and separate, redacted judgments were handed down for the claim and counter-claim respectively.

The court considered the regulatory regime under SATCAR in some detail and sought to ensure that it could operate efficiently. SATCAR should be construed in such a way that the procedures adopted can be implemented in a manner which facilitates rather than obstructs the proper conduct of the FRC's statutory investigation, whilst recognising that A is entitled to have its right to LPP protected.7

Limited waiver

The court refused the declaration sought by A on the ground that the claim was too abstract and would not satisfactorily resolve the real issues. These were best considered in determining the counterclaim. However, the court still provided useful guidance for situations in which documents are shared subject to a limited waiver of LPP:

  • An auditor is obliged to maintain its (former) client's claim to LPP, provided the documents are in fact privileged.8 If necessary, the court's guidance may be sought on the LPP status of particular documents, as was done in the counter-claim in these proceedings.
  • The initial assessment as to whether or not a document is privileged must be made by the auditor in receipt of the SATCAR notice. The client's rights will in general be sufficiently protected by the right to seek injunctive relief from the courts in the case of disagreement.9
  • The precise relationship between client and auditor is governed by the terms of engagement.10 However, the court suggested that whatever the arrangement, an auditor should inform its client of a SATCAR notice in sufficient detail to allow the client to seek an injunction if necessary.11
  • As an alternative to awaiting an application for injunctive relief by the client, the auditor may seek a declaration from the court. In any event, it would always be preferable for the dispute about LPP to be between auditor and client, since both would have had sight of the disputed documents and could make submissions accordingly.12 The FRC could be joined as a party where necessary, but would in any event be bound by the court's determination of the LPP issues (absent rare instances of 'collusion' between client and auditor).13

Practical points on limited waiver agreements

Companies would therefore be well-advised to use the formal limited waiver agreement with the auditor or professional advisor to set out their legal assessment as to why a particular document or categories of documents are to be treated as privileged. While this does not entirely remove the risk of subsequent disagreement where the advisor becomes the subject of a regulatory disclosure request, it formalises the starting point of any consideration of the LPP status of those documents. The agreement should also clearly stipulate that where a request for disclosure of documents shared subject to limited waiver is received by the auditor, they must inform the client of the request promptly.

Legal advice privilege

The court handed down a separate judgment in response to B's counter-claim. This judgment considered the six disputed documents, and found that they were not covered by legal advice privilege. Mr Justice Trower first restated the orthodox position: (1) Legal advice privilege attaches to all communications made in confidence between lawyer and client for the purpose of giving or obtaining legal advice, whether or not litigation is in contemplation;14 (2) The privilege also extends to the dissemination of such advice;15 (3) The communication does not need to record advice on matters of legal principle. LPP extends to all documents within the continuum of communications, the overall purpose of which is to give advice on what should prudently and sensibly be done in the relevant legal context.16 The judge also regarded himself as bound by the decision in R (Jet2.com) v Civil Aviation Authority17 (see OnPoint here), in which the Court of Appeal had held for the first time that the legal advice purpose had to be a 'dominant' one. Indeed, A v B & FRC is the first application of the 'dominant purpose' test in cases of legal advice privilege since Jet2. The judge acknowledged that the new test was not free from controversy.18

Having inspected the disputed documents, the judge found that none of them was wholly privileged:

  • Executive committee minutes which had been prepared or at least reviewed by A's general counsel were not privileged, being mere records of what had passed during the meeting and not containing any legal advice. Lawyers, including the general counsel, might often undertake 'secretarial functions.'19 Similarly, the mere presence of outside counsel was insufficient to imbue the meeting or the minute with LPP.20 There was a qualitative difference between a mere record of a meeting, whether taken by a lawyer or non-lawyer, and a preparatory document prepared by a lawyer in advance of a meeting, which may well be privileged.21
  • A Risk Report prepared by the general counsel was not privileged unless it contained the substance of any legal advice. However, as a matter of principle, advice on mitigating risks may be covered by LPP if it can be regarded as advice as to what should prudently and sensibly be done in a relevant legal context.22 Thus in Jet2, Hickinbottom LJ had held that commercial advice through a lawyer's eyes is privileged legal advice.23 The line will be difficult to draw in some instances.
  • Finally, a draft chairman's report which had been reviewed by outside counsel could be redacted to remove counsel's comments.24

Practical points on legal advice privilege

  • The courts will now apply the 'dominant purpose' test to both legal advice privilege and litigation privilege. However, the test remains controversial in legal advice cases and may yet be reviewed by the Supreme Court.
  • Simply labelling documents 'privileged & confidential' has 'little evidential weight' on its own.25 The judge voiced mild disapproval of companies applying this wording to communications and documents indiscriminately.
  • Documents will not be privileged merely because drafted by a lawyer, even if by the general counsel or by an external lawyer.
  • The court drew a distinction between (i) documents created by a lawyer in advance of a board etc. meeting, which are likely privileged as 'a means of advising a Board on the matters to be covered at the meeting';26 and (ii) documents created after the meeting, which are likely to be mere records of what passed and, absent actual legal advice, will not be privileged.
  • The courts will not easily be persuaded that disclosure of a document would allow the other party to infer the content of the underlying advice, where such advice is not clear on the face of the document. It is necessary to be able to identify from the document, directly or by inference, a statement of the advice or communication said to be privileged.27 Where a commercial document merely takes prior legal advice into account, it will not be protected by LPP unless the substance of that advice is 'obvious' from the document.28

How Dechert can help

Dechert has extensive experience advising corporates on various types of regulatory, administrative and criminal investigations in different jurisdictions. We are particularly well-placed to advise on disclosure obligations, including privilege issues arising in various jurisdictions, and how best to manage and respond to production requests from regulators and investigators.

Footnotes

1) A v B and Financial Reporting Council [2020] EWHC 1491 (Ch) (claim); [2020] EWHC 1492 (Ch) (counter-claim).
2) The new regulator will be known as the Audit, Reporting and Governance Authority, and follows an independent review by Sir John Kingman. See generally Audit regime in the UK to be transformed with new regulator.
3) S.I. 2016/649, implementing Regulation (EU) 537/2014 on specific requirements regarding statutory audit of public interest entities (OJ L 158/77 27 May 2014).
4) SATCAR 2016, reg. 2.
5) SATCAR 2016, Sched 2, para 1(3).
6) SATCAR 2016, Sched 2, para 1(8), which provides in its material part: 'A notice … does not require a person to provide any information or create any documents which the person would be entitled to refuse to provide or produce … in proceedings in the High Court on the grounds of legal professional privilege.'
7) A v B & FRC [2020] EWHC 1491 (Ch), at [51].
8) A v B & FRC [2020] EWHC 1491 (Ch), at [62](i).
9) A v B & FRC [2020] EWHC 1491 (Ch), at [72].
10) A v B & FRC [2020] EWHC 1491 (Ch), at [69].
11) A v B & FRC [2020] EWHC 1491 (Ch), at [72], [77].
12) A v B & FRC [2020] EWHC 1491 (Ch), at [74].
13) A v B & FRC [2020] EWHC 1491 (Ch), at [79]. The judge's conclusion on this point was buttressed by the fact that he had himself inspected the documents: [2020] EWHC 1492 (Ch), at [8](iii). The FRC also has a stand-alone power to bring LPP issues before the court under SATCAR Sched 2 para 2.
14) Three Rivers District Council v Bank of England (No 6) [2005] 1 AC 610 (HL), at [50] (per Lord Rodger).
15) A v B & FRC [2020] EWHC 1492 (Ch), at [5].
16) A v B & FRC [2020] EWHC 1492 (Ch), at [6]; Balabel v Air India [1988] 1 Ch 317, 330 (CA) (per Lord Taylor).
17) R (Jet2.com) v Civil Aviation Authority [2020] EWCA Civ 35.
18) A v B & FRC [2020] EWHC 1492 (Ch), at [7].
19) A v B & FRC [2020] EWHC 1492 (Ch), at [11].
20) A v B & FRC [2020] EWHC 1492 (Ch), at [15].
21) A v B & FRC [2020] EWHC 1492 (Ch), at [19].
22) A v B & FRC [2020] EWHC 1492 (Ch), at [22], [24]-[25].
23) R (Jet2.com) v Civil Aviation Authority [2020] EWCA Civ 35, at [100](ii).
24) A v B & FRC [2020] EWHC 1492 (Ch), at [29].
25) A v B & FRC [2020] EWHC 1492 (Ch), at [13].
26) A v B & FRC [2020] EWHC 1492 (Ch), at [19].
27) A v B & FRC [2020] EWHC 1492 (Ch), at [12].
28) A v B & FRC [2020] EWHC 1492 (Ch), at [25].