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Confidence restored: internal investigations and legal privilege

17 September 18

A recent Court of Appeal ruling on the application of legal professional privilege to internal investigations has reversed a decision that had caused the profession serious concern

by Charles Livingstone

Internal investigations can be a necessary evil where organisations suspect they may have breached their obligations in areas such as health and safety, anti-bribery and corruption, and competition law. But they are also difficult, stressful, time-consuming and expensive, and if not handled properly can undermine staff morale, create significant reputational risks and even increase the prospect of criminal or regulatory penalties. Protecting the confidentiality of an investigation is therefore always a key concern. Fortunately, a recent judgment of the Court of Appeal of England & Wales should make it easier to keep the results of internal investigations confidential.

The decision concerns legal professional privilege, which protects communications between client and lawyer relating to the seeking or provision of legal advice (legal advice privilege); and communications made and documents produced for the purposes of adversarial litigation that is either ongoing or "in contemplation", meaning a real likelihood (litigation privilege). Privilege protects information from disclosure, including to the police and regulators.

Dominant purpose 

Serious Fraud Office v Eurasian Natural Resources Corporation [2018] EWCA Civ 2006 concerns an SFO investigation of the mining company ENRC. The SFO attempted to obtain interview notes and other documents prepared by ENRC’s lawyers (and forensic analysts working under the lawyers’ direction) in the course of investigating a whistleblower’s allegations of illegal practices.

The High Court had previously ordered ENRC to disclose the documents to the SFO, notwithstanding ENRC’s claims that they were legally privileged. That decision came as a significant shock to the legal community, as it raised the bar for litigation privilege in several ways:

  • in the criminal context at least, litigation could only be "in contemplation" if the client was sufficiently aware of the underlying facts to know that prosecution was likely;
  • the internal investigation’s dominant purpose was not defending such a litigation, but rather establishing the factual position for ENRC’s own compliance and governance purposes and/or showing the information to the SFO as part of its engagement with the SFO’s "self-reporting" process; and
  • litigation privilege covered documents produced with the purpose of defending or settling a litigation, but not those aimed at avoiding litigation in the first place (i.e. persuading the SFO not to prosecute).

These requirements would create a catch-22: an organisation might not become aware of all the facts unless it investigates an allegation, but if the results could be disclosable then it is less likely ever to instruct an investigation. This would particularly undermine “leniency” schemes of the sort that operate in the anti-bribery and competition law regimes (among others), which encourage businesses to report their own breaches of the law in return for more lenient treatment or even immunity.

ENRC appealed the High Court decision and was successful in the Court of Appeal, which noted the public interest in companies being able to investigate allegations without having to reveal the results. The court decided that ENRC was entitled to regard prosecution as likely, based on the whistleblower email and its own early investigations, and certainly once it had received the SFO’s initial implied threats of prosecution. By the time it instructed lawyers it was clearly contemplating litigation, even if the underlying facts had not yet been fully established.

The court also held that a clear threat of a criminal investigation will generally give an internal investigation the dominant purpose of preventing or dealing with anticipated litigation. While reputable companies will always want to ensure high standards of compliance, obligations are ultimately enforced by the "stick" of criminal and/or civil law. ENRC’s "alternative" purpose of investigating corruption allegations for their own sake was therefore just a subset of the purpose of preventing or dealing with litigation. As for the High Court’s view that documents aimed at avoiding litigation are not privileged, the Court of Appeal bluntly dismissed that as "an error of law".

Scope of advice privilege

This outcome had been foreshadowed by another recent High Court judgment (Bilta (UK) Ltd (in liquidation) v Royal Bank of Scotland [2017] EWHC 3535), which had walked back from the earlier ENRC judgment in deciding that an internal RBS investigation aimed at avoiding or defending a threatened HMRC VAT assessment was carried out for the purpose of conducting that dispute. The Court of Appeal has now resolved the tension between those two judgments, reinstating the rules on litigation privilege as lawyers had traditionally understood them.

However, the court has gone a step further even than that, and may have boosted the prospects of internal corporate investigations also being covered by legal advice privilege. Over the last 15 years the English courts have tended to exclude lawyers’ interviews with their clients’ employees from the scope of advice privilege. This followed the Court of Appeal’s 2003 decision in Three Rivers (No 5) [2003] QB 1556) that advice privilege covers only communications with those employees specifically tasked with seeking and receiving advice on behalf of the corporate client, meaning the lawyer’s communications with other employees are no more protected than communications with third parties.

The Court of Appeal in ENRC considered itself bound by that earlier decision, but clearly believed a different view should be taken if the question ever reaches the Supreme Court. Unlike individuals and small businesses, where the person giving the instructions should also know the necessary facts, large corporations and their lawyers will usually need to obtain information from those employees with first-hand knowledge of an issue before informed legal advice can be provided. Without privilege protecting those communications, large organisations are at a disadvantage compared to others, which the court thought was undesirable as a policy matter. The court stated that "in the modern world", the courts should "cater for legal advice sought by large national corporations and indeed multinational ones", and noted that courts in other jurisdictions, including Singapore, Hong Kong and the US, allow a more expansive application of advice privilege to investigations. English law is therefore out of step.

It remains to be seen whether either party will appeal to the Supreme Court – ENRC is probably happy with the conclusions on litigation privilege, and given what the Court of Appeal said about advice privilege the SFO may not want to risk what may be (for it) an unwelcome precedent. However, the ENRC decision clearly indicates a desire for the Supreme Court to revisit the advice issue at some point.

In the meantime clients can be more confident that litigation privilege should keep the results of internal investigations confidential, and can perhaps even be a little bolder in asserting legal advice privilege over the product of internal investigations carried out by lawyers. That is particularly the case in Scotland, where Three Rivers (No 5) is not binding: while the Scottish courts generally tend to follow English authority on privilege, the Court of Appeal’s own doubts about its earlier decision should give Scotland’s lower courts a much freer hand than their English counterparts. These recent cases are therefore highly relevant on both sides of the border.

Any organisation that suspects it may have breached legal or regulatory obligations should seek specialist legal advice as soon as possible.

Charles Livingstone is a partner in Brodies’ Government, Regulation & Competition team

Keeping investigations confidential: lessons from ENRC and Bilta

  • Structure an investigation carefully, considering privilege at the outset: if no enforcement threat has yet been issued, and the facts are not clear, it may be too soon for litigation privilege to apply. Consider a phased investigation – e.g. get the basic facts first, and investigate details and attribute responsibility only once the facts suggest prosecution or litigation may be likely.
  • Get lawyers involved: while litigation privilege does not depend on lawyers being involved, in both ENRC and Bilta the instruction of external lawyers helped evidence the claim that preparing for litigation was the investigation’s purpose. ENRC may have widened the scope for legal advice privilege to apply to investigations, but that can only be available if a lawyer is involved. To maximise the chances of privilege applying, the lawyer should lead the investigation, with others such as forensic analysts working alongside. External legal support is particularly recommended for potential competition law infringements, as EU competition law does not confer privilege on in-house lawyers.
  • Record the reasons for the investigation early, in internal correspondence/minutes and external letters of engagement: contemporaneous evidence showing you were (genuinely!) concerned about litigation will make privilege easier to establish.
  • Mark documents and communications as “legally privileged & confidential – prepared in contemplation of litigation”: though again only if that belief is genuine. The wording will not by itself confer any special status, and using it in bad faith would undermine the protection of other, genuinely privileged material.
  • Be wary of "routine" investigations: if certain events (e.g. accidents) are always investigated as a matter of policy, litigation will not be the dominant purpose of the investigation and privilege will not apply (Waugh v British Railways Board [1980] AC 520). If a routine investigation identifies an issue that suggests litigation is likely, expressly record that "watershed" point and instruct a fresh investigation.
  • Share privileged material only on a strict "need to know" basis: if material ceases to be confidential it will cease to be privileged. Privilege can be lost just by circulating advice or information too widely within a business.
  • Consider waiving privilege where appropriate: leniency regimes require full co-operation, which means privileged material may have to be provided voluntarily to the regulator. The Competition & Markets Authority’s leniency process certainly requires disclosure of all relevant material. The Court of Appeal discussed the deferred prosecution agreement regime in England, but the Scottish Crown’s self-reporting initiative for bribery offences involves the same dilemma – without full co-operation they may not be willing to proceed with a self-report. There may therefore be situations where it is in your interest to waive privilege, but be sure to take advice first.

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