Corporate Communications Privilege and Document Retention Policies


The Three Rivers and BAT cases - what it means for in-house counsel

A series of recent decisions have pushed legal privilege issues into the spotlight and made inroads into the protection it once undoubtedly afforded commercial organisations.

At the same time, the Enron and Andersen collapses have made managing transparent and lawful document retention policies an integral part of the role of in-house lawyers.

Privilege and document retention are linked. Where a court or government agency has occasion to investigate a company's document retention practices, the advice the company obtained when devising its policies may be an attractive avenue of enquiry.

It is crucial that in-house counsel consider these developments and take steps to ensure that the communications channels in their organisations make the full use of the legal protection available so that adverse publicity is avoided.

The modern analysis of legal professional privilege

Certain communications and documents passing between a client and its lawyers are privileged and immune from subsequent disclosure to a third party, such as a tribunal or an opponent in litigation. The basis for the principle is that everyone, including companies, must be free to consult their lawyers in total confidence. Privilege applies to documents in its widest sense and extends to emails, voicemails, computer databases and tape recordings, as well as traditional paper communications. There are two categories of privilege:

Legal advice privilege - this protects confidential communications between lawyers acting in their legal professional capacity and their clients made for the dominant purpose of seeking or giving legal advice.
Litigation privilege - where there is "a real likelihood" of litigation or litigation is actually underway this protects communications between lawyers and clients, or between lawyers and third parties, made for the dominant purpose of advancing the prosecution or defence of the matter or the seeking or giving of legal advice in connection with it.

Why is privilege in the headlines?

The English Court of Appeal has recently considered privilege on three occasions:

An Australian Supreme Court considered privilege in communications with in-house counsel in Vance v McCormack in September 2004.

Finally, the House of Lords gave its much anticipated ruling in the appeal from Three Rivers (No 6) on 11 November 2004.

What is the background to the Three Rivers judgments?

Following the collapse of the Bank of Credit and Commerce International (BCCI) in 1991 an inquiry was set up by the UK Government to investigate the supervision of BCCI by the Bank of England (BoE), the UK central bank. While the Inquiry's report was to be made public, the outcome would not of itself carry particular legal consequences for the BoE.

The BoE set up an internal inquiry "unit" called the Bingham Inquiry Unit (the BIU) to manage its involvement in the Inquiry consisting of three BoE employees. They acted as a "funnel" through which information flowed between other people in the BoE, the BoE's solicitors and the Inquiry. The solicitors and counsel advised the BIU on all aspects of preparing the BoE's evidence to the Inquiry.

As was anticipated at the time of the Inquiry, after it concluded a large group of BCCI's creditors, including the Three Rivers Council, sued the BoE for compensation for the losses they suffered when BCCI went into liquidation.

The action was founded on the little known tort of "misfeasance in a public office". The creditors sought wide ranging discovery from the BoE to support their case.

Disputes arose as to whether the BoE was obliged to discover four categories of documents created in connection with the Inquiry over which the BoE asserted legal privilege.

The Court of Appeal (the CoA) has given two key judgments and the House of Lords one judgment in the creditors' litigation concerning the scope of legal privilege:

  • Three Rivers No 5 concerned which people form "the client" where employees of an organisation instruct lawyers on its behalf and whether communications between "non client" employees and the organisation's lawyers qualify for privilege.
  • Three Rivers No 6 concerned whether "presentational" advice from lawyers, as opposed to advice on legal rights and obligations, attracts privilege.

The privilege involved
It should be noted that in both cases it was agreed that the Inquiry was not adversarial litigation. It was an inquisitorial process. So the BoE's assertion of privilege over communications with its lawyers concerning the Inquiry was of legal advice privilege not litigation privilege. The judgments are therefore strictly concerned with legal advice privilege. Litigation privilege extends protection to a wider range of communications - chiefly those between lawyers and third parties.

The rulings
In No 5, the CoA made the controversial finding that it was only the BIU itself, that is those few employees who formed the BIU, that were, or represented, the "client". Other employees of the BoE, even the Governor himself, were not to be regarded as the client when considering privilege over documents they created.

The CoA then held that it is only communications between the lawyers and the client itself, made in the specific context of seeking advice on the client's legal rights and liabilities, that will be protected by legal advice privilege. Communications directly between the lawyers and third parties in connection with advising the client are not covered. Crucially, this applied to the "non client" employees of the BoE.

In No 6, the CoA held that a communication - even one between a lawyer and a client - only attracts privilege if its dominant purpose is seeking or giving legal advice as to the client's legal rights or obligations. Therefore communications from the BoE's lawyers concerning merely how evidence should best be presented to the Inquiry so as to attract as little criticism of the BoE as possible was not privileged.

The Lords unanimously overturned the No 6 ruling. Lord Carswell held that advising clients on the most suitable approach to adopt and assembling material for presentation in any sort of forum is a "classic exercise" of legal skills, so long as the work is done in a "legal context". Lord Scott held that in any event presentational advice before the Bingham Inquiry was advice as to public law rights and obligations.

Widespread concern over the CoA rulings
Both CoA decisions caused alarm in the legal community. To widespread relief, the Lords have now reversed the CoA's ruling in No 6. This puts an end, in considering privilege, to any need to ask whether legal advice is "presentational" or related to legal rights.

Many commentators consider the CoA finding in No 5 that it was only the BoE employees immediately concerned with instructing the lawyers that formed the client to be highly problematic. However, both the CoA and Lords refused the BoE leave to appeal that ruling to the Lords.

When No 6 went to the Lords the English Law Society and the UK Government intervened and filed briefs setting out their concerns at the effects of both decisions. The interveners urged the Lords to reconsider the ruling in No 5 when dealing with No 6.
However, for a variety of procedural reasons the Lords declined to do that, so unfortunately the CoA decision represents the law - at least in England and Wales.

A surprise?
Those who expected that in ruling in No 6 the Lords might by obiter dicta effectively reverse the CoA decision in No 5 were disappointed. In fact, in one respect the Lords' decision in No 6 has had the opposite effect and paved the way for a narrowing of litigation privilege.

Lord Scott called for a review of the rule that communications between lawyers and third parties relating to litigation are automatically covered by litigation privilege.

What are the key points to note?

1. Who's the "client"?
It is not clear that the Hong Kong courts would follow the decision in No 5 identifying the client narrowly if the facts arose here today. However, in terms of day-to-day communications between legal advisers (in-house or external) and corporate clients, it cannot be assumed that all employees of the organisation will necessarily be "the client" for the purposes of privilege.

Where lawyers collate information from sources around an organisation there is a risk, at least in non-adversarial situations, that non-privileged material and communications will be created. Where material passes between a lawyer and a "non-client" employee, that communication may now be as discoverable in legal forums.

Where normal litigation is on foot, this is much less likely to be a concern. Under litigation privilege, at least for the moment, communications with the necessary connection to the litigation between lawyers and "non client" employees will usually be protected under litigation privilege.

2. The definition of adversarial proceedings
The two judgments make clear that in order for litigation privilege to apply, the relevant proceedings must be overtly adversarial in their nature; in essence, they must exercise a judicial or quasi-judicial function. The Bingham Inquiry was an ad hoc inquiry initiated by the UK Parliament, but it was similar to an inquiry under the Commissions of Inquiry Ordinance. This did not fall within the definition of adversarial proceedings.

3. Presentational advice and legal rights and obligations
The Lords made clear that advice need not relate to legal rights and obligations as such to be covered by legal advice privilege, and therefore certainly litigation privilege. If the advice relates to the presentation of evidence so as to avoid unfair criticisms being made in inquisitorial proceedings it will be covered.

On the other hand, if lawyers provide "practical advice" to their clients about basic business issues, that advice is unlikely to be protected by legal advice privilege.

Occasionally persons who are not parties to litigation are called to give evidence. Directors of companies form an obvious category. Occasionally such people feel the need to retain their own lawyers before giving evidence.

The Lords' decision makes it reasonably clear that such advice will attract privilege, even if it does not relate to the witness's own legal rights and obligations.

Click here for an Australian footnote to Three Rivers for in-house lawyers.

What was USA v Philip Morris about?

British American Tobacco (Investments) Limited (BAT) is a party to litigation in the USA brought by the US Government against various tobacco companies on the basis that the companies deceived the American public about the health risks of smoking.
It is alleged that BAT wrongly destroyed documents, sent documents out of the jurisdiction and routed non privileged business communications through lawyers so that a claim to privilege could be asserted.

A Mr Foyle, a partner of Lovells and who once practised in Hong Kong, advised various companies in the BAT group in the 1980s and 1990s on the legal requirements relating to retaining and destroying corporate documents. Mr Foyle coordinated such advice for various territories outside the USA, including England and Australia.

The US Government applied for him to be examined in the English courts to obtain evidence for use in the US proceedings. They wished to question him about the creation and implementation of BAT's document retention policy.

The ruling
The CoA held that some of the communications between Mr Foyle and BAT could be privileged, such as communications about the law of discovery, privilege and related matters. However, other communications, such as advice on the organisation and implementation of BAT's review of its document retention policy, might not be protected.

Therefore, the CoA concluded, the best course would be to allow the questioning of Mr Foyle, leaving it to BAT to assert privilege through him on a question-by-question basis.

Privilege may be asserted in that sort of procedure. BAT resisted the application on the basis that both litigation privilege and legal advice privilege would attach to any such evidence that Mr Foyle could give.

What are the key points to note?

BAT claimed that at the time the advice was given litigation was in prospect, so the advice would necessarily be protected by litigation privilege.

The CoA referred to its two Three Rivers decisions and commented again on litigation privilege, taking a further restrictive stance. It reaffirmed that for litigation privilege to apply, the communication in question must be confidential and made for the dominant purpose of conducting or giving legal advice in relation to litigation, either pending or in contemplation.

The general apprehension of future litigation by BAT, or "a distinct possibility that sooner or later someone might make a claim", was not sufficient for litigation privilege to apply. Litigation must be "reasonably in prospect". BAT had not shown that anything like that existed when Mr Foyle had advised.

Further, even if there was sufficient likelihood for it to apply, communications in connection with legal work done very early in the process would not necessarily attract this privilege if it was not work towards preparing for trial. Such work would at best attract the narrower legal advice privilege.

As regards legal advice privilege, the CoA confirmed the stance it took in Three Rivers No 6 that not all communications between lawyers and clients will attract the privilege.

If part of a solicitor's duty is giving legal advice on his client's rights, liabilities and obligations and a further significant part of those duties consists of activities which can not be so characterised, the courts will no longer accept a "blanket" claim for privilege on the basis that the dominant purpose was the giving of legal advice. Each communication must be looked at separately to assess its purpose and determine whether it attracts privilege.

The case-by-case approach of considering each communication's claim to privilege no doubt holds good.

However, the CoA also said, curiously, that there was force in the submission that advice by Mr Foyle relating to the organisation, listing, storage and "spring cleaning" of documents was unlikely to be privileged because it required no knowledge of law.

The CoA's ruling as regards "presentational" evidence in No 6 has now been overturned by the Lords so this part of the judgment should be treated with caution.

BAT Downunder - Document Retention Policies

Mr Foyle's advice to BAT's Australian companies on document management was considered by the Australian courts in British American Tobacco Australia Services Limited v Cowell (representing estate of Rolah McCabe) [2002] VSCA 197. They are important decisions for in-house counsel in their own right.

Ms McCabe suffered from smoking related diseases and brought proceedings against BAT’s Australian subsidiary in connection with their tobacco products. In the proceedings Ms McCabe sought discovery from BAT’s Australian subsidiary of documents relating to their knowledge of the risks of smoking.

Mr Foyle and Australian solicitors had given certain advice to BAT’s Australian subsidiary in respect of their document retention policies. It was held at first instance that BAT's Australian subsidiary had "deliberately obliterated" discoverable documents and deprived Ms McCabe of the right to a fair trial. The judge, attracting considerable controversy, considered that the appropriate thing to do in the circumstances was to enter judgment against BAT with damages to be assessed.

However, the Court of Appeal reversed his decision. It stated that the relevant test for the intervention of the Court was whether the destruction of documents by a party prior to the commencement of proceedings had rendered a fair trial impossible. The Appeal Court emphasised that "there must be some balance struck between the right of a company to manage its own documents, whether by retaining them or destroying them, and the right of the litigant to have resort to the documents of the other side."

The Appeal Court went on to state "….where one party alleges against the other the destruction of documents before the commencement of the proceedings to the prejudice of the party complaining, the criterion for the court's intervention (otherwise than by drawing adverse inference, and particularly if the sanction sought is striking out of the pleading) is whether that conduct of the other party amounted to an attempt to pervert the course of justice or, if open, contempt of court occurring before the litigation was on foot."

What does all this mean for Hong Kong?

While English cases are not binding on Hong Kong courts, they remain relevant and persuasive. Hong Kong appellate courts have yet to decide whether to follow the recent stances taken by the English courts in respect of privilege.

In May 2003 in Yau Chiu Wah v Gold Chief Investment & Anor [2003] 3 HKLRD 58 Chief Judge Ma approved paragraph 24/5/8 of the Hong Kong White Book and followed the English decision in Balabel v Air India [1998] Ch 317 (CA) and accordingly took a less restrictive approach to what communications were considered privileged.

In the light of the English CoA decisions it would be dangerous to assume that a less restrictive approach will be taken by the Hong Kong courts in the future.

Practical Points for In-house Counsel

  • For any new matter on which legal advice is to be taken, a clear decision should be taken as early as possible as to the team of people to be involved in instructing the lawyers. All key relevant people should be included to ensure that communications with them are privileged. Equally, non relevant people should be excluded to avoid waiver.
  • In the initial stages, it is best to deal with matters verbally and avoid creating documents of any type including memos, emails, file notes etc.
  • Try to ensure that all documents created for the purpose of seeking or giving legal advice are marked "Confidential and subject to legal privilege". Documents created by lawyers that are not obviously legal advice as such but are protected by privilege, such as draft statements, should be marked "Privileged - lawyer work product".
  • Employees should always check with their legal advisers BEFORE forwarding on emails containing advice or privileged documents to third parties, even internal third parties. Forwarding such messages to "non client" employees could amount to a waiver of privilege.
  • Take legal advice before implementing any proposed document retention/document destruction policy. This is vital so that the risk of relevant litigation as well as legal issues such as limitation periods and the admissibility of electronic records can be considered.
  • Preserving such legal advice may assist greatly in countering allegations of bad faith should the loss of particular documents be criticised later. However, care should be taken to ensure that such advice itself remains privileged. Great care should be taken over any proposal to waive privilege in such advice.
  • As soon as there is a hint of a legal inquiry, investigation or dispute in-house lawyers should issue appropriate guidance throughout the organisation to ensure the indefinite preservation of all relevant documents, including documents that may be unfavourable to the organisation's position.