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Are documents created during an internal investigation protected by litigation privilege?


Farrers Office

That was the question determined by the High Court in the recent case of Bilta UK Ltd (in Liquidation) & Others v Royal Bank of Scotland PLC and Mercuria Energy Europe Trading Limited [2017] EWHC 3535 ("Bilta").

Privilege, where established, allows a party to withhold evidence from a third party or the court. For litigation privilege to apply, the following tests (as stated in the Three Rivers case) must be satisfied:

i. Litigation must be in progress or reasonably in contemplation;

ii. The communications must have been made for the sole or dominant purpose of conducting that litigation;

iii. The litigation must be adversarial, not investigative or inquisitorial.

Last year, in the case of Serious Fraud Office v Eurasian National Resources Corporations Ltd [2017] I WLR 4205 ("ENRC"), the High Court interpreted the scope of litigation (and legal advice) privilege narrowly – as we explored in our briefing here. In a controversial decision, the court held that documents generated by solicitors during a company's internal investigations in the context of a criminal investigation by the Serious Fraud Office were not made for the dominant purpose of litigation. The court in ENRC drew a distinction between documents prepared in order to take legal advice in relation to litigation, which would be privileged, and documents aimed at trying to avoid contemplated litigation, which it held were not.

In the recent case of Bilta, the parties accepted that litigation was reasonably in contemplation when the documents in question were produced. The litigation in question was likely to come out of a threatened assessment by HMRC against RBS in respect of over-claimed VAT. The claimants also accepted that the third condition set out above existed at the relevant time. The question considered by the High Court was whether the material was made for the sole or dominant purpose of conducting litigation.

By way of background, RBS had received a letter from HMRC alleging that it had over-claimed VAT. In response, RBS's lawyers carried out an internal investigation and produced a report (which included transcripts of interviews with key RBS employees and ex-employees) to HMRC. The claimants submitted that the documents underlying the report were not privileged and so were disclosable. They argued they were not created with the dominant purpose of conducting litigation but were pursuant to RBS's general duties and obligations as a tax payer and under its own Code of Practice to provide HMRC with a full and detailed account of the relevant facts concerning deductions of VAT that it had made. The claimants argued that the enquiry was essentially a factual one and relied on the approach adopted in ENRC above.

RBS argued that HMRC had spent two years investigating the situation prior to sending its letter to RBS. The HMRC letter constituted a watershed moment at which HMRC had decided to make an assessment but was prepared to wait for RBS's considered comments before it did so. At that stage, RBS instructed external tax litigation lawyers. RBS argued that the dominant purpose of producing the documents was to defend HMRC's claim.

The High Court in Bilta concluded that the ENRC case was not determinative and so declined to follow it. It viewed the HMRC letter to RBS to be similar in nature to a letter before claim and concluded that it was highly likely at that point that an assessment by HMRC would follow. The High Court did not think that the collaborative and cooperative nature of RBS's interactions with HMRC after the letter was received precluded the investigation being conducted for the dominant purpose of litigation. The fact that RBS was providing information to HMRC in accordance with its duties as a taxpayer and its Codes of Practice were found to be subsidiary purposes which were, in the High Court's judgment, effectively subsumed into the dominant litigation purpose of defending the expected assessment.

The decision in Bilta indicates a return to what a wider and arguably more orthodox view of litigation privilege than that underlying the decision in ENRC, something which will undoubtedly be welcome news to employers (and their lawyers!). The disparity between the two cases does however leave uncertainty over the precise scope of privilege. The Court of Appeal is due to consider an appeal against the ENRC decision in July this year and it must be hoped that more guidance will be provided to all of us then.

In the meantime, HR professionals and in-house lawyers should continue to take care in matters in which privilege can arise (such as internal investigations and dismissal decisions) to ensure that those involved in the case do not inadvertently do anything which might risk losing it.

For our tips on minimising the risk of waiving privilege, see our blog post here.

Our team has extensive experience advising on the conduct of investigations, please see our Investigations Brochure for further information.

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Farrer & Co

Farrer & Co, Insights

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