In a recent decision, the Chancellor of the High Court in Bilta v RBS confirmed that in certain circumstances litigation privilege may protect from disclosure documents created in the context of an internal investigation. The decision stands in contrast to the 2017 decision of the High Court in SFO v ENRC, which generated significant commentary and some criticism because it was perceived to have narrowed the circumstances in which litigation privilege could arise in the context of internal investigations.

Introduction

The application in Bilta (UK) Ltd v Royal Bank of Scotland plc and Mercuria Energy Europe Trading Limited (“Bilta”)^[1] concerned whether litigation privilege could be claimed over documents that had been created by the Royal Bank of Scotland (“RBS”) in an internal investigation and included 29 transcripts of interviews with current and former RBS employees (the “Documents”), of which the Claimants sought disclosure.

After a two-year investigation as part of a wider investigation into fraud related to carbon credits, Her Majesty’s Revenue and Customs (“HMRC”) wrote to RBS indicating that it was denying RBS nearly £90 million in input tax on the grounds that RBS knew or should have known that certain transactions were connected with fraud. HMRC stated that it wished to give RBS an opportunity to respond before assessing a penalty (the “HMRC Letter”).

Shortly thereafter RBS instructed external solicitors. There followed an internal investigation, considerable cooperation between RBS and HMRC and, on 28 January 2014, RBS’s external solicitors’ final report in response to the HMRC Letter was supplied to HMRC. The report which was furnished to the HMRC drew on the results of the interviews, but did not include copies of the Documents, including the interview transcripts.

The Claimants argued that the purpose of the investigation and the Documents prepared as part of it was multi-dimensional, namely for RBS to inform itself of its position, to provide a full and detailed account of the facts to HMRC and to persuade HMRC not to issue an assessment. RBS’s position was that the dominant purpose of producing the Documents was to defend the HMRC Letter which was analogous to a letter before claim. 

Litigation privilege

The test for whether litigation privilege can be claimed and disclosure resisted is set out in Three Rivers (No 6).^[2] The three requirements which must be met can be summarised as (1) litigation is contemplated; (2) the sole or dominant purpose of the communication (or in this case investigation) is the conduct of that litigation; and (3) the litigation must be adversarial.

Legal advice privilege, which applies to communications between a lawyer and client for the purposes of obtaining legal advice, has been construed narrowly by the English courts^[3]. As a result, given the reduced circumstances in which legal advice privilege is available, entities are increasingly reliant on litigation privilege in order to resist disclosure of documents created during investigations.

In Bilta the parties did not dispute the test for litigation privilege, nor that litigation was contemplated (namely the threatened assessment by HMRC) or that the litigation was adversarial. The issue in dispute therefore was whether the second limb of the test had been met, namely whether the Documents had been made for the “sole or dominant purpose of conducting that litigation”.^[4]

In the earlier judgment in The Director of the Serious Fraud Office v Eurasian Natural Resources Corporation Ltd (“ENRC”)^[5] the High Court applied a strict approach to litigation privilege in the context of self-reporting investigations, applying the principles in Three Rivers (No. 5)^[6] and the RBS Rights Issue litigation.^[7] In ENRC, Mrs Justice Andrews found that on the facts of that case, the creation of documents in order to obtain advice as to how best to avoid litigation (even if that entailed seeking to settle the dispute) undermined the rationale for litigation privilege and prevented litigation being the dominant purpose of the preparation of the documents in question.

The context which existed in ENRC did not exist in Bilta. The Chancellor found that RBS had taken steps “to protect its position which were only consistent with its overarching purpose being preparation for the litigation…”^[8] The Chancellor held that the interviews were conducted and the Documents brought into existence for the sole or at least the dominant purpose of the expected litigation and were therefore covered by litigation privilege.

A number of key points arise from the Bilta judgment:

1. First, the Chancellor referenced a tension between the judgment in ENRC and that of the Court of Appeal in Re Highgrade Traders^[9] (“Highgrade”). Highgrade, which the Chancellor noted appeared not to have been cited in ENRC (although it has since been brought to our attention that the case was cited to Andrews J in the course of the ENRC hearing), suggested that a subsidiary purpose can be subsumed into the dominant litigation purpose of the document. Highgrade concerned the disclosure of an insurers’ report into a fire where arson by the insured party was suspected. The Court found a duality of purpose whereby the insurers wanted to use the report to obtain advice from their solicitors but also to find out the cause of the fire. The Court found that the two purposes were inseparable, particularly in circumstances where the claim of arson had been made and litigation would inevitably follow. In ENRC, the Court held that attempts to settle prevented litigation being the dominant purpose. In Bilta v RBS, the Chancellor citing Highgrade, stated that in his view “one has to take a realistic, indeed commercial, view of the facts.” In his view, the investigation conducted by RBS’s solicitors was not done in order to dissuade HMRC from issuing an assessment or if it was, that it was obviously a subsidiary purpose. He went on to state that “fending off the [Inland Revenue’s] assessment was just part of the continuum that formed the road to the litigation that was considered, rightly, as it turned out, to be almost inevitable.”
2. Second, determining the sole or dominant purpose in each case was a question of fact. As the Chancellor explained, “Although both cases, that is ENRC and this case, involve internal investigations by corporates in the face of scrutiny by government authorities, one cannot simply apply conclusions that were reached on one company's interactions with the Serious Fraud Office in the very different context of another company's interactions with HMRC.”
3. Third, the HMRC Letter was considered a “watershed moment” from which it was highly likely that an assessment would follow. The Chancellor considered that the report prepared by RBS’s solicitors was a “close comparable to a response to a letter before claim in ordinary commercial litigation.” That RBS’s key personnel including legal counsel and its external counsel considered an assessment highly likely and that RBS appointed external solicitors within weeks of receipt of the HMRC Letter also supported the view that RBS was preparing to defend a claim.

It seems the Chancellor considered the HMRC Letter, in which it indicated that it had sufficient evidence to issue an assessment, to be key. In light of the HMRC Letter, a number of subsidiary purposes for conducting the interviews and creating the Documents were “subsumed under the purpose of defeating the expected assessment.” Despite the “ostensibly collaborative and cooperative nature of RBS’s interactions with HMRC after the HMRC letter” this did not alter the position. Even where RBS was meeting with HMRC and updating it on the progress of RBS’s investigation, this did not preclude the investigation being conducted for the dominant purpose of litigation. In contrast, in ENRC, Mrs Justice Andrews held that litigation privilege did not apply to documents intended to equip a party with evidence to persuade a party not to commence proceedings in the first place. However, different to Bilta, on the facts in ENRC, almost all the information generated was intended to be shared with the SFO, with the dominant purpose being to enable reports and presentations to be made to the SFO.

Comment

A key takeaway from the different outcomes in ENRC and Bilta, is that when conducting an internal investigation records should be kept of the trigger and the basis for the investigation. Such evidence could well be instrumental in demonstrating that the documents were created for the dominant purpose of the contemplated litigation.

The Court of Appeal may provide greater clarity on the scope of litigation privilege in internal investigations following the hearing of the ENRC appeal in July this year. We will continue to monitor developments on this important area that has material implications for financial institutions and corporates in the conduct of internal investigations.

_{[1] [2017] EWCH 3535 (Ch).}

_{[2] Lord Carswell, Three Rivers District Council v Governor & Company of the Bank of England (No 6) [2005] 1 AC 610 at para 102.}

_{[3] Three Rivers District Council and others v The Governor & Company of the Bank of England and another (no 5) [2003] EWCA Civ 474; [2003] QB 1556.}

_{[4] [2017] EWCH 3535 (Ch) at paragraph 7.}

_{[5] [2017] EWHC 1017 (QB).}

_{[6] Three Rivers District Council and others v The Governor & Company of the Bank of England and another (no 5) [2003] EWCA Civ 474; [2003] QB 1556.}

_{[7] Re the RBS Rights Issue Litigation [2016] EWHC 3161 (Ch). We previously reviewed and analysed the ENRC decision in Navigating the Currents – Legal Privilege Under English Law.}

_{[8] [2017] EWCH 3535 (Ch) at paragraph 35.}

_{[9] [1984] BCLC 151.}