Commercial Court examines "dominant purpose" in the light of SFO v ENRC

The Commercial Court has held that an auction house could not claim litigation privilege over correspondence with experts about the authenticity of a painting in circumstances where the correspondence was for the dual purpose of reaching a commercial decision and preparing a strategy for anticipated litigation.

Background

In Sotheby’s v Mark Weiss Limited & Others [2018] EWHC 3179 (Comm), Sotheby’s was engaged by a seller to arrange the sale of a painting, said to be by the 17th-century Dutch painter Frans Hals. In the sale contract, Sotheby’s undertook to refund the purchase price if the painting was subsequently determined to be a counterfeit. Several years later, the buyer raised questions as to the authenticity of the painting. Sotheby’s immediately arranged for the painting to be examined by an expert, who initially reported orally to Sotheby’s that he thought it was probably a counterfeit. Sotheby’s requested that he provide a detailed report in writing and instructed external lawyers, as well as a second expert to provide a peer review. The written report and the peer review both confirmed that the painting was likely to be a counterfeit. Sotheby’s promptly provided a copy of the report to the seller and convened a committee to decide whether or not the buyer should be refunded. The committee decided that he should. Sotheby’s duly did so and brought proceedings against the seller to recover the amount of the refund.

At the disclosure stage, Sotheby’s disclosed the existence of correspondence between itself and both experts leading up to and following their reports, but withheld inspection on the grounds of litigation privilege. The seller applied for an order requiring Sotheby’s to permit inspection.

The issues

In order to claim litigation privilege, Sotheby’s had to show that the correspondence was for the “dominant purpose” of litigation that was in reasonable contemplation. It was clear from the correspondence that Sotheby’s had anticipated at a very early stage that litigation between itself, the buyer and/or the seller was a real possibility. However, the seller argued that the dominant purpose of the correspondence was not to conduct or settle that litigation, but to determine what it needed to do in order to fulfil its contractual undertaking to the buyer.

The decision

Teare J held that, on the facts, the decision as to whether or not to refund the buyer and the need to prepare a litigation strategy were of equal importance and relevance. Therefore, Sotheby’s had not discharged the burden of demonstrating that the conduct of litigation was the dominant purpose, and it could not claim litigation privilege. Factors which Teare J took into account in his analysis included:

• The initial instructions to the first expert expressly provided that he was not being engaged to testify in litigation;
• The subsequent instructions, provided after the first expert had given his verbal opinion, referred both to the need to make decisions about a strategy for potential litigation and to the need to decide whether or not the obligation to refund the buyer was engaged;
• The instructions to the second expert also referred to both purposes;
• The agreement between Sotheby’s and the buyer required written evidence that the painting was not authentic before a refund could be issued, meaning that Sotheby’s could not reach that decision without obtaining a report;
• The committee had the correspondence in front of it when making its commercial decision;
• The question of whether or not it had inadvertently been involved in the sale of a counterfeit painting was naturally taken extremely seriously by a reputable auction house such as Sotheby’s;
• Realistically, the correspondence between Sotheby’s and the experts would have been necessary for the purposes of the commercial decision even if litigation with the seller had not been in prospect.

In the court’s view, it was not realistic to distinguish between the role of the expert in advising Sotheby’s on the commercial decision it had to take and his role in advising on technical aspects of the anticipated litigation. Both roles necessitated an investigation into the authenticity of the painting, and neither was dominant over the other. The court ordered inspection of the correspondence.

Comment

In reaching its decision, the court rejected a suggestion that SFO v ENRC Ltd [2018] EWCA Civ 2006 changed the law on the approach to be taken where a document was produced for two purposes, one of which was litigation. Rather, that case confirmed that the exercise of determining the dominant purpose was highly fact-specific. Teare J considered that the facts of the earlier case – which concerned an internal investigation of corruption allegations against the backdrop of a potential SFO prosecution – were too different to be of any assistance in determining the dominant purpose in the present case.

While only a first-instance decision, the outcome of this case will be disappointing to companies who had hoped that SFO v ENRC signalled a less stringent and more commercial application by the courts of the dominant purpose test. One of the more welcome aspects of the SFO v ENRC decision was the implication that companies should not be discouraged from dealing responsibly with allegations of wrongdoing by a fear that their factual investigations could be disclosable in subsequent litigation. This latest decision could be seen as a step backwards in that regard – Sotheby’s acted prudently in engaging experts to understand the extent, if any, of its liability, but the documents created were not privileged because the fact-finding mission was at least as important to Sotheby’s as preparing for litigation.

Ultimately, the key message of this case is that the dominant purpose test is very fact-sensitive. Whereas in some cases fact-finding might be so intertwined with anticipated litigation that privilege will apply (e.g. SFO v ENRC Ltd), in others the fact-finding will be independently necessary (e.g. in this case to understand whether a contractual obligation was triggered), in which case there will be a greater risk that documents created in the fact-finding mission will not be privileged.

For further details, please email the authors or your usual CMS contact.