Hong Kong: Disciplinary Procedures & Privilege

Two recent English decisions highlight the particular challenges when managing legal professional privilege in the context of resolving employee issues. We consider these decisions and how the principles may apply in Hong Kong in relation to dominant purpose, waiver and iniquity and the lessons that they provide to employers in the context of employee investigations and disciplinary actions.

The decisions

FM Capital Partners Ltd v Marino & Ors [2017] EWHC 3700 (Comm)

The Claimant, an asset management company (the Company), received a letter from a client alleging breaches of duty and unlawful conduct by the Company's CEO. The Company suspended the CEO and engaged solicitors who instructed an accountancy firm to conduct an investigation. The CEO was interviewed by the accountancy firm and was later given a copy of the firm's interim investigation report (the Report) ahead of a disciplinary meeting. The CEO was subsequently dismissed for serious misconduct and the Company brought proceedings against the CEO for dishonest breaches of duty. The Company asserted privilege over the Report, which the CEO challenged.

The key findings in relation to privilege were:

1. Dominant purpose: The Court accepted that the dominant purpose of the documents prepared for the investigation was for the Company to ascertain its rights and liabilities in relation to potential proceedings and rejected the CEO's claim that the disciplinary process was an equal purpose of the investigation. The Court accepted that, at the time the accounting firm was instructed, the company contemplated claims including: a) from its client against the company; b) by the company against the CEO; and c) by the CEO against the company in relation to his suspension preceding his dismissal
2. Waiver: The Court found, however, that by providing the Report to the CEO ahead of his disciplinary meeting, the Company had waived privilege in the Report, as it had not given any express restriction as to the use of the Report by the CEO. The Company argued that there was an implied restriction on the use of the document other than for the purpose of the disciplinary proceedings. However, the Court disagreed and referred to the fact that, where litigation including against the CEO was contemplated, the natural inference (without a statement to the contrary) was that the CEO could use the report for the disciplinary process and for any litigation against him that may follow.

X v Y Ltd [2018] UKEAT 0261 17 0908

The second case involved an individual (the Claimant) who was employed by the Respondent as a lawyer until he was dismissed on 31 January 2017. During his employment, the Claimant had brought a claim in the employment tribunal alleging disability discrimination by the Respondent. From August 2016 onwards, the Respondent conducted a reorganisation and implemented various redundancies. In October 2016, the Claimant received, anonymously, a print out of an email dated 29 April 2016 and marked as 'Legally Privileged and Confidential' sent between two of the Respondent's in-house lawyers (Email). Shortly afterwards, the Respondent terminated the Claimant's employment with three months' notice, purportedly due to redundancy.

Following termination, the Claimant brought a second tribunal claim alleging further disability discrimination, victimisation and unfair dismissal. In these proceedings, the Claimant argued that the Email was not protected by privilege due to the principle of iniquity.

The Tribunal found that:

1. the advice in the Email did not simply point out the risk of claims if the Claimant was selected for redundancy, but instead advised how the redundancy could be used as a cloak for dismissing the Claimant, who the Respondent considered troublesome because his disability discrimination claims; and
2. this established a strong prima facie case that the advice in the Email amounted to "an attempted deception of the Claimant but also, if persisted in, deception of an Employment Tribunal in likely and anticipated legal proceedings".

The Tribunal was clear that for a lawyer to advise that a certain course of action may be unlawful (whether the illegality be breach of contract, discrimination or breach of fiduciary duty) is not in itself iniquitous. Indeed, the Tribunal held that if the Email had gone no further than "you may select the Claimant, an employee with a disability, for redundancy but you run the risk of a claim by him", that would not reach the threshold required to exclude privilege on the basis of iniquity. In the Tribunal's opinion, however, the Email did not record any advice on neutral selection criteria for redundancy but instead concentrated exclusively on how the reorganization could be used to remove the Claimant from the company.

The key findings were:

1. Privilege was displaced due to the iniquity principle as there was a strong prima facie case that the Email advised on how to "cloak" a dismissal as a redundancy. The Tribunal therefore found that that the Email, and the advice it contained, was an attempt to deceive both the Claimant and, ultimately, an employment tribunal.
2. The Tribunal left open whether advice to commit the tort of discrimination would in itself engage the principle, but argued that depending on the facts, such advice could be "so unconscionable as to bring it into the category of conduct which is entirely contrary to public policy".

The decision of the Tribunal has been appealed and will be heard by the English Court of Appeal later this year.

Key takeaways

Hong Kong will often follow the English law position in relation to principles of privilege. The English decisions therefore provide valuable lessons for employers on the particular issues that may arise when managing employee issues, including:

1. not to assume that privilege will apply to all investigation materials and instead consider the purpose for which they are prepared (e.g. to obtain legal advice or to determine the course of disciplinary action to take);
2. take care not to inadvertently waive privilege of investigation materials which are disclosed to employees or others including as part of disciplinary processes;
3. ensure that there is a lawful and genuine reason that underpins the decision to terminate employees.