Notices to produce documents to an adviser’s regulator: Court of Appeal generous on privilege, but harsh on relevance

The Court of Appeal has overturned a decision by the High Court that required a client to produce privileged documents to a regulator investigating the client’s auditor under Schedule 2 of the Statutory Auditors and Third Country Auditors Regulations 2016. Although the documents would be kept confidential and could not be used against the client, requiring disclosure would infringe the client’s privilege and undermine the purpose of encouraging frankness between clients and their legal advisers.

However, the Court of Appeal held that pre-existing attachments which were not privileged in their own right did have to be disclosed, even if they would have been irrelevant but for the fact that they had been attached to a relevant (but privileged) email.

Background

In Financial Reporting Council Ltd v Sports Direct International plc [2020] EWCA Civ 177, the FRC was investigating the conduct of Sports Direct’s auditor and wanted to ascertain how much the auditor knew about tax advice which Sports Direct had received on its VAT position. It issued a notice to Sports Direct under Rule 10 and Schedule 2 of the Regulations (the “Rule 10 Notice”) requiring it to produce various documents relevant to this question. The relevant documents were defined by reference to date ranges, custodians and search terms.

The disputed documents

Sports Direct claimed legal advice privilege in relation to email correspondence with its legal advisers seeking advice on tax law and other matters, and pre-existing attachments to those emails, including contracts between Sports Direct subsidiaries and third parties.

Emails with legal advisers

At first instance, Arnold J accepted that the emails between Sports Direct and its auditors were privileged. However, he held “with some hesitation” that producing the emails to the FRC in circumstances where they could not be used against Sports Direct, but only against the auditors who were the subjects of the investigation, would not infringe the privilege. Based on a detailed review of previous authorities, the Court of Appeal disagreed. Rose LJ held that nothing in the authorities required the court to recognise a so-called “infringement exception”, and if Parliament had intended to introduce such an exception, it could have set that out in the 2016 Regulations. Further, such an exception would erode the purpose of legal advice privilege, namely to enable clients to be frank with their legal advisers.

Pre-existing attachments

The established position in English law is that pre-existing documents do not attract legal advice privilege; documents are only privileged if they have come into existence for the purpose of obtaining legal advice. At first instance, Sports Direct challenged this understanding based on a line of cases dealing with the concept of the “continuum of communication”, to the effect that a communication that does not itself contain legal advice or a request for legal advice may still be privileged if it is part of a chain of communications relating to the giving of such advice. Arnold J rejected this argument, holding that earlier cases on the “continuum” concept had not considered pre-existing documents and did not overturn what he described as “the orthodox view” that privilege does not extend to such documents.

Before the Court of Appeal, Sports Direct instead argued that even if the attachments were not privileged, they were not disclosable because they did not fall within the date ranges, custodians and search terms specified in the Rule 10 Notice. They were in issue only because the emails to which they were attached fell within those criteria. The Court of Appeal rejected this revised argument as well, criticising it as “overly technical”. The court held that if a covering email met the criteria, then any non-privileged attachments to that email were disclosable, even if the email itself was not disclosable due to legal advice privilege.

Comment

Businesses will welcome the Court of Appeal’s recognition that forcing a client to disclose privileged documents to its auditor’s regulator is an infringement of the client’s privilege. In that respect, this is a commercial decision that upholds the purpose of legal advice privilege.

The court’s decision on the approach to be taken to email attachments is likely to be less well received. This represents the second recent case, after Jet2.com v CAA [2020] EWCA Civ 35, in which the courts have had to grapple with the question of whether emails and attachments are to be construed as a single communication for disclosure purposes or whether each component must be considered separately. In both cases, the court has come down in favour of construing the communication as a whole, but has stopped short of allowing a covering email to extend the cloak of privilege to an attachment that is not privileged in its own right. When it comes to relevance, however, it seems that the court has no such hesitation. According to this decision, an attachment which would not be relevant when considered in isolation can become relevant when it is attached to a relevant email, even if that email itself is not disclosable due to privilege. This is a risk that is difficult for businesses to manage, since relevance – unlike privilege – can only be judged once a dispute has arisen.

Both Sports Direct and the FRC have applied for permission to appeal to the Supreme Court.

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