Court of Appeal decision underlines need for clear evidence of dominant purpose in maintaining claim to litigation privilege

The Court of Appeal has upheld a decision rejecting a claim to litigation privilege for reports obtained by liquidators, as the liquidators had failed to establish that the dominant purpose of the reports was for use in litigation: Rawlinson and Hunter Trustees SA & ors v Akers & anr [2014] EWCA Civ 136 (and see here for our post on the first instance decision).

The decision confirms the court’s strict approach in analysing the purpose for which a report was prepared in determining a claim to litigation privilege, and consequently the need for those asserting the privilege to put forward clear and precise evidence of the dominant purpose. Where the evidence is vague or equivocal, the court is likely to find that the hurdle has not been met.

The Court of Appeal's decision may however give some comfort to liquidators. The first instance decision had appeared to suggest that where documents were produced to determine the extent to which “problem loans” were recoverable in order to establish the financial position of a company, that exercise would be quite independent of the possible need to take recovery proceedings and so would not attract litigation privilege. The Court of Appeal has recognised that an exercise to establish the financial position of a company need not be independent of the possible need to take recovery proceedings. Each case will turn on its facts. What is clear is that the onus is on the party asserting the privilege to show that the test is satisfied.

Background

Litigation privilege applies where, at the time a communication or document was created: (i) litigation was in reasonable prospect; 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.)

The facts are set out in more detail in our see post on the first instance decision. Briefly, the question for the court was whether five reports which had been prepared by a firm of accountants on the instructions of joint liquidators were subject to litigation privilege.  

At first instance the High Court (Eder J) held that none of the reports were subject to litigation privilege. The liquidators appealed.

Decision

The Court of Appeal unanimously dimissed the appeal. Tomlinson LJ gave the lead judgment, with which Ryder and Moore-Bick LJJ agreed.

The court noted that there was no dispute as to the applicable principles, which require that the document in question was made with the dominant purpose of being used in aid of, or obtaining legal advice from a lawyer about, actual or anticipated litigation. The court will look at "purpose" from an objective standpoint, looking at all relevant evidence including evidence of subjective purpose. The evidence in support must be specific enough to show something of the deponent's analysis of the purpose for which the documents were created, and should refer to such contemporary material as is possible without disclosing the privileged material. 

The Court of Appeal said the judge was right to emphasise that the mere fact that a document is produced for the purpose of obtaining information or advice in connection with litigation, or of conducting or aiding in the conduct of such litigation, is not sufficient to found the claim for litigation privilege. It is only if such purpose can properly be characterised as the "dominant purpose" that a claim for litigation privilege is sustainable.

The court quoted at length from the first instance decision, including the judge's detailed analysis of the evidence and his own reasoning regarding the dominant purpose for each of the five reports.

The court noted the judge's apparent suggestion that if the purpose of commissioning a report was to conduct an exercise the liquidators were bound to carry out in any event, irrespective of whether litigation was pending or in contemplation, then such a purpose would necessarily be independent of the possible need to take recovery proceedings. However, Tomlinson LJ said he suspected the judge might have been "guilty of over-compression in expression"; it would by no means necessarily be the case that identification of intra-company balances which should be reversed would be independent of the possible need to take recovery proceedings. This did not however undermine the judge's analysis.

As the Court of Appeal stated, the real difficulty for the liquidators was that "in circumstances which call for clarity and precision" they "made no effort to grapple with the obvious need to establish which of dual or even multiple purposes was dominant if a plausible claim to privilege was to be made out". In relation to one report, for example, the evidence of purpose was as follows:

"The [report] was prepared entirely to enable the Joint Liquidators and their legal advisors to respond to the varying scenarios and to prepare a Defence and Counterclaim quantifying the amounts claimed. Specifically it was to identify all inter-company balances that should be reversed and to calculate the effect of the these balances/reversals on dividends to creditors;"

The first sentence, the court said, identifies two purposes: the first is vague and the second is on its face independent of the first, although it need not necessarily be so. The final sentence appears to put forward a different, narrower purpose, which might embrace use in the conduct of contemplated litigation but need not necessarily do so. The judge's assessment concerning that report could not therefore be criticised.

Like the judge, the Court of Appeal considered that strongest case for litigation privilege could be made out for another report that had been commissioned following an express request from counsel to enable them to advise on potential claims against various possible defendants identified in a previous report. The court considered that there was "some force" in the rhetorical question for what purpose could this report be said to have been commissioned other than for use in the conduct of litigation. However, the court said, that was not quite the right question since the relevant litigation needed to have been reasonably in prospect. The liquidators therefore needed to deal with the fact that no proceedings had been commenced in the more than two and a half years since the report was produced. Accordingly there was no basis on which the court could legitimately differ from the judge's assessment that even in that case the dominant purpose test had not been satisfied.

Comment

The Court of Appeal's decision helpfully recognises that what might appear to be separate purposes may not in fact be independent of one another. That is consistent with the leading authority of Re Highgrade Traders Ltd [1984] BCLC 151 (CA) in which the Court of Appeal upheld a claim for privilege in respect of reports commissioned by insurers into the cause of a fire which destroyed the insured’s business, finding that the purpose of ascertaining the cause of the fire was "quite inseparable" from the purpose of obtaining advice regarding possible claims and therefore the "dominant purpose" test was satisfied.

The first instance decision in the present case had appeared to take a harder line in the context of reports obtained by liquidators. In particular it appeared to suggest that where a liquidator is seeking to establish the financial position of a company, that exercise will be seen as independent of the possible need to take recovery proceedings. The Court of Appeal's rejection of any such inflexible rule will give some comfort to liquidators. However, it is clear that the onus will be on the party asserting the privilege to establish that what might appear to be separate purposes are not in fact independent of each other, and that the litigation is the dominant purpose.

The decision is also interesting in suggesting that a claim to litigation privilege may be more difficult to establish where proceedings have not been commenced some significant period after the document in question was prepared. In theory, to establish litigation privilege there is no requirement that litigation need ever be commenced, so long as it was reasonably in prospect at the time in question. However, it seems that in practice the court may be more sceptical about an assertion of privilege where proceedings have not been commenced within a reasonable period after the document was prepared. At least, as the decision shows, it is a circumstance that should be addressed in the evidence.