Regulating Inroads to Privilege: Only Statutory Exceptions to Privilege can be used to Compel Disclosure

Emily Gillett and Kam Dhaliwal

The English Court of Appeal recently delivered its decision in Sports Direct International Plc v Financial Reporting Council [2020] EWCA Civ 177, partially allowing Sports Direct’s appeal. The Court of Appeal overturned the High Court’s finding that regulators may be able to compel disclosure of privileged documents if doing so would not result in a general loss of privilege. The Court of Appeal also confirmed that privilege cannot be claimed over documents merely because they are attached to a privileged email. Both parties are seeking leave to appeal to the Supreme Court.

Background

The UK’s Financial Reporting Council (“FRC”) regulates statutory auditors and audit work.  It has statutory powers to require certain persons to provide it with audit-related information of particular entities under the Statutory Auditors and Third Country Auditors Regulations 2016 (“SATCAR”).

Currently, the FRC is investigating the conduct of Grant Thornton UK LLP when auditing Sports Direct. As part of its investigation, the FRC requested certain emails and their attachments from Sports Direct. Whilst Sports Direct complied with the request to a very large extent, it claimed legal professional privilege (“LPP”) over, and withheld, certain documents because they were emails sent to or by Sports Direct’s internal or external legal advisers.

Decision at First Instance

At first instance, Sports Direct was ordered to disclose the documents over which it had claimed LPP.  The judge applied Parry-Jones v The Law Society and Ors [1969] 1 Ch 1 and Morgan Grenfell v Special Commissioner of Income Tax [2002] UKHL 21 to the effect that, if disclosure were ordered, LPP would not be infringed because the documents disclosed would not be used for any purpose other than the investigation against the auditors (not against Sports Direct). In those circumstances, there would be no general loss of Sports Direct’s LPP and, therefore, LPP would not be materially infringed.

This approach had come to be referred to as the “no infringement exception”, i.e. an exception to the protection from disclosure offered by privilege because there would be no infringement of privilege if: (a) the request for disclosure came from a regulator in the exercise of its information gathering powers; (b) the regulator was bound by duties of confidentiality in its use of the documents; and (c) the documents were to be used only for the purposes of the regulator’s investigation into someone other than the holder of privilege. Whilst it is easy to see that this is an exception to LPP, the “no infringement” label risks confusion. The very essence of LPP is the right to withhold documents from disclosure and it is difficult to think of LPP not being infringed in a circumstance where that right to withhold documents does not prevail.

The judge also considered the so-called “technical infringement exception”. The judge held that SATCAR overrode the general right to LPP.  However, because the production of documents by a regulated person to a regulator does not infringe the LPP of the regulated person’s clients, the same must be true of the production of documents to the regulator by the client itself. Therefore it only gave rise to a “technical infringement” of LPP and disclosure should be ordered.

Appeal

On Sports Direct’s appeal against the disclosure order, the Court of Appeal considered issues:

  1. Whether the “no infringement” or “technical infringement” exceptions to LPP applied in the context of SATCAR’s express provisions, such that Sports Direct had no right to withhold documents from the FRC; and
  1. Whether privilege can be claimed over attachments to privileged communications simply because the attachment (which was otherwise not privileged) was sent for the purpose of seeking legal advice.

So-called Exceptions Rejected

The Court of Appeal endorsed the well-established principle that LPP can only be overridden by statute expressly or by necessary implication. It also held that the earlier authorities did not establish “the existence of a no infringement exception to the protection conferred by LPP or for the application of some lower threshold for implying a statutory override” of LPP. The Court of Appeal explained that the task of the court is to consider, in each case, the relevant statute and decide whether the legislators must have intended to override privilege.

In SATCAR, there is an express provision which confirms that a person responding to a notice from the FRC is entitled to refuse disclosure on the grounds of privilege, irrespective of whether the person entitled to privilege is the auditor or the auditor’s client. The Court of Appeal noted that with such an express provision in SATCAR, the argument that there had been any implied intention to override LPP was difficult to maintain.

As a consequence, it was held that Sports Direct’s LPP would be infringed if the privileged documents were produced to the FRC and no so-called exceptions were applicable to circumvent Sports Direct’s right to withhold documents thanks to LPP.

No Privilege in Non-privileged Attachments

Applying Ventouris v Mountain (The Italia Express) (No 1) [1991] 1 WLR 607, the Court of Appeal confirmed that non-privileged documents do not become privileged merely because they are attached to a privileged email. In this case, where a privileged email met the criteria of documents requested by the FRC but had non-privileged attachments, such attachments had to be disclosed by Sports Direct.

Comment

This decision clarifies that LPP can only be overridden by express provision or by necessary implication and the two so-called exceptions to privilege in the context of regulatory investigations may now be consigned to history, subject to the Supreme Court’s final word on the matter.

Given the importance of LPP, ways in which it can be infringed should be limited and stated in the clearest terms. Even the well-established ‘necessary implication’ override sits uncomfortably with the importance accorded to the protection of a fundamental right.

As is apparent from the authorities discussed in the Sports Direct decision, the power to request documents and the corresponding privilege protections vary from statute to statute and from regulator to regulator. It remains to be seen if this case will have any impact on how statutory investigation powers are construed in other common law jurisdictions such as Hong Kong and Australia, where different regulators similarly have varying statutory powers to investigate and request documents.

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