An exception to privilege?

This blog post looks at Accident Exchange Ltd & Anor v McLean & Ors [2018] EWHC 23 (Comm) which examines the crime-fraud exception to privilege in the context of a major motor credit hire fraud.

Accident Exchange Ltd & Anor v McLean & Ors [2018] EWHC 23 (Comm) is a very recent decision of Sir Andrew Smith which examines the crime-fraud exception to privilege in the context of a major motor credit hire fraud. The question at the heart of the decision is whether an expert’s alleged fraud can undermine the privilege of the clients for whom the expert was acting. Here, the answer was “no”.

The claimants (AE) provide replacement motor vehicles on credit terms to clients whose vehicles have been damaged in road accidents. Their hire charges are recovered from the other drivers (and their insurers) involved in the accident. The House of Lords in Dimond v Lovell, [2002] 1 AC 384 held that, if a replacement vehicle is hired on credit terms by someone who does not need credit, generally the cost attributable to the provision of credit will not be an expense incurred by way of reasonable mitigation of the loss and so will not be recoverable.. Defendants in accident cases can therefore seek to show that the hire charge is excessive because it includes an unnecessary credit element, and in such cases it is "stripped out" from what is recoverable by the claimant, which is thereby limited to the "basic hire rate" (BHR).

Autofocus Limited (AF) used to provide forensic services where a question arose about the hire recoverable by a claimant who had hired a replacement vehicle on credit terms. AF produced thousands of such reports, but in 2009 a decision emerged in which it became apparent that an AF employee (a rates surveyor), who had prepared a court report, had falsely claimed to have based the evidence on information from car hire companies who had been contacted about their hire rates. AE alleged that in the years before AF went into liquidation in 2010, it was involved in the systemic and endemic fabrication and manipulation of evidence about rates and the research that it had conducted so as to deceive businesses such as AE and, if the claim was not settled, to deceive the courts hearing the claim. AF's purpose, it argued, was to achieve favourable settlements or court decisions for those defending credit hire claims which would be correspondingly adverse to the interests of AE.

AE therefore brought conspiracy and deceit proceedings against two former AF directors and three firms of solicitors who acted for defendant drivers facing claims by AE's clients to recover the hire charges for replacement vehicles.

AE relied on AF’s allegedly fraudulent conduct to challenge the defendant solicitors’ claims to privilege on behalf of its clients, its application ultimately seeking an order that they give inspection of communications within their control furthering the fraudulent purpose of AF, that fraudulent purpose being defined as AF's "intention of producing dishonest evidence and data which could be deployed by the solicitor defendants and the defendant drivers or their insurers.

There is no privilege in respect of documents which are in themselves part of an iniquitous proceeding or in communications made in order to obtain advice for the purpose of carrying out iniquity: R v Cox and Railton, (1884) 14 QBD 153. It was not alleged that the defendant solicitors' clients (whether they be the persons whose cars were damaged or their insurers or both) were involved in any impropriety: rather AE relied on the decision of the House of Lords in R v Central Criminal Court ex p. Francis & Francis [1989] 1 AC 346, which extended the exception to a case where the client was taken to have had no criminal purpose, but was used "as an innocent tool" of a criminal. As to this, AE argued that AF was to be regarded as using the defendant solicitors' clients as its "tools" because an integral part of the fraudulent scheme was that its reports and evidence be deployed so as to achieve favourable results for its clients, whether in court or through claims being settled, and the reports and evidence could be so deployed only by the defendant drivers or the defendant solicitors acting on their behalf. AE maintained that, once the fraudulent purpose of AF was established sufficiently for the application, the only question was whether the communication or other document was in fact one that evidenced the furtherance of that purpose, regardless of the purpose of the persons who were party to the communication.

Analysing in great detail the leading speech of Lord Goff in Francis, Sir Andrew Smith concluded that, in cases of third party iniquity, privilege is overridden only where the client was the wrongdoer's tool or mechanism for his wrongdoing: and further that Lord Goff intended that in cases of this kind the iniquity exception applies only where there is a particular nexus or relationship between the client and the wrongdoer:

” … Lord Goff's authoritative enunciation of the common law in the Francis and Francis case extended the iniquity exception to cover cases where a third party is guilty of wrongdoing and a client, though innocent, has been used in his dealings with a lawyer by the wrongdoer as his "tool". “

That led to the questions, when does the law consider that a client has been so used and had AF so used the clients of the defendant solicitors? In answering these, the Judge referred to Popplewell J in JSC BTA Bank v Ablyazov, [2014] EWHC 2788 (Comm), who had to distinguish cases where a client continues to enjoy privilege even though he knowingly misleads his lawyer with untruths; and cases where the iniquity exception applies because the client is furthering a criminal purpose by misleading his lawyer. As to that, Popplewell J said:

“If the iniquity puts the advice or conduct outside the normal scope of such professional engagement, or renders it an abuse of the relationship which properly falls within the ordinary course of such an engagement, a communication for such purpose cannot attract legal professional privilege. In cases where a lawyer is engaged to put forward a false case supported by false evidence, it will be a question of fact and degree whether it involves an abuse of the ordinary professional engagement of a solicitor in the circumstances in question. … The deception of the solicitors, and therefore the abuse of the normal solicitor/client relationship, will often be the hallmark of iniquity which negates the privilege".

How did this apply in the in the AF case? There was no real dispute that the driver defendants went to the defendant solicitors so that they might act for them in relation to a claim against them arising from a motor accident. Thus far, AF was not involved, and, thus far, it could not be said that there was anything other than a normal confidential relationship between lawyer and client, within the ordinary scope of professional employment. AE nevertheless submitted that the position changed at some point during that relationship because AF used the defendant solicitors' relationship with the defendant drivers and their insurers to further its fraudulent scheme: at this point, AE argued, the relationship fell outside the ordinary scope of professional employment because it sufficed to bring the iniquity exception into play that the third party, AF, had a fraudulent purpose, and it took the opportunity of its instructions to further it. Sir Andrew Smith rejected this argument:

“ … it involves so generous an interpretation of the requirement that the wrongdoer be using the client as a tool that it will seldom, if ever, limit the iniquity exception, as I have concluded Lord Goff intended that it should. A requirement for so indirect a "nexus" … as that between AF and the clients of the defendant solicitors (whether they be the defendant drivers or their insurers or both) would hardly restrict the third party iniquity exception at all, and certainly would not confine it to "most exceptional" cases. … Nor am I impressed with AE's submission that the order that it seeks would not involve a major extension of the iniquity exception because of the scale of AF's wrongdoing … I cannot accept that the defendant drivers should lose their privilege because there were many other cases similar to their own. Indeed, there seems to me a danger that the scale of AF's assumed wrongdoing distracts from the position of individual defendant drivers and from their rights.”

Accordingly, the defendant drivers and their insurers were properly using their solicitors' services, and could not be said to be AF's "tools", even in simple cases in which the only issue was what credit hire charges were recoverable. The position would be even clearer in other cases: where, for example, liability or contributory negligence might be in issue, or where AE's client might have other claims (say, for personal injuries), or where the defendant driver might bring a counterclaim. Accordingly, although the opportunities afforded by the defendant solicitors' relationship with their clients might have been exploited by AF so as to further its fraudulent purpose, this did not mean that the defendant drivers were AF's "tools" in the sense of the expression used by Lord Goff or in any meaningful sense. Sir Andrew concluded:

“The essential considerations can be shortly stated: in the cases in which third party iniquity has deprived an innocent client of the protection of privilege, the wrongdoer and the client have had a relationship (or nexus) separate from the dealings with a solicitor, and that separate relationship was used by the wrongdoer to advance the wrongdoing. In my judgment, such connections between client and wrongdoer and between their relationship and the iniquity will be a hallmark of cases where an innocent client loses the protection of privilege. They might not be absolute requirements in all such cases, but I find it difficult to envisage a case in which they would not be present. This case is very different: AF's wrongdoing was … "parasitic" upon an existing lawyer/client relationship, which was created and continued for a normal and legitimate purpose. I accept the arguments of [counsel] that AF has not used the defendant drivers or their underwriters as its tool, nor has it done anything that might mean that their relationship with the defendant solicitors is not of the ordinary kind. To apply the iniquity exception to this case would be a major innovation that I consider unjustified by authority, legal principle or established principles of public policy.”

Despite the Judge’s conclusion, this was by no means a straightforward case, as the Judge’s observations on the challenge of devising a test that allows a court to decide such cases demonstrates. As to this, the Judge noted counsel’s arguments that in third party iniquity cases the iniquity exception applies only if the wrongdoer's iniquity is "upstream" of the solicitor/client relationship, so as to bring it about:

“I can accept that this might be the hallmark of a typical case in which the law, as developed in Francis and Francis, applies, but … I cannot accept that there is an acid test of this kind as to when third party wrongdoing will override privilege ... Nor, for example, can I believe that the result in the Francis and Francis case would have been different if [the client] had already been instructing the solicitors to buy a modest property, her relative provided funds by way of drug trafficking to buy a mansion instead, and [the client] changed the instructions to the solicitors accordingly. As in cases of iniquity on the part of a lawyer's client it is, as Popplewell J concluded, a question of fact and degree whether the iniquity takes the lawyer/client relationship outside the ordinary scope of professional employment, in my judgment it is a question of fact and degree whether the nexus between the wrongdoer and client does so. This might be said to be an unsatisfactorily vague test for determining whether a client enjoys legal professional privilege, but Popplewell J's compelling analysis of cases of client iniquity in JSC BTA Bank v Ablyazov) led him to a conclusion of which the same criticism might be made.”

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.