UK: High Court Upholds Claim To Privilege In Respect Of Underlying Instructions To Law Firm Relating To Escrow Monies

Last Updated: 31 January 2019
Article by Herbert Smith Freehills

The High Court has rejected an application for disclosure of documents containing the underlying instructions to a law firm acting for a party funding a transaction, in circumstances where the law firm provided a confirmation to the seller as to the nature of its irrevocable instructions regarding escrow monies: Raiffeisen Bank International AG v Asia Coal Energy Ventures Ltd [2019] EWHC 3 (Comm).

The court rejected an argument that the instructions were not confidential, or that privilege had been waived, because the client had authorised the law firm to state what instructions it had been given. The judge emphasised that underlying instructions do not cease to be confidential just because the client authorises the solicitor to divulge information it has received in confidential communications from the client. The question is whether the client has given the solicitor authority to disclose the underlying communications.

Caution is needed however. It may be difficult to distinguish between cases where the client has given the solicitor authority to disclose the underlying communications and cases where it has merely authorised the solicitor to divulge information received from the client without disclosing the underlying communications. Particular care should also be taken where a party is considering referring to lawyer/client communications in the context of legal proceedings. If the court finds that the underlying privileged material is being deployed in the proceedings it may order those communications to be disclosed along with any other documents relevant to that issue, under the principle of collateral waiver or the "cherry picking rule".

The decision also illustrates the broad protection which can be afforded to lawyer/client communications under the head of legal advice privilege. The privilege is not limited to requests for legal advice or the provision of advice, but will include the entire continuum of communications between solicitor and client relating to a transaction in which the solicitor has been instructed, provided that they are directly related to the solicitor's performance of his professional duty as legal adviser. Here that principle meant that instructions regarding the holding and transfer of escrow monies were privileged, even if they did not contain advice on matters of law.

Background

The claimant ("RBI") and the first defendant ("ACE") entered into a sale and purchase agreement ("SPA") in relation to the sale by RBI of certain loans and ancillary rights in connection with a proposed public takeover of a company in which RBI held shares. The purchase by ACE was financed by a third party ("SMM") which was represented by the second defendant ("Ashurst").

The SPA contemplated the parties agreeing an escrow arrangement under which the maximum amount due to RBI, US$85 million, would be held in escrow and released on satisfaction of the conditions precedent under the SPA. If the escrow agreement was not entered into within 30 days of the SPA, the parties would discuss alternative arrangements to achieve the same commercial purpose. As provided in the SPA, Ashurst issued a confirmation to RBI (the "Confirmation") which stated:

"(a) we have been put in funds in an amount that is not less than US$85 million...; and

(b) we have irrevocable instructions as follows: (i) to transfer the Escrow Amount to the Escrow Agent upon the signing of the Escrow Agreement in accordance with the terms thereof; and (ii) in the event that the Escrow Agreement is not signed within 30 days of the date hereof, to continue to hold the Escrow Amount pending agreement by the Parties contemplated by [the SPA]..."

Ultimately, the transfer of the loans and ancillary rights was not completed and the relevant funds were not transferred. RBI brought a claim against ACE for breach of contract and against Ashurst alleging misrepresentation in respect of the Confirmation and a breach of a duty of care to RBI.

RBI sought disclosure from Ashurst of any document containing the "irrevocable instructions" referred to in the Confirmation, or any variation to those instructions, as well as any instructions as to what was to be done with the $85 million. Ashurst resisted the application on grounds that such documents were subject to legal advice privilege, which SMM had refused to waive when requested by Ashurst. RBI argued that the documents were not privileged for a number of reasons, including:

  • The instructions in question were not confidential, or any privilege had been waived, because SMM had authorised Ashurst to enter into a legal relationship with RBI and asked Ashurst to state what instructions it had been given (which Ashurst did).
  • The nature of the instruction as to the use of funds was not a communication of a kind which attracted legal advice privilege: Ashurst was doing no more than a bank often does in similar circumstances.
  • To the extent that Ashurst communicated the instructions to ACE, these communications were not privileged as ACE was not Ashurst's client and it was unlikely that the instructions were shared on a confidential basis.

RBI also sought disclosure of the balance of Ashurst's client account into which the escrow amount was paid, from when the money entered the account to when it left the account. Ashurst did not consent to the order but did not object to such an order being made.

Decision

The High Court (Mrs Justice Moulder) ordered disclosure of Ashurst's client account balance, which she accepted did not involve legal advice privilege, but upheld the claim to privilege in respect of the instructions.

Were the instructions confidential or had privilege been waived?

It was common ground that, unless a document is confidential, there can be no question of legal advice privilege arising.

RBI relied on the Court of Appeal decision in Conlon v Conlons [1952] 2 All ER 462 as authority for the proposition that legal professional privilege does not extend to a communication which the client instructed the solicitor to repeat. In that case, the plaintiff's solicitors wrote to the defendant stating that the plaintiff was prepared to accept £1000 in settlement. In the court's view, this was akin to saying "my client authorises me to say to you that he will accept such and such an amount in settlement". It held that the plaintiff could not claim privilege in respect of what he had said to his solicitor and at the same time had told his solicitor to communicate to the other side. The plaintiff therefore had to answer the question as to whether or not he had authorised his solicitors to settle the case for £1000.

Moulder J said that the application in the present case was much broader than in Conlon where the plaintiff was able to give a simple "yes" or "no" response. Here the  claimant sought specific disclosure of documents which might well contain legal advice as well as containing the irrevocable instructions. This was closer to the position in Ramac Holdings Ltd v Brachers [2002] EWHC 1683 (Ch), in which the court rejected a submission that, where a solicitor was instructed by his client to certify a particular matter, privilege was thereby waived so that the solicitor was at liberty to refer to the underlying facts and matters on which he relied and which had been communicated to him in confidence for the purpose of legal advice.

In the present case, properly analysed, SMM did not authorise Ashurst to tell RBI what the client's instructions were. The purpose of the instructions was to enable Ashurst to provide independent and legally binding representations on its own behalf to RBI, irrespective of the position as between Ashurst and SMM which was a matter for Ashurst. The documents which contained the instructions remained confidential, the judge concluded, for the following reasons:

  1. Unlike in Conlon, Ashurst was not acting as the client's agent in giving the Confirmation.
  2. In Conlon the plaintiff put in issue the authority of his solicitor and so the decision could be viewed as a form of waiver.
  3. Underlying instructions do not cease to be confidential merely because the client authorises his solicitor to divulge information which has passed in the course of confidential communications; the question is what authority the client has given to his solicitors. Here SMM did not give authority to disclose the underlying communications.

Moulder J rejected for similar reasons the argument that any privilege had been waived, describing it as a repackaging of the arguments made in relation to confidentiality.

Was there a relevant legal context?

It was common ground that privilege attaches not only to a document conveying legal advice and a specific request for advice but (as stated by Taylor LJ in Balabel v Air India [1988] Ch 317 at [330] and cited with approval by Lord Carswell in Three Rivers DC v Bank of England (No 6) [2005] 1 AC 610):

"where information is passed by the solicitor or client to the other as part of the continuum aimed at keeping both informed so that advice may be sought and given as required, privilege will attach... Legal advice is not confined to telling the client the law; it must include advice to what should prudently and sensibly be done in the relevant legal context."

Further, as noted by Lord Carswell in Three Rivers, all communications between a solicitor and his client relating to a transaction in which the solicitor has been instructed for the purpose of obtaining legal advice will be privileged, provided that they are directly related to the performance by the solicitor of his professional duty as legal adviser of his client.

In the present case, Moulder J noted, communications regarding the transfer of the funds and the confirmation to be provided to RBI were part of the completion arrangements for the purchase of the loans and the provision of finance by SMM. Ashurst's role was to provide legal advice to SMM in relation to the provision of that finance. The Confirmation had to be viewed in the context of the transaction as a whole and the legal advice that Ashurst would give as to how to achieve its client's commercial objective and safeguard its interests. The underlying communications were inextricably bound up with that legal advice.

The judge recognised that the documentation containing the instructions relating to the holding of the $85 million might not contain advice on matters of law, but said it would still be part of the continuum of communication.

Accordingly, all of the categories of instructions were privileged as they were given in a relevant legal context and were directly related to Ashurst's performance of its role of providing legal advice to its client.

Did it matter if the instructions were shared with ACE?

RBI accepted that if the instructions were shared with ACE confidentially, privilege would apply, but it submitted that it was inherently unlikely that that was the case.

Moulder J did not accept that it was unlikely that communications between Ashurst and ACE were intended to be confidential. ACE and SMM shared a common interest in the purchase of the assets and may therefore have exchanged information through Ashurst on a confidential basis. There was no such common interest between ACE and RBI or SMM and RBI which would suggest that communications between Ashurst and ACE as to instructions received from SMM were intended to be shared with RBI.

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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