High Court holds auditor must form its own view on client's claim to privilege when responding to its regulator’s notice to produce documents

The High Court has held that an auditor required to produce documents to its regulator, the Financial Reporting Council (“FRC”), must form its own view on whether documents are privileged and can therefore be withheld on that ground, regardless of whether the privilege is that of the auditor or its underlying client: A v B and another [2020] EWHC 1491 (Ch).

The court considered that the duty to disclose was on the auditor and disclosure could only be refused on the grounds that a document was actually privileged. Mere assertion of privilege by the client was insufficient.

In practical terms, where there is a dispute between a client and its auditor over whether documents are privileged, the client can seek an injunction prohibiting the auditor from disclosing the documents on the basis that the client’s privilege will be infringed (or the auditor could seek a declaration that documents are not privileged if the client is not engaging). The status of the documents will then be determined in those proceedings. The FRC will not necessarily be party to those proceedings, but can be joined if necessary.

Where, conversely, the auditor asserts the client’s privilege, the FRC can bring proceedings challenging the refusal to produce the documents and the court can, if necessary, join the client to the proceedings.

The decision presupposes that the client is made aware of the auditor’s intention to disclose. The judge considered it unrealistic to suggest that an auditor would not engage with its client before making disclosure in sufficient detail to enable the client to seek an injunction if it wished to do so.

This decision is also of relevance outside of the audit regulatory context, given that regulators’ powers to obtain documents are often subject to exceptions for privileged documents. Subject to any appeal, and the terms of the particular regulatory regime, the decision suggests that the regulated entity cannot refuse to produce documents on the grounds that a claim to privilege has been asserted or could be asserted by a client (or other third party to whom duties of confidentiality are owed); the regulated entity must take its own view on the privilege claim. Where it gets this wrong and discloses documents that are privileged, it will likely be in breach of its obligations to its client (or other third party). While there are ways of having the status of documents determined by the court, these are likely to be costly and time consuming.

Finally, the case is of interest in rejecting, in a separate judgment, most of A’s claim to privilege in respect of the disputed documents, including minutes prepared by a lawyer: A v B [2020] EWHC 1492 (Ch).

Background

The decision arises in the context of an investigation by the FRC into the audit of the 2018 accounts of a retailer, A. The subjects of the investigation are A’s former auditor, B and an audit partner of B.

The FRC is the UK regulator for auditors and its powers to investigate and impose sanctions are set out in the “Statutory Auditors and Third Country Auditors Regulations 2016” (“SATCAR”).

In the course of its investigation, the FRC issued notices to B under SATCAR requiring the production of certain documents. Under the terms of the regulations, B was not required “to provide any information or create any documents which [it] would be entitled to refuse to provide or produce…. in proceedings in the High Court on the grounds of legal professional privilege”.

A asserted that some of the documents sought by the FRC from B were protected by A’s privilege. The documents were in B’s possession as A had provided the documents to B during the course of the audit on the basis of a limited waiver of privilege.

It was common ground that any privilege A had in the documents had not been lost because of the provision of the documents to B on a limited waiver basis and that, in light of the Court of Appeal decision in Sports Direct International plc v Financial Reporting Council [2020] EWCA Civ 177 (see our post here), there could be no argument that disclosure of the documents would not amount to infringement of any such privilege. B therefore was under an obligation to assert A’s privilege in the documents where that claim was properly made.

B took the view that certain of the documents sought were not privileged and had to be disclosed. A in response commenced proceedings against B and the FRC asking the court to determine whether B was obliged to withhold documents on the basis of A’s assertion of privilege, or whether B was obliged to make its own assessment of whether the claim to privilege was valid. It sought a declaration that A’s assertion of privilege was sufficient.

At a directions hearing, in light of concerns over whether A’s declaration proceedings would determine the issues between the parties, A was ordered to provide to B a list of the documents to which it was asserting privilege and B was given permission to serve a counterclaim seeking a declaration as to the privileged status of those documents. That process resulted in B rejecting A’s claim to privilege in respect of six out of 22 documents and seeking declaratory relief by way of counterclaim regarding them. The FRC was not a party to the counterclaim. A confidential hearing was then held to determine whether the documents were privileged, the documents in issue being provided to the court.

Decision

The High Court (Trower J) handed down two judgments, the first regarding the claim for a general declaration and the second concerning whether the six documents were privileged.

Who decides which documents to withhold as privileged?

In his first judgment, the judge held that it was inappropriate to make the declaration that A sought, largely on the basis that the status of the documents would be determined by the counterclaim and that was the most effective mechanism of resolving the underlying dispute.

In any event, the declaration that A sought did not reflect the true legal position as it was for B, as the person on whom the duty to disclose is imposed, to determine whether to withhold a document on grounds of privilege.

So far as A is concerned, it is likely that B will have been under a duty to tell A about the statutory notice (or will in any event have been in contact with A about it). If B disagrees with A’s assertion of privilege and plans to disclose the documents, A can bring proceedings (including seeking an injunction) against B. This will be based not on SATCAR but on the terms of the underlying relationship between A and B. In an appropriate case it is open to A, B or the court to join the FRC to the proceedings. The status of the documents will then be determined in those proceedings. It would also be possible, where A asserts privilege but does not bring the matter to court, for B to bring matters to a head by seeking declaratory relief against A.

If, alternatively, B decides to withhold documents on the basis that A’s claim to privilege is properly made, the FRC can challenge that decision by making an application to court under SATCAR. The court will then be able to make such directions as it considers appropriate, including joining A if necessary.

Determination of the privilege claims

In his second judgment, part of which is redacted on the grounds of confidentiality, the judge rejected A’s claims to privilege in respect of five of the documents, save that it ordered redaction in respect of one of these documents. The judgment in respect of the sixth document is redacted.

The judge first set out the relevant principles, including:

• Privilege applies to documents such as internal communications within a company which reproduce legal advice for dissemination to those who need it.
• Legal advice privilege extends to what can or should prudently and sensibly be done, so long as that advice is given in a legal context.
• The dominant purpose of a communication or document needs to have been to obtain or give legal advice for legal advice privilege (following Jet 2.com – see our post on that decision here).

So far as the six documents were concerned:

Minutes of A’s executive corporate governance group meetings

The minutes, created by A’s General Counsel, were labelled confidential and privileged and the metadata showed the GC was the last person to modify them.

The judge commented that the mere fact that a lawyer is involved in the preparation of minutes of a meeting does not mean the function he is performing is connected with the giving of legal advice. It  also was not possible to identify from the document, either directly or by inference, a statement of the advice or communication said to be privileged.

A claim for redaction of a section headed “Regulatory and legal matters” was also rejected. It was clear that a solicitor was present, but that was not sufficient to demonstrate that any advice was given or, if it was, to identify that advice from the face of the minute.

Minutes of a board meeting

The issue was whether the minutes drafted by a solicitor were a post-meeting record of what was discussed, which would not be privileged, or a pre-meeting advice to the board as to what they should be discussing, which might be privileged. The judge considered on the evidence it was most likely a post-meeting record.

Risk register

A’s case was that the content of advice could be inferred from the record of how the risks set out in the register (prepared by the GC with the assistance of others) were to be resolved by the business. That was not sufficient. A document is not privileged merely because it takes into account legal advice; it is only privileged if the way in which it does so makes clear or communicates in an obvious manner the substance of that advice.

Draft Chairman’s script

The script contained a deleted comment from a lawyer, the comment still being visible. The judge took the view that this version of the script was likely to have been produced by someone in the business who had deleted the lawyer’s comment. It was therefore not privileged in its entirety but the lawyer’s comment should be redacted. If this had been the lawyer’s draft, it appears the judge would have accepted that it was privileged.

Note: An application for permission to appeal against this decision was refused on 23 October.