In a recent decision, the High Court found that the claimant’s reference to an expert’s preliminary report in the context of a security for costs application had not amounted to a collateral waiver of privilege, so the report itself did not have to be disclosed: Two Renewables Ltd v Reeves  EWHC 789 (Ch).
It is well-established that, where a party relies on privileged material to support its claim, it may be required to disclose other privileged material relating to the same issue or transaction. This is due to the principle of collateral waiver, or the “cherry picking rule”, which is designed to avoid the unfairness which might result if parties were permitted to rely on privileged material out of context.
In the present case, the court found that the claimant had relied only on the effect of the report, rather than its content – a distinction which has been applied in other cases, but which is often a very fine line. The decision also suggests that a collateral waiver may be less likely to result where a privileged document is deployed only for a limited purpose which does not go to the merits of the claim (here, to rebut a suggestion that the claimant’s liquidators could not possibly believe the stated quantum of the claim).
In practice, however, any decision to refer to privileged material in support of a party’s position – whether an interlocutory stage or at trial – should be considered very carefully. It may be difficult to predict in any given circumstances whether a collateral waiver will result or how far it will extend.
The liquidators of the claimant company (TMO) brought a claim for £19.5 million against its former directors and one other defendant. It was alleged that the defendants were in breach of contract or fiduciary or statutory duties by causing TMO to enter administration and then liquidation, which led to the administrators selling its business and assets for less than they would otherwise have been worth.
The defendants applied for security for costs. The principle that TMO should give security was accepted. The focus was on the adequacy of after the-event (ATE) insurance obtained by TMO, and whether there was a real risk that the policy might be avoided for fraud if the claims were found to be exaggerated.
In the defendants’ evidence in support of the application, it was said that the figure of £19.5 million for the alleged loss and damage was “an unexplained and unsupported figure which the Liquidators cannot possibly believe”.
One of the liquidators (Mr Duffy) responded, saying this was a slur on his “professional competence”, and he therefore wished to make plain the circumstances in which the value of the claim had been calculated at £19.5 million. His evidence explained that EY had been instructed to prepare a preliminary indicative market valuation of TMO, identified the individual at EY with overall responsibility for the valuation, and stated:
“Without waiving any privilege in the report which EY prepared, using a discounted cash flow methodology EY carried out a valuation of TMO in a range of different scenarios. The figure of £19.5m is derived from that valuation. … In the above circumstances. I am confident that the quantum of TMO’s pleaded claim is soundly based. It goes without saying that I wholly reject the suggestion that the stated value of TMO’s claim is sufficiently lacking in credibility that I could not (and do not) believe it”.
The defendants requested production of the EY report, on the basis that Mr Duffy had deployed it by referring to it in these terms.
The Deputy Master agreed that Mr Duffy had deployed the EY report and therefore waived privilege. Although Mr Duffy had said the figure of £19.5 million was “derived from” the EY report, in their context these words referred to the content of the report rather than its effect. That statement was intended to deal with the issue about whether the quantum figure could be justified, an issue which went to the merits of the case as a whole.
The judge (HHJ Jarman QC) allowed the appeal, finding that privilege had not been waived.
The principle underlying collateral waiver, or the “cherry picking” rule, is the desire to ensure fairness between the parties by not allowing one party to quote or rely on privileged material out of context. The judge cited the following passage from Matthews & Malek, Disclosure (5th ed.):
“Where a person is deploying in court material which would otherwise be privileged, the opposite party and the court must have the opportunity of satisfying themselves that what the party has chosen to release from privilege represents the whole of the material relevant to the issue in question. To allow an individual item to be plucked out of context would be to risk injustice through its real weight or meaning being misunderstood.”
The judge summarised the relevant principles, including that:
- Reliance in itself is not the test but whether the contents of the document are being relied on, rather than its effect.
- If the document is referred to in order to persuade the court at an interlocutory stage to take a particular view of the merits of the case (eg an application for a freezing order or for summary judgment), this operates as a collateral waiver.
- If use of the document can be shown to be made for a limited purpose only at the interlocutory stage, there may be no waiver.
In the present case, the judge noted that the EY report was referred to for the narrow purpose of rebutting the allegation that the liquidators could not have believed the pleaded quantum, and that the report was obtained for pleading purposes only and was not intended for use at trial. It was also relevant that, on a security for costs application, unlike for example an application for summary judgment or a freezing order, the underlying merits of the claim are not usually engaged (unless it can be demonstrated that there is a high degree of likely success or failure, which was not the case here).
If the Deputy Master had taken these points into account, the judge said, there would have been no justification for his conclusion that the EY report had been deployed on the merits of TMO’s case. There was no justification for concluding that any reference went further than rebutting the serious allegation regarding the liquidators’ lack of belief in the quantum figure.
Taken in context, the judge concluded, the evidence had merely set out the effect of the EY report to justify Mr Duffy’s belief in the £19.5 million figure. It was clear that the EY report was a complex and detailed one.
“In my judgment by referring in two sentences in very broad terms to the methodology, it cannot properly be said that he was referring to its content, as opposed to its effect, namely the effect on his state of mind, in answer to the allegation that he could not possibly believe the figure.”
Therefore, privilege had not been waived.