Litigation privilege found not to apply to internal board communications discussing settlement

In a decision that might surprise many, the Court of Appeal has held that emails between board members composed for the dominant purpose of discussing a commercial proposal for settlement of a dispute were not covered by litigation privilege.  

In reaching this decision, the Court of Appeal rejected the argument that SFO v ENRC had extended the scope of litigation privilege. The test remained as expressed by Lord Carswell in Three Rivers. This test confines litigation privilege to communications between parties or their solicitors and third parties for the purpose of obtaining information or advice in connection with the conduct of contemplated litigation, provided they are for the sole or dominant purpose of the conduct of the litigation. This extends to documents in which such information or advice cannot be disentangled or which would otherwise reveal such information or advice. And, as confirmed in ENRC, the conduct of litigation includes avoiding or settling litigation. 

As such, the Court has confirmed that litigation privilege does not cover all documents that are created for the purposes of actual or contemplated litigation.

The decision highlights the caution that any party contemplating or involved in litigation should exercise with its internal communications, and in particular any communications concerning settlement. Unless those internal communications seek or reveal advice or information obtained for the purpose of conducting the litigation, they may be disclosable. How that will be achieved in practice will be difficult and we may now see a somewhat artificial "workaround" whereby legal advice is intentionally "entangled" within communications to ensure that the test is satisfied.

Background

The underlying proceedings concerned a dispute between WH Holding Limited and West Ham United Football Club Limited (West Ham) and its landlord E20 Stadium LLP (E20). 

The appeal concerned West Ham's challenge to claims of litigation privilege E20 had made over certain documents, namely six emails between E20 board members, and between E20 board members and stakeholders.

E20 claimed privilege on the basis that the documents were prepared with the dominant purpose of discussing a commercial proposal for the settlement of the dispute between E20 and West Ham. It was accepted that the documents were relevant to the issues arising in the proceedings. The only question was whether litigation privilege applied to them.

Decision at first instance

At first instance, Norris J upheld the claim to privilege. He rejected the argument that litigation privilege covered only documents concerned with obtaining advice or evidence for use in litigation because only those documents could fairly be said to relate to “conducting” the litigation. In his view, that "narrow formulation" was no longer correct in the light of the Court of Appeal decision in SFO v ENRC. 

As such, he held that documents prepared for the dominant purpose of formulating and proposing an offer of settlement in respect of the litigation that was in reasonable contemplation (or in existence) are protected by litigation privilege. He recognised that the principle must be carefully applied and that documents may be generated about the settlement of a claim for other purposes. But, where the sole or dominant purpose was the conduct of the litigation in the sense of settling it, they should be covered.

In reaching his decision, he referred to the consequences that disclosure of internal settlement discussions would have in relation to "without prejudice" communications. Any without prejudice settlement offers would not be before the court, but any internal party documents (such as emails between board members) recording the terms of the proposed offer or discussion of the offer would be open to inspection and put before the court. Another even "odder" consequence would be where a settlement discussion within the board of a corporate party arises during the trial itself. He questioned whether a party should then have to disclose documents recording its settlement strategy because they were not covered by litigation privilege. He did not think that could be right.

West Ham appealed.

The Court of Appeal decision

The Court of Appeal allowed the appeal. Litigation privilege did not extend to documents which were concerned with the settlement or avoidance of litigation where the documents neither sought advice or information for the purposes of conducting the litigation nor revealed the nature of such advice or information. 

The following observations are worth noting:

• The requirement that a communication must be created for the sole or dominant purpose of conducting the litigation is a restriction on, and not an extension of, the principle that communications must be made for the purpose of obtaining information or advice in connection with the litigation. As such, a communication first has to satisfy the test that it was made for the purpose of obtaining information or advice in connection with the litigation before the dominant purpose test can be applied. In practical terms, this means that it is not sufficient to show that documents have been prepared for the dominant purpose of conducting litigation in a broad sense; they must have been prepared for the purpose of obtaining advice or evidence in relation to the conduct of that litigation.
• ENRC did not extend the scope of documents covered by litigation privilege. The disputed documents in that case all fell within the recognised categories of advice or information going to the merits of the contemplated litigation. The only possible change attributable to the decision in ENRC was the confirmation that the conduct of litigation includes its avoidance or compromise. Norris J was therefore wrong in thinking otherwise. 
• There was no justification for extending the scope of litigation privilege so as to cover purely commercial discussions: "It has always been recognised that privilege is an inroad into the principle that a court should be able to decide disputes with the aid of all relevant material" (para 19).
• That said, the Court did accept that a document in which advice or information obtained for the sole or dominant purpose of conducting litigation cannot be disentangled, or a document which would otherwise reveal the nature of such advice or litigation, would itself be covered by litigation privilege.
• The Court also dismissed an alternative submission that relied on a 19th century decision in support of the argument that there was privilege for internal communications within a corporate body. The Court could not "see any justification for covering all internal corporate communications with a blanket of litigation privilege" and overruled the 19th century decision.

Given the above, the Court of Appeal concluded:

• Litigation privilege is engaged when litigation is in reasonable contemplation.
• Once litigation privilege is engaged, it covers communications between parties or their solicitors and third parties for the purpose of obtaining information or advice in connection with the conduct of the litigation, provided it is for the sole or dominant purpose of the conduct of the litigation.
• Conducting the litigation includes deciding whether to litigate and whether to settle the dispute giving rise to the litigation.
• Documents in which such information or advice cannot be disentangled or which would otherwise reveal such information or advice are covered by the privilege.
• There is no separate head of privilege covering internal communications falling outside the ambit of litigation privilege described above.

In this case, the sole ground upon which privilege was claimed was that the documents were created with the dominant purpose of discussing a commercial settlement of the contemplated dispute. As they neither sought advice or information for the purposes of conducting the litigation, nor revealed the nature of such advice or information, they fell outside the test.

Too restrictive an approach

The decision that settlement discussions of contemplated litigation are not covered by litigation privilege does, at first, seem surprising. As Norris J pointed out, this could result in parties being able to put evidence of without prejudice discussion before the court by the back door.

However, when one considers the rationale for litigation privilege, the decision is perhaps not so surprising. The privilege is available to allow litigating parties to prepare for litigation; in other words, take advice and gather evidence. Internal commercial discussions, even if considering settlement of any contemplated litigation will, without more, rarely fall within that rationale. The Court of Appeal highlighted in ENRC how the courts are directed by the public policy rationale when determining privilege issues (hence its criticism of Three Rivers); it is a useful barometer to bear in mind. 

Implications for litigating parties

The decision highlights the caution that any party contemplating or involved in litigation should exercise with its internal communications, and in particular any communications concerning settlement. 

Protocols should always be put in place as soon as adversarial proceedings are commenced that not only preserve existing documents, but control the creation of new documents. 

Extra caution will also need to be exercised with regard to board discussions of any contemplated or ongoing proceedings, particularly discussions relating to settlement. Unless those discussions include or reflect advice or information obtained for the purpose of conducting the proceedings, they may be disclosable. The difficulty is that, while formulation of settlement offers and internal discussions around settlement strategies will almost always implicitly involve the taking into account of legal advice, they will not necessarily expressly allude to it. We may now see a somewhat artificial "workaround" whereby legal advice is intentionally entangled within communications to ensure the test is satisfied.

Approach to litigation privilege remains the same post-ENRC

This is not the only case where ENRC has been relied on to argue for a more generous approach towards litigation privilege. As this case and the recent High Court decision in Sotheby’s v Mark Weiss Ltd illustrate, ENRC has not changed the test for litigation privilege or broadened its scope.

The Sotheby's case concerned the dominant purpose test. The documents in question were correspondence passing between Sotheby's (itself or through its solicitors) and two art experts on the issue of whether a particular painting was counterfeit.

The Court had to decide whether the dominant purpose test was satisfied. Sotheby's relied on ENRC, and the witness evidence was framed with that case (and the case law relied on in ENRC) in mind. In particular, it emphasised that the contemplated litigation was the perspective from which all the work was undertaken and solicitors engaged. If litigation had not been contemplated then, although findings from the expert would still have been sought, a detailed written report would not have been required nor would solicitors have been engaged to undertake the exercise with the expert.

The Judge remained unconvinced. In his view, the correspondence was generated for two purposes: the decision whether or not to exercise a contractual right to rescind the contract of sale, and the anticipated litigation. The latter could not be said to be the dominant purpose. A concern flowing from this exercise of judicial dissection is that the former decision might previously have been thought to be a constituent element of an overall strategy/approach to the contemplated dispute.

Both decisions highlight the "anxious scrutiny" any evidence in support of a claim for privilege will be subject to. They also highlight the fact-sensitive nature of such decisions. In Sotheby's the Judge rejected attempts to draw an analogy with ENRC, making it clear that every case has to be decided on its own facts. 

Cases referred to:

WH Holding Ltd & Anor v E20 Stadium LLP [2018] EWCA Civ 2652
SFO v ENRC [2018] EWCA Civ 2006
Three Rivers DC v Governor and Company of the Bank of England (No 6) [2004] UKHL 48, [2005] 1 AC 610
Sotheby’s v Mark Weiss Ltd [2018] EWHC 3179 (Comm)