Litigation privilege post ENRC - part 1

This blog post examines the first of two recent post ENRC decisions on litigation privilege.

I never cease to be surprised by the constant stream of privilege issues coming before the English courts. 2018 is proving to be a bumper year, because in addition to the important issues determined by the ENRC decision, we have also seen key decisions on (i) the scope of the iniquity exception (X v. Y Ltd [2018] UKEAT 0261_17_0908, covered in my blog here) and (ii) on the development of the Lord Hoffmann-approved technical abrogation of privilege, in FRC v Sports Direct International Plc [2018] EWHC 2284 (Ch). Both of these decisions will go to the Court of Appeal next year.

In the meantime, there have been two post ENRC decisions on litigation privilege, including yet another Court of Appeal decision. The first of these is Sotheby's v Mark Weiss Limited [2018] EWHC 3179 (Comm), where the party asserting privilege relied on comments made in ENRC (The Director of SFO v Eurasian Natural Resources Corporation Limited [2018] EWCA Civ 2006).

In overruling the first instance decision of Andrews J., the CoA held amongst other things that litigation was reasonably in ENRC’s contemplation (against the background of a threatened criminal investigation by the SFO) when it commissioned an investigation into its compliance and governance programme as part of its response to that threat. However, the Court had also to address whether it was reasonable to regard ENRC's dominant purpose in relation to that review as being to investigate the facts to see what had happened and to deal with compliance and governance, or to defend those proceedings. The CoA disagreed with Andrews J. who had held that it was the former purpose. The CoA said (at [109]):

“In our judgment, in this case, the answer can be achieved by unpacking the words 'compliance' and 'governance'. Although a reputable company will wish to ensure high ethical standards in the conduct of its business for its own sake, it is undeniable that the 'stick' used to enforce appropriate standards is the criminal law and, in some measure, the civil law also. Thus, 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 … must be brought into the zone where the dominant purpose may be to prevent or deal with litigation."

In other words, since the overarching purpose of the investigation was to avoid a SFO prosecution, then the fact it was characterised as a compliance investigation did not take it outside the scope of litigation privilege.

The CoA’s “stick” analogy was unsuccessfully prayed in aid in the Sotheby’s decision. Here, Sotheby's sold a painting by private treaty on behalf of MW but on terms that Sotheby's would rescind the sale and return the purchase price if the buyer, H, provided written evidence raising doubts as to the authenticity or attribution of the painting, and Sotheby's determined that the painting was counterfeit. H eventually did so, having obtained a report from an expert, M, commissioned by Sotheby’s on his behalf. Two months later, Sotheby's, having commissioned another expert, T, to conduct a peer review of M’s report, determined that the painting was a counterfeit, rescinded the sale and paid US$11,287,500 to H. It then sought rescission of its contract with MW and repayment of the purchase price.

MW sought disclosure of Sotheby’s correspondence with both experts between late April 2016, once M had reached a “negative conclusion” about the painting, and July 2016, when Sotheby’s formally determined the painting was counterfeit. The key question was whether the dominant purpose of Sotheby’s communications with the experts was its anticipated litigation with MW.

Once it became aware of his negative conclusions, Sotheby’s informed M in May 2016 that it was possible that there would be litigation with the buyer and seller, and asserted that all correspondence between M and Sotheby's was in the context of that anticipated litigation: “to enable Sotheby's to understand the strengths and weaknesses of its position and to make the right legal and commercial decisions in anticipation of that potential litigation. " M issued his finished report in late May 2016 and Sotheby's then set up a committee chaired by its CFO to decide whether Sotheby's should determine that the painting was counterfeit. That committee so determined in July 2016, following which Sotheby's decided that the sale should be rescinded.

In asserting privilege over Sotheby's’ correspondence with M, its solicitor claimed that M’s report was being developed at a time when litigation was in prospect and for the dominant purpose of being deployed in that litigation (or potentially settling that litigation). He added that his firm was “advising on the report, and on its role in the forthcoming decision as to whether to rescind (which would almost inevitably result in proceedings being issued), from the perspective of how it would be used as evidence in the litigation. I understand from Sotheby's that had litigation not been contemplated, then findings from [M] would have been sought, but no detailed written report of this kind would have been embarked upon and [we] would not have been engaged to undertake this exercise with [M]."

Teare J. did not find this explanation easy to accept: litigation with MW was undoubtedly contemplated, but so also was the need for Sotheby's, in the context of its agreement with H, to determine whether the painting was counterfeit, and if so, to rescind the sale and return the purchase price. Thus, the correspondence between Sotheby's and M between late April and July 2016 appeared to have been generated for two purposes: one, to enable that decision to be taken and two, for use in the litigation contemplated between Sotheby's and MW. Teare J. considered that these purposes were “of equal importance and relevance. At any rate Sotheby's is unable, in my judgment, to establish that the second purpose was the dominant of the two purposes.”

Teare J. also rejected Sotheby’s attempt to adopt the reasoning of the CoA in ENRC at para 109 (quoted above). Sotheby’s argued its case was analogous with ENRC, in that litigation would "inevitably" follow from the taking of a particular commercial decision: in the present case the "stick" which motivated the correspondence with M was the contemplated civil proceedings with MW and so, using the same reasoning as the Court of Appeal, the dominant purpose of that correspondence was to assist Sotheby's in that litigation. Teare J. disagreed:

“32 … The "stick" analogy was no doubt appropriate in [ENRC] where criminal proceedings were used to enforce appropriate standards of corporate governance. But in the present case whilst civil proceedings were in contemplation they were not a "stick" in the sense used in [ENRC]. I do not read the ENRC case as deciding that whenever litigation is the "inevitable" consequence of taking a particular commercial decision, the dominant purpose of documents produced for the making of that decision is necessarily their use in the contemplated litigation.”

So far as concerned the correspondence with T, his engagement letter showed that this was to ensure that Sotheby’s had a proper basis for exercising its discretion to rescind MW’s contract, if necessary, and that this position was robust in any litigation, hence Sotheby's wanted M’s analysis subjected to a peer review. Teare J. held that this encapsulated the dual purpose of T’s work, namely to ensure that Sotheby's had a proper basis for rescinding the sale and to ensure that Sotheby's position in the contemplated litigation was robust. That being so, “ … it is clear, in my judgment, that use in litigation cannot be said to be the dominant purpose of [T’s] work for Sotheby's.”

Conclusion: even where litigation is in in the background and thus in contemplation, one has to be careful to ensure that the surrounding correspondence is for the dominant purpose of that litigation. As Sotheby’s shows, if there is a prior commercial decision that has to be taken, even if that decision will trigger litigation, then the dominant purpose test may well not be satisfied.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.