Commercial Court rejects claim to litigation privilege

In the latest decision illustrating the court's strict approach when applying the test for litigation privilege, the Commercial Court has rejected a defendant's claim to privilege over reports prepared by third parties (a bank and a firm of accountants) regarding a potential entitlement to deferred consideration following a business sale: Starbev GP Ltd v Interbrew Central European Holding BV [2013] EWHC 4038 (Comm).

In relation to the bank documents, the court held that litigation was not in reasonable prospect at the time of preparation. The bank was instructed to investigate what were mere suspicions on the part of the defendant; unless and until that investigation confirmed there was substance to the suspicions, there was no real reason to anticipate litigation. In relation to the accountants' report, the defendant had not established that it was for the dominant purpose of the litigation. That was in part because the report had been commissioned and the underlying work completed at a time when litigation was not (as the court concluded) in reasonable prospect; the court did not accept that the purpose of the report had been transformed by an instruction to put the conclusions in writing, even if litigation was in reasonable prospect by that later stage.

The key message is to consider and record, at the stage a report is commissioned, whether litigation is contemplated and (if this is the case) that it is the purpose of the report. Such a statement will not be definitive but may assist in evidencing the required elements for litigation privilege. As ever, if there is any room for doubt, the safest course is to assume that the report will not be covered by litigation privilege.

Background

Litigation privilege applies where, at the time a communication or document was created: (i) litigation was in reasonable prospect (as opposed to a mere possibility); and (ii) the communication or document was created for the dominant purpose of that litigation. (See our Handy client guide to privilege and our more detailed notes on the reasonable prospect and dominant purpose aspects of the test.)

Here the underlying dispute concerned the defendant's sale of a brewing business to the claimant in December 2009, which the claimant sold on to a third party in April 2012. The defendant alleged that it was entitled to deferred consideration as a result of the on-sale. That question depended on whether the cash proceeds of that on-sale exceeded certain thresholds as defined in the Contingent Value Right Agreement ("CVR").

The claimant challenged the defendant's claim to litigation privilege in respect of two categories of documents, relating to: (i) advice received from Barclays in April 2012 concerning the structuring of the consideration for the on-sale; and (ii) work done by KPMG after 20 July 2012 on the question of deferred consideration.

Decision

The court (Hamblen J) held that neither category of document was subject to litigation privilege.

Barclays documents

In relation to the Barclays documents, the defendant had not established that litigation was reasonably anticipated when Barclays were instructed in April 2012. At that stage, the defendant's Vice-President Mergers and Acquisitions had a "suspicion" concerning the consideration for the on-sale and instructed Barclays to investigate whether there was substance to his suspicion. As the judge put it, unless and until Barclays confirmed that there was substance to the suspicion, there was no real reason to anticipate litigation. That conclusion was not affected by:

• The VP's statement that it occurred to him that the defendant "would end up in another dispute" with the claimant. That merely suggested that such a dispute was a possibility; it did not mean the defendant reasonably anticipated there would be such a dispute and that it would result in litigation.
• The fact that Barclays' advice was to be and was shared with its corporate solicitors. They may have been part of the investigatory exercise, but that was all it was at that stage.

KPMG documents

In relation to the KPMG documents, even if litigation was reasonably anticipated by 20 July 2012 when KPMG was asked to produce a written report, the defendant had not established that the litigation was the dominant purpose of that report.

KPMG had been appointed in early July 2012 to conduct an audit of notices sent by the claimant. KPMG reported in a call on 20 July and, according to evidence from a Director in the defendant's Global Acquisitions and Mergers group, it emerged that there were grounds to suppose that the defendant was entitled to deferred consideration and the Director "anticipated that it might well end up in litigation". He therefore instructed KPMG to prepare a written report of its conclusions, and the arguments that might be available to the defendant to challenge the claimant's analysis, for the purposes of that prospective litigation. One month later the defendant sent the claimant what the judge described as in substance a pre-action letter.

The judge said that at the time KPMG was instructed litigation was not reasonably anticipated and the primary purpose for instructing KPMG was to carry out an audit pursuant to the defendant's rights under the CVR. The retainer letter showed that the next stage contemplated was seeking "agreement" with the claimant; there was no mention of anticipated litigation in either the retainer letter or the instruction given on 20 July. The judge noted that the 20 July instruction related to work which had already been commissioned and completed, and which KPMG was already obliged to produce in written form under the existing retainer.

In light of the above, even if by 20 July litigation was reasonably anticipated, and that litigation had become a purpose for instructing KPMG, the defendant had not established that it had become the dominant purpose for doing so. The judge said it was difficult to see how the purpose of doing work already done could be changed by an instruction to put it in writing in such circumstances.

The judge also noted that the defendant's external lawyers did not advise of the need to preserve disclosable documents in the course of a conference call on 20 July. If, as the defendant asserted, litigation was reasonably anticipated at that time then the lawyers would have been duty bound to give such advice under the e-disclosure practice direction (CPR 31BPD) which states that "as soon as litigation is contemplated" the parties' legal representatives must notify their clients of the need to preserve disclosable documents. That was not in fact done until an internal instruction was given by the group legal director in October 2012.

Comment

Previous authorities show that litigation may be in "reasonable prospect" when a report is prepared even though, depending on the conclusions reached in the report, a dispute may or may not ultimately arise. For example, in Westminster International BV v Dornoch Ltd [2009] EWCA Civ 1323 the Court of Appeal held that the defendant's surveyor's report was privileged even though, at the time the report was commissioned, it might simply have confirmed the claimant's position in which case no dispute would have arisen. On the facts of that case, the defendant had reasons for concern about the reliability of the claimant's figures. Accordingly, the court said, it was as likely as not that their own surveyor would come up with lower figures, and if that was the case there would be a real prospect of litigation. The claim to privilege was upheld on that basis. The present decision appears to take a tougher line; the judge's view was that unless and until Barclays confirmed that there was reason for suspicion, litigation would not be in reasonable prospect.

In the end it is a matter of fact and degree, and therefore difficult to predict a court's conclusions in a given scenario. It seems to come down to the likelihood, at the time the report is obtained, that its conclusions will lead to a dispute. If there is good reason to think that is the case, then a court may be prepared to find that litigation was in reasonable prospect at that stage.

Even where litigation is in reasonable prospect, there is still of course the separate question of whether that litigation was the dominant purpose of the document or report under consideration. As this and other recent decisions demonstrate (see for example High Court decision underlines strict dominant purpose test for litigation privilege) the court tends to take a strict approach in analysing the purpose in order to determine whether a claim for litigation privilege is available.