Litigation privilege – a cautionary tale

In Starbev GP Ltd v Interbrew Central European Holding BV [2013] EWHC 4038 (Comm), the Claimant, Starbev GP Ltd ("Starbev"), successfully challenged the claim of the Defendant, Interbrew Central European Holding BV ("ICEH"), to withhold inspection of two categories of documents on the ground of litigation privilege.

The case is a useful articulation of the relevant principles governing litigation privilege and a helpful reminder of how difficult it is to protect pre-litigation fact finding exercises from being disclosed during the course of litigation.

Background

Starbev acquired ICEH's European brewing business (the "Business") in December 2009. As part of the acquisition the parties entered into a Contingent Value Right Agreement ("CVR"), which gave ICEH the right to receive deferred consideration upon any subsequent sale of the Business.

ICEH's entitlement arose if the cash proceeds of any such subsequent sale exceeded certain thresholds, which were linked to the value of defined term "Investment Amount" in the CVR. Essentially, the higher the Investment Amount figure was, the less deferred consideration ICEH would be entitled to under the CVR.

In April 2012 Starbev entered into an agreement to re-sell the Business (the "Subsequent Sale"). The consideration for the sale included both a cash payment and a non-transferable Note ("the Note") redeemable after December 2012, deferring part of the payment. ICEH alleged that structuring the deal in this way had the effect reducing its entitlement under the CVR. The extent to which ICEH is entitled to a share of the proceeds from the Subsequent Sale forms the basis of the litigation between the parties.

An issue at the hearing held on 12 December 2013 was whether ICEH could withhold inspection of two categories of documents on the ground of litigation privilege. These categories were:

1. documents relating to advice received by ICEH from Barclays in April 2012 concerning the structuring of the consideration for the Subsequent Sale ("the Barclays documents"); and
2. documents relating to ICEH's dealings with KPMG after 20 July 2012 in the course of work done for ICEH in relation to CVR ("the KPMG documents").

Law

The Court summarised the legal requirements necessary to establish litigation privilege as follows:

1. The burden of proof was on the party seeking to rely on litigation privilege. Witness evidence regarding the purpose of a communication was not determinative. 
2. The purpose of a particular communication was a question of fact which might require independent proof. 
3. The party claiming privilege must establish that litigation was reasonably contemplated or anticipated as opposed to there being a mere possibility of litigation, or a general apprehension of future litigation.
4. The party claiming privilege must show that the relevant communications were for the dominant purpose of either (i) enabling legal advice to be sought or given, and/or (ii) seeking or obtaining evidence or information to be used in or in connection with such anticipated or contemplated proceedings.
5. Where communications might have taken place for a number of purposes, the party claiming privilege needed to establish that the dominant purpose was litigation.

The Court also noted that it was necessary to subject evidence in support of a claim for privilege to "anxious scrutiny", in particular because of the difficulties in going behind that evidence as recently articulated in the case of Tchenguiz[1]. In practical terms this would involve reviewing the contemporaneous documents in order to reach an objective assessment of the communicator's subjective intent.

The Barclays documents

In respect of the Barclays Documents, the evidence of the individual at ICEH who had sought the advice from Barclays, Mr Golden, was that having been notified on 3 April 2012 that the consideration for the Subsequent Sale included the Note, he had been "immediately suspicious". When Mr Golden was subsequently informed that the Investment Amount advanced by Starbev was significantly larger than he had anticipated, it seemed to him that Starbev had deliberately structured the sale of the Business in order to "game" the CVR and eliminate any payment that would have been due to ICEH.

Mr Golden's evidence was that at this point he thought ICEH would end up in a dispute with Starbev and, as a result, he sought advice from Barclays as to what steps were available to challenge the structuring of the Subsequent Sale. On this basis ICEH submitted that at this point litigation was reasonably anticipated and that the dominant purpose of instructing Barclays was in connection with that anticipated litigation and therefore litigation privilege should apply.

Decision - The Barclays documents

The Court held that litigation privilege did not extend to the Barclays Documents.

In reaching its conclusion the Court was mindful of the contemporaneous documentation which suggested that the purpose of the communications with Barclays was to check the position and calculate the payment that might be likely to come to ICEH as a result of the Subsequent Sale. The Court also considered that Mr Golden's statement "it occurred to me that ICEH would end up in […] dispute with Starbev" suggested that such a dispute was no more than a possibility as opposed to there being a reasonable anticipation that there would be a dispute which would result in litigation.

In the Court's view, the overall effect of Mr Golden's evidence was that he had a suspicion concerning the sale of the Business by Starbev and instructed Barclays to investigate in order to see if there was substance to his suspicion. That is insufficient to establish that litigation was reasonably contemplated or anticipated. Unless and until Barclays confirmed that there was substance to Mr Golden's suspicion there was no real reason to anticipate litigation.

The KPMG documents

The evidence of the individual within ICEH who was involved in the appointment of KPMG, and subsequently instructed KPMG to prepare a written report, Mr Caton, was that KPMG were originally appointed in early July 2012 in order, primarily, to conduct an "audit" of the various notices that Starbev had sent ICEH under the terms of the CVR.

However, during a call which took place on 20 July 2012, it was Mr Caton's evidence that it became clear that ICEH was likely to dispute Starbev's quantification of the Investment Amount and he anticipated that matters might well end up in litigation. Following the call, KPMG were instructed to prepare a written report of its conclusions and the arguments that might be available to ICEH to challenge Starbev's analysis. ICEH submitted that the dominant purpose of this instruction related to the prospective litigation and therefore litigation privilege should apply.

Decision - The KPMG Documents

The Court held that litigation privilege did not extend to the KMPG Documents.

Critical to the Court's analysis were the contemporaneous documents that had been adduced. In particular, in an email dated 20 July 2012, the day of the KMPG call, Mr Caton had stated "As part of our normal process with projects such as these, we'd like a written summary that outlines the work you've done the past couple weeks with respect to the […] CVR". In the Court's view this email contradicted the assertion for litigation privilege on the basis that:

1. it made no mention of any anticipated litigation; 
2. the scope of Mr Caton's request went no further than KPMG had already agreed to in its retainer letter; and 
3. the report was to cover work which had already been done.

The Court also noted the fact that these points had not been addressed by ICEH in its evidence.

The Court was also of the view that ICEH's position was undermined by its retainer letter with KMPG dated 4 July 2012. The letter only made reference to the audit work that KMPG had been initially instructed to perform and stated that any developments in the scope of the work would be recorded in writing. The Court also noted that there was no record of the KPMG retainer being changed or extended despite the fact that, on ICEH's evidence, as of 20 July 2012 KPMG had been asked to fulfil a very different role. Again, this point had not been addressed in ICEH's evidence.

The Court also thought Mr Caton's position that at the date of the retainer on 4 July 2012 litigation was not reasonably anticipated but only two weeks later it had become the dominant purpose for instructing KMPG, thereby displacing the original purpose set out in the retainer letter, was inherently implausible.

Finally, the Court also made reference to the fact that if ICEH's assertion that litigation was reasonably anticipated as of 20 July 2012 was correct then ICEH's solicitors would have been duty bound to advise ICEH as at that date of the need to preserve disclosable documents under CPR 31 BPD, para 7. However, this advice had only been given to ICEH on 5 October 2012 by its group legal director, although this individual explained that it was his practice to only give such instruction where litigation is more likely than not.

Comment

It is clear from this case that the Courts will scrutinise carefully any witness statements filed in support of a party's position that a particular document or class of documents are privileged and cross reference any such statement with the contemporaneous material available.

In particular, this case shows how difficult it can be to evidence what the dominant purpose of a particular communication was. Given this difficulty, it is advisable to make it clear on any document or communication on which litigation privilege is sought that it is both confidential and created for the purposes of litigation. It is also advisable to draft (or update) retainer letters to professional advisors so as explicitly to state that the advice sought is for the purposes of litigation.

Even with these precautions, the practical reality is that most investigations will be carried out with another purpose to litigation, not least to find out what went wrong. In these circumstances it will be extremely difficult to rely on litigation privilege by claiming that the dominant purpose was litigation. Parties should therefore always proceed on the basis that there is a significant risk that any documents they do create will not carry litigation privilege.

In appropriate situations, a solution to the difficulties of asserting litigation privilege over pre-litigation investigation documents may be to appoint lawyers to lead any such investigations. By doing so, i.e. having lawyers conduct any interviews and draft any written reports, the party may be able to rely on legal advice privilege.

[1] Tchenguiz & Anor v Serious Fraud Office & Ors [2013] EWHC 2297 (QB)