High Court decision supports orthodox view of litigation privilege in an investigations context

The High Court has found that documents prepared by a defendant in the course of an investigation into allegations by HMRC were protected by litigation privilege: Bilta (UK) Ltd (in liquidation) & ors v Royal Bank of Scotland Plc & anor [2017] EWHC 3535 (Ch).  The decision arguably departs from the reasoning in the controversial decision in SFO v ENRC [2017] EWHC 1017 (considered here), where the court took a very strict approach to the question of whether documents prepared in the course of an investigation were for the dominant purpose of litigation.    

The court in ENRC found that the primary purpose of an investigation was to find out if there was any truth in allegations made by a whistleblower and (if there was) to decide what to do about it, and took the view that this was not sufficient to meet the dominant purpose test. It also drew a rather problematic distinction between documents prepared in order to take legal advice in relation to litigation, which would be privileged, and those aimed at trying to avoid contemplated litigation, which it said were not. The ENRC decision is subject to an appeal which is due to be heard by the Court of Appeal in July this year.

In the present case, Vos LJ expressed the view that there was “something of a tension” between ENRC and the Court of Appeal’s decision in Re Highgrade Traders [1984] BCLC 151 (CA), in which the court was prepared to find that discovering the truth and enabling advice to be given in relation to litigation both formed part of a single overarching purpose. Similarly, on the facts of the present case, Vos LJ found that the defendant’s subsidiary purpose of avoiding litigation if possible could be “subsumed into” the dominant purpose of preparing for litigation which it considered almost inevitable. He said it was necessary to take a “realistic, indeed commercial, view of the facts”, which supported the defendant’s case.

Vos LJ emphasised that determining the dominant purpose is a question of fact in each case, and so conclusions reached in one case cannot simply be applied across to another context. However, the present decision is encouraging in that it appears to return to what may be considered a more orthodox view of litigation privilege than that underlying the decision in ENRC. Until the Court of Appeal has considered these issues in ENRC, however, parties may wish to take a cautious view.

Background

The claimants to the action applied for disclosure and inspection of documents which were held by the first defendant (RBS) and over which it asserted litigation privilege.

The documents had been created in the course of an investigation following a letter RBS had received from HMRC dated 29 March 2012. HMRC’s letter asserted that there might be grounds to deny RBS’s VAT reclaim in relation to certain carbon credit trades on the basis that RBS “knew or out to have known” that the trades were connected to VAT fraud.

RBS instructed external lawyers to conduct an investigation into the factual circumstances surrounding its involvement in the trades. This resulted in a final report in response to HMRC’s letter which argued that HMRC’s assessment was time-barred, and in any event RBS did not know and ought not to have known that the trades were connected to VAT fraud.

The claimants accepted that, at the time the documents were created, litigation was in contemplation, in the form of a potential assessment by HMRC against RBS in respect of overclaimed VAT. However, it argued that the documents were not created for the sole or dominant purpose of conducting that litigation, and therefore litigation privilege did not apply.

Decision

The High Court (Sir Geoffrey Vos, Chancellor) dismissed the application, finding that litigation privilege had been established.

He referred to a number of authorities, including Highgrade in which the liquidator of an insurance company sought disclosure of reports into a fire where arson by the insured was suspected. In that case, Oliver LJ said:

“What then is the purpose of the reports? The learned judge found a duality of purpose because, he said, the Insurers wanted not only to obtain the advice of their solicitors, but also wanted to ascertain the cause of the fire. Now, for my part, I find these two quite inseparable. The insurers were not seeking the cause of the fire as a matter of academic interest in spontaneous combustion.”

The Court of Appeal in Highgrade was satisfied that the purpose of determining the cause of the fire was all part of the litigation purpose, which was dominant.

Vos LJ noted that the claimants “placed much reliance” on ENRC,  but said he did not consider that decision to be determinative for a number of reasons, including because he thought there was “something of a tension” between Andrews J’s decision in ENRC and the Court of Appeal’s decision in Highgrade, which he noted did not appear to have been directly cited to her. Further, the exercise of determining the sole or dominant purpose in each case is, he said, a question of fact, and therefore the court could not simply apply the conclusions from ENRC to the present case.

On the facts of the present case, Vos LJ was satisfied that the documents were prepared for the dominant purpose of litigation. He noted the claimants’ arguments that, in conducting the review and creating the report, RBS had other purposes, including maintaining a good relationship with HMRC, complying with its own codes of practice, and trying to persuade HMRC to change its mind about the assessment. However, he concluded that all of these purposes were “effectively subsumed under the purpose of defeating the expected assessment”.

The commercial reality was that RBS had to comply with its own protocols and its statutory duties to cooperate with HMRC, but that did not change the fact that RBS knew the overwhelming probability was that an assessment would follow the HMRC letter. It took steps to protect its position which were “only consistent with its overarching purpose being preparation for the litigation”.

Although he noted Andrews J’s view that attempts to settle prevented the litigation purpose being dominant on the facts of ENRC, it was not possible to draw a general legal principle from her approach on those facts. Here, he said: “Just as the insurers [in Highgrade] were not determining the cause of the fire as a matter of academic interest, RBS was not spending large sums on legal fees here in the hope that HMRC would be dissuaded from issuing an assessment.”