ICAEW.com works better with JavaScript enabled.

Case law: Court clarifies when information obtained in internal investigations at work is protected by litigation privilege

Businesses carrying out internal investigations should check whether their records of investigations are protected by litigation privilege, and do not have to be disclosed to the other side in legal proceedings, following a recent ruling.

March 2018

This update was published in Legal Alert - March 2018

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

A bank was involved in transactions that were allegedly VAT frauds. Innocent companies involved claimed that the bank had wilfully shut its eyes to the fraud when carrying out its part of the transactions. They started legal action, claiming more than £73m compensation.

Before the companies made their claim, the bank had received a letter from HM Revenue & Customs (HMRC) notifying it that it had enough evidence to take legal action for unpaid VAT against the bank, but would wait to hear what the bank had to say first. The bank instructed external tax litigation lawyers to carry out an investigation. The lawyers recorded 29 interviews with former and existing bank employees. When the investigation was complete the bank submitted a report to HMRC. However, the cover letter said that submission of the report did not amount to a waiver of the bank's legal privilege in the underlying documents.

When they began their claim, the companies applied for an order that the bank disclose, and allow inspection of, the documents prepared by its external lawyers during its investigation. The bank claimed litigation privilege applied.

Litigation privilege means that communications/documents between lawyers and their clients and third parties are privileged, ie, can be kept secret from the other side in litigation, if:

  • litigation was underway, or in contemplation, when the documents were created
  • the documents were created for the sole or dominant purpose of litigation, and
  • the litigation was adversarial (not, for example, merely investigative or inquisitorial)

The companies accepted that the first and third requirements were met. The issue was whether the documents they wanted to see had been created for the sole or dominant purpose of the litigation.

They argued that the dominant purpose of the investigation, transcripts and report submitted to HMRC was to co-operate with HMRC and persuade it not to start any litigation, rather than for litigation that was underway or contemplated. They relied on a High Court decision in 2017 that documents created for a company to obtain legal advice from external lawyers on how to avoid a regulator bringing criminal proceedings against it were not 'for the dominant purpose of litigation' – and were not therefore protected by litigation privilege.

The High Court said that it was a question of fact, dependent on the circumstances in each case, whether a document's sole or main purpose was litigation. In this case, it found that the fact the bank had co-operated with HMRC did not stop the relationship between them from being adversarial. In its letter, HMRC had told the bank it considered it had sufficient evidence to issue an assessment to VAT. The letter was, therefore, similar in nature to a letter before action, sent as a preliminary to taking legal action, and the bank's response was similar to that which would be given to a letter before action in ordinary commercial litigation. The bank's investigation, through its external tax litigation advisors, was therefore consistent with the purpose of gathering evidence to protect itself in expected litigation.

The Court also decided that the fact the bank might also have hoped that the report would stop HMRC from taking legal action was only a subsidiary purpose of the investigation and report. It did not stop its dominant purpose being for the purposes of litigation. It said that ‘fending off an assessment was just part of the continuum that formed the road to litigation that was considered … to be almost inevitable’.

The Court therefore ruled that the documents were protected by litigation privilege.

Operative date

  • Now

Recommendation

  • Organisations carrying out internal investigations should carefully check whether or not the resulting records, etc, are protected by litigation privilege – or risk them being disclosed to the other side in legal proceedings

Case ref: Bilta (UK) Ltd (in Liquidation) & Ors v Royal Bank of Scotland plc and Mercuria Energy Europe Trading Limited [2017] EWHC 3535