The crime-fraud exception to privilege

This post looks at a recent decision which highlights concerns that the threshold required to be reached to invoke the exception is being weakened.

There has long been concern that the Court of Appeal’s decision in Barclays Bank Plc v Eustice1 had the potential to weaken the high thresholds that must be met to invoke the crime-fraud exception to privilege. Eustice was a decision in which the exception was invoked in proceedings under s.423 Insolvency Act 1986. Here, a client sought advice with the aim of keeping his assets away from his main lender in order to provide some breathing space while he addressed certain business challenges. The Court of Appeal held there was a strong prima facie case that he had breached s.423 and therefore he lost his privilege over some of his dealings with his lawyers, even though his objective was to act within the law. This contrasts with many of the older decisions on the exception in which clients have sought legal advice about crimes they planned to commit. In the course of its ruling in Eustice, the Court of Appeal observed that:

“Insofar as those wishing to engage in sharp practice are concerned, the effect of the present decision may well be to discourage them from going to their lawyers.”

Identifying what is sharp practice, and thus where lawyers need to pause in terms of deciding whether they can advise clients on strategies that may be attacked in a way that ultimately destroys the usual cloak of privilege, is very difficult, as the recent decision in X v Y Limited2 demonstrates.

X, who suffered from medical problems, was employed by Y as a lawyer. He raised a grievance, claiming that he had been subjected to disability discrimination. Ultimately, X was made redundant. He submitted a claim to the ET, alleging disability discrimination, victimisation and unfair dismissal.

X enjoyed a piece of good fortune in that he was sent anonymously a copy of an email exchanged between lawyers within Y. The text of the email is not available, but its contents evidently covered legal advice as to how to deal with X as part of Y’s redundancy programme. X sought to use this email to further his discrimination claim, arguing that the exception should be applied so that privilege over it was lost. The ET disagreed, holding that, at its highest, it disclosed advice on how to handle a possible redundancy of X as part of a UK wide process by which it reduced the number of lawyers it employed.

Slade J (sitting alone in the EAT) interpreted the email rather differently and held:

“If [X] were to be dismissed by proper application of a redundancy selection procedure there would have been no need to write that "there is at least a wider reorganisation and process at play that we could put this into the context of". Further in a genuine redundancy dismissal there would be no need to say "Otherwise we risk impasse and proceedings with ongoing employment with no obvious resolution". In my judgment these passages record advice that the redundancy situation can be used as a cloak for dismissing [X] for other reasons. … Against the background of a claim of disability discrimination having been made, a grievance raising disability issues and issues over performance said by [X] to be attributed to his disability and his allegation of Y's failure to make reasonable adjustments, the risk referred to in the email was of future complaints of disability discrimination. In my judgment the email … is to be interpreted as recording legal advice that the genuine redundancy exercise could be used as a cloak to dismiss the Claimant to avoid his continuing complaints and difficulties with his employment which were said by him to be related to his disability.”3

Did that lead to the application of the exception? Slade J. held that if the advice in the email had gone no further than "you may select the Claimant, an employee with a disability, for redundancy but you run the risk of a claim by him," then it would not have reached the high threshold required to disapply legal advice privilege. However:

” … properly interpreted, the email … records advice on how to cloak as dismissal for redundancy dismissal of [X] for making complaints of disability discrimination and for asking for reasonable adjustments which will continue if there is "ongoing employment". In my judgment a strong prima facie case has been established that what is advised is not only an attempted deception of [X] but also, if persisted in, deception of an Employment Tribunal in likely and anticipated legal proceedings. The email does not record any advice on neutral selection criteria for redundancy. It concentrates exclusively on how the redundancy can be used to rid [Y] of ongoing allegations of discrimination by [X] and of underperformance which he stated are related to his disability and failure to make reasonable adjustments. Whether the legal advice given was in fact to perpetrate or in furtherance of iniquity will be for the Employment Tribunal hearing the claim to which it relates to decide."4

Accordingly, Slade J. held that privilege over the email was lost and that X could therefore use it in pursuing his disability claim.

The decision is of great interest because, even though the contents of the offending email are not yet available, the Judge’s description of them shows that privilege can be put at risk even where advice is given that seeks to protect a clients’ interests. While a line was evidently crossed in doing so, the challenge in such situations will be to identify how far towards that line the lawyer can go in order to advise their client on legal strategies that are aimed at helping to avoid adverse legal consequences. Here, based on Slade J.’s description of the email’s contents, it seems that a strategy to evade a disability claim by wrapping the claimant’s grievance - seemingly improperly - into a redundancy scheme in a manner that may have amounted to a deception went too far. As to this, the Judge noted:

“Advising that taking a certain course of action runs a risk of being held unlawful whether the illegality be breach of contract, discrimination or even breach of fiduciary duty is not in itself iniquitous. Giving advice that a certain course of action which may be unlawful could be taken shades into iniquity. Advising how a fraud could be perpetrated … would clearly be an iniquity, as would advice on how to breach a fiduciary duty …”

The Judge added that, in contrast, a lawyer advising on a termination which would be a breach of a notice provision in an employee's contract may well not be conduct that goes beyond a civil wrong and so does not amount to “sharp practice”. This is only mildly helpful, because there are many shades of grey towards iniquity here: what for example, of the lawyer who advises that a certain course of action could be attacked as being unlawful, but on balance the lawyer considers the actions to be defendable. What happens if in due course a Court finds that the lawyer was wrong so to have advised? On the basis of Eustice that advice may well be within the scope of the exception.

This starts to become very challenging for the lawyer, who may now have to think very carefully about whether he can advise at all - perhaps an outcome the Courts seek, given Schiemann L.J.’s comment in Eustice that:

“Insofar as those wishing to engage in sharp practice are concerned, the effect of the present decision may well be to discourage them from going to their lawyers. This has the arguable public disadvantage that the lawyers might have dissuaded them from the sharp practice. However, it has the undoubted public advantage that the absence of lawyers will make it more difficult for them to carry out their sharp practice.”

But it is not that easy in practice, when clients want fast answers to challenging problems. As Slade J. also noted:

“ … advice which could be construed as advice to commit the tort of discrimination, depending on the facts, may be different in degree from advice on how to commit fraud or breach of fiduciary duty. However, depending on the facts the discrimination advised may be so unconscionable as to bring it into the category of conduct which is entirely contrary to public policy. In this respect I differ from the decision of the EJ in which he held … that it goes too far to elevate the tort of discrimination "to the status required to disapply legal advice privilege". That may be an appropriate view in many cases but the facts of some discrimination may take advice on how to commit it into the category of advice which is contrary to public policy.”

There has been a need for some time for the Supreme Court to re-examine Eustice. Lord Neuberger made it clear in a number of his rulings over the years that he is concerned by the consequences of the decision. Those concerns will only have been fuelled by the decision in X v Y.

1 [1995] 1 W.L.R. 1238
2 [2018] UKEAT 0261_17_0908.
3 [2018] UKEAT 0261_17_0908 at [33-35].
4 [2018] UKEAT 0261_17_0908 at [59].

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.