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It’s the client’s privilege but who assesses it? Clarification from the High Court

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management

07-07-2020

In the course of an audit a company may need to disclose privileged documents to its auditors to allow them to properly fulfil their audit obligations- for example, to assess the adequacy of provision made for litigation, the auditors need to understand the prospects of the claim succeeding. The auditors are also required to document on the audit file the evidence they have relied on in forming their opinions. Therefore audit files often contain privileged material which the audit firm may need to consider in the context of its own disclosure obligations in regulatory action against the audit firm relating to the audit.

In A v B & Anor [2020] EfWCH 1491 (Ch) the High Court  considered the question of legal professional privilege in this context.  

Background

The Financial Reporting Council (“FRC”) had commenced an investigation under the Audit Enforcement Procedure into B’s audit of the financial statements of A.  The FRC sought disclosure of documents from B pursuant to a statutory notice which B was required to comply with. The FRC accepted that certain documents of A’s in B’s possession did not need to be provided to it if a claim to legal professional privilege could be maintained; the case of Sports Direct International plc v The Financial Reporting Council [2020]EWCA Civ 177 determined that there is no infringement exception available to the FRC which might override A’s claim to privilege even if it is otherwise well-founded.

It appears to have been accepted that A had provided any privileged documents to B solely for the purposes of the audit on a limited waiver basis. What was in contention between A and B was whether the documents were actually privileged. A asserted that they were and argued that the decision to withhold them was for it to make. B did not accept a number of A’s privilege claims and maintained that B was entitled to take its own view on whether a claim to privilege by A was one which B could properly assert against the FRC. 

A sought a declaration reflecting its position but the Judge declined to make it, in part because the Court by then had been asked to determine the status of the documents about which A and B disagreed. However, the Judge did make some observations regarding the claim that will be of assistance to service providers (C) and their clients (D):

1.    Like the FCA and other regulators, the FRC’s right to require C to provide it with documents does not extend to documents which would be protected from disclosure in High Court proceedings by legal professional privilege;

2.    This protection from disclosure extends to documents provided to C by D on a limited waiver basis;

3.    It would require very clear words in the contract between C and D for C to be required by its own relationship with D to maintain a claim to privilege on the basis of nothing more than a mere assertion by D that privilege exists;

4.    Therefore it is for C to determine whether the document is privileged because it is the person who has the duty to disclose in response to the statutory notice;

5.    C may have an obligation to tell D about the statutory notice. D’s rights can be protected by proceedings (and if appropriate an injunction) against C.

6.    Both the regulator and D can challenge the decision C makes regarding privilege.

Key points

Neither client nor service provider decides conclusively that a client’s document held by the service provider is privileged.  However, if a service provider is required to provide documents to a regulator it is generally entitled to take its own view on privilege rather than having to comply with the client’s assertions in that regard.

To minimise the prospects of privileged documents inadvertently being disclosed in these circumstances the following should be considered at the time documents are provided by the client:

  • Privileged documents should be clearly marked as such
  • Privileged documents should be provided on a limited waiver basis, the terms of which are clearly expressed
  • It can be helpful to specify in the engagement terms between the service provider and client what will happen if a regulator or third party seeks documents from the service provider