In a judgment handed down this morning, the Court of Appeal has held that an audit client was not required to hand over its privileged documents in response to a notice from its auditor’s regulator requiring the production of documents in connection with an investigation into the auditor’s conduct: Sports Direct International Plc v The Financial Reporting Council  EWCA Civ 177.
The court overturned the High Court’s judgment in this case, which had found that the audit client’s privilege would not be infringed by requiring production (see our blog post on the first instance decision here).
The decision is helpful in reinforcing the protection of privilege in the regulatory context, whether the privilege belongs to the person who is subject to a regulatory investigation or a client of that person. In either case, privilege will be a defence to a notice requiring production of documents under a regulator’s statutory powers, unless the statute overrides privilege either expressly or by necessary implication.
The decision also confirms that privilege cannot be claimed for non-privileged documents merely because they are attached to privileged communications. The court rejected an attempt to distinguish between a non-privileged attachment and the communication of that attachment between lawyer and client.
The Financial Reporting Council (“FRC”) sought a court order compelling the respondent (“SDI”) to comply with notices requiring the production of documents to assist with an investigation being conducted by the FRC into the conduct of SDI’s former auditors. The applicable regulations contain a carve-out 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”.
SDI argued that it was entitled to withhold certain documents from production on grounds of legal advice privilege. These comprised emails sent between SDI and its legal advisers, and attachments to those emails.
The FRC argued that:
- even if the emails were privileged, there would be no infringement of SDI’s privilege if the emails were handed over (“the Infringement Issue”);
- in the alternative, even if the emails were protected by privilege, some of the attachments were pre-existing documents and were not protected by privilege simply by being attached to privileged emails (“the Communication Issue”).
The High Court (Arnold J) accepted the FRC’s arguments on both issues and ordered that the emails and attachments be disclosed. SDI appealed.
The Court of Appeal allowed the appeal on the Infringement Issue but dismissed the appeal on the Communication Issue. Rose LJ gave the leading judgment, with which Lewison LJ and the Master of the Rolls agreed.
The Infringement Issue
Rose LJ referred to the House of Lords decision in R (Morgan Grenfell & Co Ltd) v Special Commissioner of Income Tax  UKHL 21, in which she said Lord Hoffmann referred to two principles that were not in dispute: first, that legal professional privilege is a fundamental human right; and second, that a statute can only override privilege expressly or by necessary implication. In the present case, the FRC’s statutory powers contained an express carve-out for privilege and so could not be interpreted as overriding privilege. However, the FRC relied on comments made by Lord Hoffmann in Morgan Grenfell in support of its position that SDI was nevertheless required to produce privileged documents.
Those comments related to the rationale behind Parry-Jones v Law Society  1 Ch 1, in which the Court of Appeal held that a solicitor being investigated by the Law Society could not refuse to hand over documents requested pursuant to the Law Society’s statutory powers on the grounds that they were subject to his clients’ privilege. In Morgan Grenfell, Lord Hoffmann stated:
“…I think that the true justification for the decision was not that Mr Parry-Jones’s clients had no LPP [ie legal professional privilege], 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. It does not seem to me to fall within the same principle as a case in which disclosure is sought for a use which involves the information being made public or used against the person entitled to the privilege.”
The FRC submitted that, in that paragraph, Lord Hoffmann recognised a further exception to legal professional privilege to the effect that, where a regulator has a statutory power to request documents, there is no infringement of the privilege when documents are handed over in response to a request made under that power (the “no infringement exception”) – or, in the alternative, any infringement is “technical” only and therefore can be overridden on the basis of a less stringent test than that applied in Morgan Grenfell (the “technical infringement exception”).
The FRC accepted that for either exception to apply, three conditions must be met: (i) the request for the information must come from a regulator; (ii) the regulator must be bound by duties of confidentiality in its use of the information; and (iii) the holder of the privilege must be someone other than the person who is at risk of some adverse finding as a result of the use of the information by the regulator.
Following a detailed analysis of Morgan Grenfell and subsequent case law, Rose LJ held that there was no justification for regarding Lord Hoffmann’s comments as authority for the existence of a “no infringement exception”, or for the application of some lower threshold for implying a statutory override to privilege on the grounds that any infringement would be “technical”. Accordingly, Arnold J had erred in ordering disclosure of the privileged documents on the grounds that SDI’s privilege would not be infringed as a result, or that any infringement would be merely technical and was authorised by the statutory powers.
The Communication Issue
Rose LJ referred to Arnold J’s conclusion, based on authorities including Ventouris v Mountain  1 WLR 607, that pre-existing documents which are not themselves privileged do not achieve the protection of privilege by being attached to a privileged communication.
SDI’s counsel accepted that pre-existing documents are not covered by privilege simply because they are sent to a legal adviser. However, he sought to draw a distinction between, on the one hand, whether an attachment was privileged in itself and, on the other, whether the communication of that attachment was privileged.
Rose LJ held that such a distinction could not survive the judgment in Ventouris v Mountain and the authorities cited in that case.