Litigation privilege in internal investigations

• United Kingdom

• Litigation and dispute management

23-02-2018

Bilta v (1) Royal Bank of Scotland ("RBS") (2) Mercuria Energy Europe Trading ("Mercuria")¹

R (for and on behalf of the Health and Safety Executive) v Paul Jukes²

To what extent do these recent decisions represent a departure from the approach taken in Serious Fraud Office ("SFO") v Eurasian Natural Resources Corporation ("ENRC")³?

Bilta v RBS: Background

In mid-2009, RBS and its (then) subsidiary Mercuria entered into a series of transactions for the purchase of tradeable carbon credits known as European Union Allowances. RBS subsequently claimed the VAT element of the transactions from HMRC as input tax. In the second half of 2009, HMRC launched a market-wide investigation into allegations that companies were engaged in a fraudulent scheme known as ‘carousel fraud’.

In March 2012, HMRC sent RBS a letter stating that there were potential grounds to deny payment of VAT reclaimed by RBS (the "HMRC Letter"). RBS subsequently instructed external tax litigation lawyers to investigate the allegations (the "Investigation"). In January 2014, a final report was produced by RBS’s external lawyers and sent to HMRC (the "Report"). The Report set out various findings of fact and legal analysis.

In 2015, Bilta commenced proceedings against RBS and Mercuria, claiming that RBS had wilfully shut its eyes to what was an obvious fraud by Bilta’s directors. Bilta sought disclosure from RBS of documents created during the Investigation; namely, those created from the date of the HMRC Letter to the date of the Report. RBS resisted disclosure on the basis that litigation privilege applied.

Sole or dominant purpose?

The test for litigation privilege as set out in Three Rivers District Council v Governor & Company of the Bank of England (No 6)⁴ ("Three Rivers") is as follows:

1. litigation must be in progress or in contemplation;
2. the communications must have been made for the sole or dominant purpose of conducting that litigation; and
3. the litigation must be adversarial, not investigative or inquisitorial.

Bilta challenged whether the documents were made for the sole or dominant purpose of conducting the litigation then in contemplation. Bilta argued that the Report (and related documentation) had been created for the sole or dominant purpose of "avoiding" penalties imposed by HMRC. It relied on the reasoning adopted in SFO v ENRC, where the SFO successfully challenged claims by ENRC that legal professional privilege applied to documents prepared by ENRC’s solicitors and accountants in the course of an internal investigation into allegations of bribery and corruption. In ENRC, Andrews J held that litigation privilege did not apply where the creation of the documents pursuant to the internal investigation was: (1) intended to dissuade the SFO from taking further action; and (2) against a backdrop of ENRC’s self-reporting to the SFO, concluding that the ‘sole or dominant purpose’ for the creation of the documents was not the conduct of the litigation with the SFO.

Judgment

Vos LJ dismissed Bilta’s application. Specifically, Vos LJ held that:

• the HMRC Letter was analogous to a letter before claim as it analysed the relevant law, applied it to the facts (as HMRC understood them) and requested comment from RBS. The Report was comparable to a response to a letter before claim in ordinary commercial litigation;
• the law required only that HMRC prove that RBS "knew or should have known" that the relevant transactions were connected with fraud. This comparatively light burden of proof, compounded by what then perhaps appeared to be a developing pattern of unfavourable decisions by HMRC, led a key RBS employee to conclude that it was a "racing certainty" that the HMRC Letter would end in litigation;
• RBS had appointed external solicitors (specialists in tax litigation) shortly after receipt of the HMRC Letter. This indicated that RBS was preparing to defend an anticipated claim; and
• RBS’s cooperation with HMRC did not alter the fact that the sole or dominant purpose for the creation of the Report was for the conduct of litigation. The "commercial reality" of RBS’s position was such that it had to comply with its own code of conduct/statutory duties and cooperate with HMRC. RBS had taken steps which were consistent with its overall purpose; preparation for contested litigation with HMRC.

Vos LJ drew a clear distinction between the facts of this case and ENRC and declined to "draw a general legal principle" from the approach taken by Andrews J in ENRC. Instead his conclusion was based on a "realistic, indeed commercial, view of the facts" for example:

• the HMRC Letter marked a "watershed moment" and a "step change" from an investigation to a tax dispute. By contrast, there was arguably no such watershed moment in ENRC. The decision of the SFO to commence an investigation into ENRC in April 2013 might have been a "watershed moment" but the documents sought by the SFO were prior to that date;
• RBS had submitted evidence in support of the proposition that the HMRC Letter was a watershed moment (in the form of direct witness statements). ENRC relied on a statement from a solicitor with conduct of the matter. Andrews J considered this evidence was insufficient to discharge the first limb of the Three Rivers test;
• the collaborative approach adopted by RBS should not detract from its ability to assert litigation privilege. The engagement with the HMRC investigation must be understood in context; namely, RBS was bound by its statutory duties and code of conduct to cooperate with the authorities in such circumstances. ENRC, was driven by a different imperative. The documents sought by the SFO in ENRC arose out of an internal investigation to assess the veracity of allegations made by a whistle-blower, which in turn were to be provided to the SFO. It was on this basis that Andrews J concluded that the dominant purpose of these documents was the avoidance of litigation; and
• RBS had appointed specialist tax litigation solicitors soon after receipt of the HMRC Letter whereas ENRC had instructed two firms of solicitors; one with conduct of the investigation phase and the other to advise on the outcome of the former’s investigation. The SFO sought disclosure of the former firm’s documentation, and the delineation of roles impacted on ENRC’s ability to resist disclosure on the basis of legal professional privilege.

R v Jukes: Further judicial consideration of ENRC

Since the decision in Bilta, the Court of Appeal has considered the ENRC decision in R v Jukes where it is cited with approval by Flaux LJ, who notes that "an investigation is not adversarial litigation".

In Jukes, a fatality had led the Health and Safety Executive ("HSE") to commence an investigation. The appellant sought to argue that a witness statement, in which he had accepted he was responsible for health and safety at the company, was inadmissible as it was subject to litigation privilege. The Court of Appeal held that at the time the statement was made, no decision to prosecute had been taken by the HSE and matters were still at an investigatory stage.

The Court of Appeal agreed with the analysis in ENRC as to when a criminal prosecution could be said to be in reasonable contemplation (quoting paragraphs 160 and 161 of the ENRC judgment). There was no evidence that at the time the statement was prepared, the individual appellant or the company had sufficient knowledge as to what the investigation would unearth. Therefore, they could not have appreciated at that point that it was realistic to expect the HSE to be satisfied that there was enough material to stand a good chance of securing a conviction.

What next?

The Court of Appeal has confirmed that an investigation is not adversarial litigation. However, whether a particular investigation has become sufficiently adversarial to attract litigation privilege will be determined on the facts of each individual case.

The Court of Appeal is due to hear the ENRC appeal in July 2018, which should provide further clarity and guidance on the application of legal professional privilege.

¹ [2017] EWHC 3535 (Ch)

² [2018] EWCA Crim 176

³ [2017] EWHC 1017 (QB)

⁴ [2005] 1 AC 610