Litigation privilege: applying the test

In Axa Seguros S.A. de C.V. v Allianz Insurance plc and others [2011] EWHC 268 (Comm), the High Court held that engineers' reports produced for the reinsurers were not subject to litigation privilege. Although litigation was reasonably in prospect, the reports were not produced for the dominant purpose of the litigation. There was in fact a dual purpose, and neither element predominated.

Key points:

• The fact that the existence of a dispute depends on various contingencies will not necessarily rule out a finding that litigation is reasonably in prospect. It depends on the prospect of those contingencies occurring.
• Contemporaneous documents recording a party's perceptions of the likelihood of litigation may assist in establishing that litigation was reasonably in prospect at a particular time.
• Where a document was created for a dual purpose, then unless the purpose of obtaining advice or evidence in relation to the litigation can be said to predominate, litigation privilege will not be available.

Practical implications:

• Parties should consider recording in writing when they consider litigation to be reasonably in prospect, in case this is disputed at a later date.
• Before instructing an expert adviser to prepare a report in which a party may wish to claim privilege, the purpose of the report should be carefully considered and recorded.
• Where there are multiple purposes, and only one or some relate to the prospective litigation, consider obtaining separate reports on the different issues.

Background

There are two well-established conditions which must be satisfied in order to claim litigation privilege:

• At the time the document was created, litigation must have been "reasonably in prospect" and not a "mere possibility", though the chances need not have been more than 50% (USA v Philip Morris Inc [2004] EWCA Civ 330).
• The document must have been created with the sole or dominant purpose of obtaining advice or evidence in relation to that litigation.

This case gives an interesting illustration of the application of these conditions, in the context of reports prepared for reinsurers.

Axa insured a Mexican state-owned bank in respect of damage to a Mexican highway for which the bank was responsible. 70% of the risk was reinsured in the London market.

It was an express term of the reinsurance contract that cover only applied to roads constructed to internationally acceptable standards, and a survey was to be carried out to confirm the quality of construction of the roads. That survey was carried out in February 2001, but the surveyor's report was not entirely satisfactory to reinsurers, who introduced a "Reverse Onus of Proof" clause requiring Axa to prove that the roads were built to the requisite standard.

In September/October 2001, Hurricane Juliette caused considerable damage to parts of the highway. Axa was required to pay out US$14.8m under the insurance policy, but reinsurers refused cover under the reinsurance contract.

A dispute arose as to whether reinsurers could assert privilege over three reports produced by engineering firm Halcrow during its investigation of the highway between 2002 and 2003.

Was litigation reasonably in prospect?

The judge noted that the dividing line between circumstances where litigation is reasonably in prospect and where it is a mere possibility is not always clear.

The fact that a number of conditions must be fulfilled in order for a dispute to arise does not necessarily mean that litigation is only a possibility. Much will depend on the prospect that the conditions will be fulfilled.

This case was "close to the borderline" but the judge was persuaded that there was a reasonable expectation of litigation at the time the reports were produced, in particular because reinsurance cover was only available for roads constructed to internationally acceptable standards and the February 2001 survey had not confirmed the acceptability of the construction. This was highly material. On this basis, there was a reasonable prospect that Halcrow's reports would not show the roads were constructed to an acceptable standard, resulting in reinsurers rejecting Axa's claim, and that litigation would follow.

The judge commented that the evidence as to the actual perception of reinsurers and their lawyers at the relevant time was some guide as to whether there was a reasonable prospect of litigation, though it was not conclusive.

Were the reports produced for the dominant purpose of the litigation?

The judge held that the reports had been produced for the dual purposes of:

• assessing whether the highway had been constructed to the requisite standard – this purpose was relevant to the anticipated litigation between Axa and reinsurers; and
• determining to what extent damage was caused by the hurricane and assessing the quantum of the claim – in relation to this purpose, Axa and reinsurers had a common interest.

Neither purpose was predominant, and the material could not be separated into distinct parts relating to the separate purposes. Accordingly, the claim for privilege failed.

Comments

Although not cited, the approach taken in this case is reminiscent of the Court of Appeal decision in Westminster International BV v Dornoch Ltd [2009] EWCA Civ 1323. These cases demonstrate that litigation may be in "reasonable prospect" when a report is obtained, even though the report itself may (depending on its conclusions) result in there being no dispute between the parties.

What is clear from the authorities is that the question of whether litigation is in reasonable prospect is a matter of fact and degree. It may be impossible to reach hard and fast conclusions as to where the court will come out in particular circumstances which might be close to the borderline, as the court described the present case. A party should err on the side of caution where it is not clear that litigation privilege will be available for any report obtained.

Contemporaneous documents recording a party's perceptions of the likelihood of litigation may assist in establishing that litigation was reasonably in prospect at a particular time. Parties should therefore consider recording in writing when they consider litigation to be reasonably in prospect, in case this is disputed at a later date.

This case is also of interest in demonstrating the court's strict approach to the "dominant purpose" test. Before instructing an expert adviser to prepare a report, a party should carefully consider the purpose of the report. It may be advisable to record the purpose, particularly if it may be subject to any doubt. Where there are multiple purposes, and only one or some relate to the prospective litigation, parties should consider obtaining separate reports on the different issues.

There are two further matters considered by the judge which are worth noting, though they did not have to be decided in light of his conclusions on litigation privilege:

• The first relates to the question of an expert's independence. Halcrow, the engineer that produced the reports in question, was later retained by the reinsurers as their expert for the purposes of the proceedings. The judge noted that an expert had an obligation to act independently and to inform the court of any matter known to it which was inconsistent with or cast doubt on its opinion. Documentary evidence of Halcrow's investigations could not, in the judge's view, properly be withheld if Halcrow was to give expert evidence in the case.
• The second relates to loss of confidentiality and therefore loss of privilege. Axa argued that, even if Halcrow's reports were initially privileged, confidentiality in them had been lost as a result of their disclosure to loss adjusters jointly appointed by Axa and reinsurers (and, in the case of one of the reports, to Axa itself) and general discussions between the parties relating to the content of the reports. The judge commented that he did not consider "such partial (and possibly inaccurate) revelation as has taken place" to have destroyed confidentiality in the reports, other than the one that was actually disclosed to Axa.