The High Court has held that an audit client could not withhold documents on grounds of privilege when responding to a notice requiring the production of documents in connection with an investigation into the auditor’s conduct: The Financial Reporting Council Ltd v Sports Direct International Plc  EWHC 2284 (Ch).
The decision suggests that, where privileged documents are provided to a regulator for the purposes of an investigation into the conduct of a regulated person, and the privilege belongs to a client of the regulated person, there is no infringement of the client’s privilege. Accordingly, the fact that documents are subject to a client’s privilege will not justify a refusal to provide the documents to a regulator in response to a demand under its statutory powers, whether or not the statute can be taken to override legal professional privilege.
The decision also confirms (though it was not actually in doubt) that non-privileged documents do not become privileged merely by being attached to privileged lawyer/client communications for the purpose of giving or obtaining legal advice.
The Financial Reporting Council (“FRC”) issued notices under their statutory powers requiring the respondent (“SDI”) to provide certain documents to assist with its investigation into the conduct of an accountancy firm and individual in relation to their audit of the financial statements of SDI. The FRC contended that SDI had failed to comply in certain respects with the notices and therefore sought a court order compelling compliance.
SDI argued that it was entitled to withhold certain documents from production on grounds of legal advice privilege.
It was common ground that, if the documents in question were subject to privilege which would be infringed by being produced to the FRC, then SDI was not required to produce them. This was because of a carve-out in the applicable regulations for information or documents which a person “would be entitled to refuse to provide or produce in proceedings in the High Court on the grounds of legal professional privilege”.
The FRC did not accept the claim to privilege. The parties agreed that there were three issues of principle that should be resolved by the court regarding the claim to privilege:
- whether legal advice privilege applied to documents purely by virtue of them having been attached to emails passing between SDI and its lawyers (“the Communication Issue”);
- whether SDI’s waiver of privilege by sending copies of documents to its auditors for the purposes of the audit extended to the FRC (“the Waiver Issue”); and
- whether production of the documents to the FRC would infringe any privilege of SDI (“the Infringement Issue”).
The High Court (Mr Justice Arnold) held that, to the extent the documents were privileged, SDI had not waived that privilege in respect of the FRC by sending copies to its auditors. However, production of the documents to the FRC would not infringe SDI’s privilege, and so SDI was required to produce them.
The Communication Issue
Unsurprisingly, the court held that legal advice privilege did not apply to documents which were not privileged in themselves merely because they were attached to emails sent between SDI and its lawyers.
The judge referred to SDI’s submission that a scanned copy of the front page of The Times would be privileged if attached to a lawyer/client email seeking or providing legal advice, describing this as a “startling proposition”. He did not accept that it was supported by Property Alliance Group Ltd v Royal Bank of Scotland plc  EWHC 3187 (Ch) (considered here), in which Snowden J upheld a claim for privilege over lawyer/client communications which included matters that were in the public domain. As Arnold J said, Snowden J was not concerned with a claim to privilege for pre-existing documents on the basis that they had been sent by a client to a lawyer, or vice versa, in connection with a request for advice or the giving of advice.
The Waiver Issue
SDI accepted that, in sending the emails to the auditors, there was a selective and limited waiver of privilege, but contended that the waiver did not extend beyond the auditors or beyond use for audit purposes; ie it did not extend to the FRC as the auditor’s regulator.
Arnold J referred to three authorities on the question of whether waiver for a particular purpose entailed a broader waiver:
- In British Coal Corporation v Dennis Rye Ltd (No 2)  1 WLR 1113, the claimants had handed privileged documents to the police to assist with a criminal investigation, and those documents were disclosed to the defendants, who were subsequently acquitted. The court held that the claimants could still claim privilege over the documents in subsequent civil proceedings against the defendants; they had made the documents available for a limited purpose only, and that could not be construed as a broader waiver of privilege.
- In Scottish Lion Insurance Co Ltd v Goodrich Corp  BCC 124, in the context of a scheme of arrangement, where a company’s creditors had submitted privileged material to support the valuation of their claims for the purposes of the weighting of their votes at a creditors’ meeting, the court held that they had waived privilege for the purposes of the subsequent court application to sanction the scheme (though not for other purposes).
- In Belhaj v Director of Public Prosecutions  EWHC 513 (Admin) (considered here), where a government department had passed privileged material to the police, the Crown Prosecution Service and the DPP for the purposes of an investigation and decision whether to charge, the court rejected an argument that the government had waived privilege for the purposes of any judicial review proceedings challenging that decision. Unlike in Scottish Lion, where the voting and court application were all part of a single process, the court in Belhaj said there was no inevitable link between the decision on prosecution and the subsequent judicial review.
Arnold held that the present case was analogous to British Coal and Belhaj because the regulatory process was entirely distinct from the audit process. By sending privileged documents to the auditors for the purposes of audit, SDI did not waive privilege against the FRC.
The Infringement Issue
Arnold J described this as the most important, most far-reaching and most difficult of the issues raised.
His starting point was that privilege is a fundamental human right, and therefore can be overridden only by primary legislation which so provides either expressly or by necessary implication – see R (Morgan Grenfell & Co Ltd) v Special Commissioner of Income Tax  UKHL 21.
Nevertheless, as he noted, there is a line of cases in which it has been held that privilege cannot be relied on as an objection to the production of documents to regulatory bodies. He referred to a number of authorities including Parry-Jones v Law Society  1 Ch 1 and Morgan Grenfell, referred to above. In Parry-Jones, the Court of Appeal held that a solicitor could not refuse to produce documents for inspection by the Law Society on the grounds that they were subject to his clients’ privilege. In Morgan Grenfell, Lord Hoffmann agreed with the result but not the reasoning in Parry-Jones, saying:
“I think that the true justification for the decision was not that Mr Parry-Jones’s clients had no LPP, or that their LPP had been overridden by the Law Society’s rules, but that the clients’ LPP was not being infringed. The Law Society were not entitled to use information disclosed by the solicitor for any purpose other than the investigation. Otherwise the confidentiality of the clients had to be maintained. In my opinion, this limited disclosure did not breach the clients’ LPP or, to the extent that it technically did, was authorised by the Law Society’s statutory powers.”
Arnold J commented that, although Lord Hoffman’s primary reason for supporting the decision in Parry-Jones was strictly obiter, it was an important step in his reasoning in that case and it has the persuasive force of a unanimous House of Lords. Although subject to academic criticism, it has been followed in subsequent case law and there is no authority to the contrary. It must be therefore be taken to represent the current state of the law.
Accordingly, the judge concluded, where a regulated person produces documents to a regulator solely for the purposes of a confidential investigation into its conduct, that does not infringe any privilege of the regulated person’s clients. The same must be true where documents are produced to the regulator by a client.
If he was wrong, and there was a technical infringement of the client’s privilege in the current case, Arnold J concluded, “with some hesitation”, that this was authorised by the statutory powers. Although there was no wording that expressly or by necessary implication overrode privilege, since any infringement was a technical one, general words were sufficient. To the extent that any infringement was not merely technical, privilege would be preserved by the carve-out in the regulation. The example given by FRC’s counsel, which the judge accepted, was where a client such as SDI was contemplating a claim for negligence against the auditor, and obtained legal advice as to the merits of that claim; in those circumstances (on this alternative basis for the decision) the client could rely on privilege.