UK: Disclosure Of Documents To A Regulator Held Not To Infringe Privilege

Last Updated: 25 September 2018
Article by Tim Crockford and Andrew Forsyth
Most Read Contributor in UK, November 2018

The High Court has recently held that an entitlement to legal professional privilege on the part of an auditor's client is not infringed by the production of documents to the Financial Reporting Council ("FRC") when the purpose of the disclosure was for a confidential investigation carried out by the FRC into the auditor's conduct. In this briefing, we discuss this recent decision; the case of The Financial Reporting Council Ltd v Sports Direct International plc [2018] EWHC 2284 (Ch).

Background

The FRC is conducting an investigation under its Audit Enforcement Procedure ("AEP") into the conduct of the auditors in relation to the audit of some of Sports Direct International Plc's ("Sports Direct") financial statements. The FRC exercised its power pursuant to paragraph 1(3) of Schedule 2 of the Statutory Auditors and Third Country Auditors Regulations 2016, SI 2016/649 ("SATCAR") and rule 10(b) of the AEP to issue notices ("Rule 10 Notices") to Sports Direct requiring the provision of certain documents that were likely to assist the FRC's investigation.

Sports Direct produced most of the documents but claimed legal advice privilege in respect of some emails between Sports Direct, or its subsidiaries, and its external lawyers, and attachments to those emails. The FRC submitted that Sports Direct failed to comply with the Rule 10 Notices and therefore applied to the court for an order compelling Sports Direct's compliance with the notices. It is believed that this is the first application of its type to have been heard by the Courts.

The issues before Arnold J were as follows:

  1. Did legal advice privilege apply to documents which were not privileged themselves but were attached to privileged emails between lawyer and client?
  2. Did Sports Direct's waiver of privilege over documents, which occurred by sending copies of them to their auditors for the purposes of the audit, constitute an extension of the waiver to the FRC?
  3. Would a disclosure of the documents to the FRC infringe Sports Direct's privilege?

The High Court decision

1. Pre-existing, non-privileged documents

On the first issue, Arnold J followed the case of Ventouris v Mountain (The Italia Express) (No 1) [1991] 1 WLR 607, and held, unsurprisingly, that privilege did not extend to a pre-existing, non-privileged document merely because it has been attached to a piece of privileged communication.

2. Implied waiver of privilege

In respect of the second issue, the FRC argued that disclosure of privileged material to an auditor necessarily required the regulator of the auditor, when investigating a conduct issue, to have access to the material that had been provided to the auditor. The FRC contended, following Scottish Lion Insurance v Goodrich Corporation [2011] CSIH 18, that there was an extension of the waiver, and further that the auditor's terms of engagement had made clear to Sports Direct that the FRC had power to inspect confidential information in the files and working papers. However, the judge agreed with Sports Direct's argument that the case was analogous to British Coal Corp v Dennis Rye (No 2) [1988] 1 WLR 113 and the regulatory process was entirely separate from the process of audit. Further, the terms of engagement said nothing about privileged documents. Therefore, it was held that Sports Direct had not waived privilege in relation to the FRC.

3. Infringement

With regards to the third issue, however, Arnold J held that providing the FRC with the documents for the purposes of its investigation into the auditors' conduct would not infringe Sports Direct's legal advice privilege. While the judge expressed that this issue was "the most important and far-reaching issue raised by the present application, and the most difficult", he applied Lord Hoffmann's obiter comments in the case of R (Morgan Grenfell & Co Ltd) v Special Commissioners of Income Tax [2002] UKHL 21, that a client's legal professional privilege was not infringed by limited disclosure to the Law Society (as in Parry-Jones v Law Society [1969] Ch.1) for the purposes of investigations into the solicitor or the Inland Revenue for the purposes of an investigation into the client's tax adviser in his own capacity as a taxpayer. Arnold J held that although Lord Hoffmann's statements had been heavily criticised, the Courts have continued to treat it as good law and therefore it must be taken to be the current state of the law.

Arnold J noted that Lord Hoffman's comments in Morgan Grenfell contained an alternative reasoning for his conclusion, which was that the Solicitors Act 1957 could be construed as having authorised the Law Society to obtain documents even if that infringed a client's legal professional privilege. Sports Direct argued that the power of the FRC to require documents from a person under SATCAR had expressly excluded documents which that person "would be entitled to refuse to provide or produce in proceedings in the High Court on the grounds of legal professional privilege". However, Arnold J accepted "with some hesitation" the assertion made by the FRC that the protection afforded by SATCAR was confined to circumstances where the infringement of legal professional privilege "was not a technical one". Arnold J commented that he had "not found this a straightforward point to resolve".

Comment

The issue of whether regulators can compel the disclosure of legally privileged documents is an area where the law is subject to some uncertainty. There has been criticism of the line of cases following Morgan Grenfell which holds that privilege belonging to a professional's client is not infringed by disclosure to a body carrying out an investigation against the professional on the basis that the documents cannot be used by the regulator for another purpose, on the basis that this appears to ride rough-shod over privilege: something which has been expressed to be a fundamental right.

Until now, this line of cases has permitted disclosure of privileged documents in circumstances where there is either no express protection of privilege in the relevant legislation (as in Parry-Jones) or the protection is limited to particular circumstances. The judgment in this latest case appears to have elevated the concept of non-infringement to a point where it has over-ridden a broad statutory protection of privilege. The "non-infringement" argument would seem to depend in part on the fact that production is being sought in a context that is different to that of High Court proceedings, but it is not clear how this is compatible with the statutory protection afforded by SATCAR which extended to documents that would be privileged if they were being disclosed in High Court proceedings. The judgment also creates a new concept of infringement that is only "technical", which is ill-defined and likely to be problematic in its application to particular circumstances.

Sports Direct has been granted permission to appeal Arnold J's findings in respect of the infringement issue and the application of Morgan Grenfell. We will therefore be watching developments in this area closely. Until then firms may decide to continue as they are (i.e. to remove/redact material for privilege) but to flag to clients the potential privilege "infringement" risk.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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