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Legal advice privilege: What financial services clients need to know

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26/01/2017

Legal advice privilege is a hugely valuable legal right. The High Court has revisited legal advice privilege and has reiterated its narrow scope.  This important decision is essential reading for any financial services organisation involved in a dispute or in any regulatory or internal investigation.  Walker Morris Partner Louise Power, a specialist in retail financial services litigation and non-executive director of a local building society, explains privilege and offers her practical advice.

Important protection

Privilege is a vital legal protection for financial services organisations, but it is a concept whose rules are complex and often confusing. Privilege entitles a party to withhold documents (including electronic communications) from a court or third party, without any adverse inferences being drawn.  A proper understanding of the operation of privilege in litigation and regulatory investigations can therefore help clients and their lawyers to obtain advice and information without risk of exposing or compromising their position. A lack of understanding, however, can potentially prove fatal to a case.

There are important public policy justifications underpinning privilege, such as the need for clients to be able to candidly disclose matters to their lawyers; to enable lawyers to obtain, investigate, record and freely communicate to their clients information so that clients can make fully informed decisions; and, in the context of regulatory investigations, so that regulators can deal with experienced lawyers who can accurately advise their clients how to respond and cooperate, which in turn will advance public interest.

Privilege has hit the legal headlines a lot recently, and in uncertain and increasingly regulated times, it is essential that financial services clients understand and apply this important right and safeguard.

Types of privilege

There are various different forms of privilege, including: litigation privilege, which arises where a document or communication has been created for the dominant purpose of existing or pending litigation; without prejudice privilege, which enables parties to conduct settlement negotiations without fear of prejudice in subsequent court proceedings; and common interest privilege, which can arise where a document is disclosed to a third party who has a common interest in the subject matter.

Another key form of legal professional privilege, and the subject of this article, is legal advice privilege.

The following essential factors must exist for legal advice privilege to apply:

  • The document or communication in question must be confidential. Any document that has been too widely disseminated or has been made public (for example has been posted online) cannot attract privilege protection;
  • The document must pass between a qualified lawyer and his or her client.
  • The document must have been created for the purpose of giving or receiving legal advice in the relevant legal context. Today, a commercial lawyer’s role often extends beyond advising on black letter law and privilege will not arise where a lawyer advises on purely business or administrative matters. To determine whether there is the requisite relevant legal context, the court will ask whether the lawyer’s involvement relates to the rights, liabilities, obligations or remedies of the client either under private law or under public law and whether a policy justification for legal advice privilege applies in the particular case. Finally;
  • Privilege must not have been lost or waived, even inadvertently.

The second of these factors has given rise to some real controversy in the courts, and is the focus of a recent High Court case.

Who is the ‘client’?

Following the Court of Appeal’s 2003 decision in the well-known Three Rivers (No. 5) [1] case, ‘client’, in this context, is very narrowly defined and will only cover those members of an organisation who are actually charged with instructing lawyers.

In the Three Rivers litigation, creditors of Bank of Credit and Commerce International sued the Bank of England for misfeasance in public office.  A special inquiry unit, comprised of just three employees of the bank, was given responsibility for coordinating and communicating with the bank’s lawyers.  The Court of Appeal held that the ‘client’ was limited to members of that unit.  The reasoning was that it is in the public interest that courts should, wherever possible, come to judgments based on all relevant material and so legal advice privilege, which precludes disclosure to the court, should not extend beyond the confines properly necessary to facilitate the lawyer-client relationship.

That decision has led to much criticism, from both an academic and a practical perspective, because of difficulties that it provides for large corporates and institutions. Information that a lawyer needs to gather in any given case or investigation might have to be compiled from various different employees across the business. Those employees may or may not fit within this very narrow definition of the ‘client’ and the risk that communications will not be privileged if they do not can severely hamper the investigation process.  The Three Rivers (No. 5) approach has therefore been rejected in other common law jurisdictions, including Australia, Singapore and Hong Kong.

It has, however, been applied, and firmly reiterated, in a recent decision of the High Court of England and Wales, as part of the ongoing RBS Rights Issue Litigation [2].

Narrow application

In this case Mr Justice Hildyard acknowledged that there was some force in criticism of the Three Rivers (No. 5) approach and even noted that the Supreme Court may need to revisit the law of legal advice privilege.  He did, however, consider that Three Rivers (No. 5) was binding on him and he concluded that the law clearly remains that:

  • the client for the purposes of privilege consists only of those employees authorised to seek and receive legal advice from the lawyer.

What about interview working papers?

In anticipation of the court finding that employees and ex-employees interviewed by its lawyer [3] did not fall within the narrow definition of ‘client’, RBS alternatively argued that the lawyer’s notes of those interviews were nevertheless privileged as they formed part of the lawyer’s working papers.

There was no dispute that a verbatim transcript of an unprivileged interview would not be privileged, nor that privilege protection would apply if the notes of the interview could indicate the content or direction of legal advice being given.

Concluding, however, that there is a significant difference between interview notes merely reflecting the note-takers’ line of enquiry or perception of particular points of interest, and them giving a clue as to legal advice, the High Court confirmed that:

  • legal advice privilege does not extend to information provided by employees or ex-employees simply because it is provided to a lawyer.

Practical matters

This is an important, if unwelcome, decision for financial services organisations involved in a dispute or regulatory or internal investigation. It is a restatement of the law as per Three Rivers (No. 5) and it even extends the principle that legal advice privilege has a narrow ambit, by virtue of the judge’s confirmation that information given by [ex-]employees in an interview may not be privileged simply by virtue of it being provided to a lawyer or recorded in lawyer’s notes.

So what can financial services and other commercial clients do? 

  • At the outset of any investigation (internal or regulatory) or any dispute, consider carefully the advisors who will be retained and the ‘client’ (i.e. the person or persons within the client-organisation) who will be charged with instructing advisors.
    • Privilege will only attach to documents and communications passing between a client and a qualified lawyer. Privilege will not arise when advice – even advice on legal matters – is taken from any other professional.
    • If too many people within an organisation are charged with instructing lawyers that could undermine any claim to privilege. It could also cause practical, case management difficulties if there are no clear reporting lines for the giving and receiving of instructions, documents and legal advice. It could also risk confidentiality breaches, which could, again, undermine privilege.
    • However, if too few people are authorised to instruct lawyers, that could cause practical difficulties if, for example, the key client contact(s) was/were absent, uncontactable, or perhaps left the business.
    • In line with one of the key underlying justifications for privilege, consider appointing specialist legal advisors to assist with any investigations and/or litigation. Appointing external lawyers can have the dual benefit of providing specialist expertise and strengthening any claim to privilege.
  • There may be circumstances in which dissemination of information, documents and/or advice relating to an investigation is necessary with an organisation beyond the defined ‘client’ circle. Where that cannot be avoided, the communication/document should be endorsed with wording which confirms that it is privileged and that provision of it does not amount to a waiver of privilege. Confirmation should also be obtained from the recipient(s) that the document will be held in confidence and not distributed any further.
  • Where it proves essential for a privileged document to be disclosed to any third party, the third party should be asked to enter into a common interest privilege agreement, or to give an undertaking to ensure that the document will be held in confidence and to prevent waiver of privilege.
  • Non-lawyer employees, experts or advisors should not conduct the information-gathering, interviewing and/or reporting process in any investigation or [potential] litigation. It is possible, even likely, that any documents created by non-lawyers will be disclosable unless the fairly stringent requirements for litigation privilege can be met.
  • To maximise protection, any reports, transcripts, minutes or other documents created by lawyers for clients should ideally interweave legal analysis and advice along with factual matters and they should be headed “privileged and confidential”.
  • Finally, an important point to note is that you cannot make a document or communication privileged simply by saying it – whether or not privilege applies will, in each case, be a matter of fact and law. If you are in any doubt, always seek specialist legal advice.

Further development?

RBS might well appeal this decision, in which case the law relating to legal advice privilege could be subject to further development soon. Walker Morris will monitor closely and report on any developments.

In the meantime, if you are faced with an investigation or any potential or ongoing dispute and wish to protect your important right of privilege, please do not hesitate to contact Louise Power or any member of the Financial Services team.

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[1] Three Rivers District Council & Ors v Governor & Co of the Bank of England [2003] EWCA Civ 474
[2] A number of institutional investors are suing the bank for losses sustained after they invested in a rights issue in reliance upon an RBS prospectus which allegedly portrayed the bank’s financial health and stability in a more favourable light than was really the case.  The judgement which is the subject of this briefing has citation [2016] EWHC 3161 (Ch)
[3] as part of the business’ internal investigations

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