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5 July 2020

Crime, fraud and iniquity: How can an allegation of wrongdoing override Legal Professional Privilege?

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By Sangeeta Bedi

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Legal professional privilege (‘LPP) is a common currency for lawyers and clients of every discipline. Even in the most amiable transactional work, a lawyer should know whether the advice and communications are privileged or, perhaps more importantly, whether the client expects them to be privileged. Subject to narrow public interest exceptions (for example, where the matter concerns a risk of serious harm) or clear statutory intent, LPP is an absolute right. A court cannot decide that LPP should be overridden, no matter the strength of the competing arguments. This is even the case where the privileged material might assist the defence of a person accused of murder (see R. v Derby Magistrates’ Court Ex p. B [1]).

This immutable status being accepted, challenges usually seek to establish that LPP never existed in the first place, or else has subsequently been lost. Recent high-profile challenges have concerned how LPP arises in contemplation of a criminal investigation (Director of the Serious Fraud Office v Eurasian Natural Resources Corp Ltd [2]) or tax litigation (Bilta (UK) Ltd (In Liquidation) v Royal Bank of Scotland [i]).

The so-called ‘crime-fraud exception’ (‘CFE) is an example of where LPP is sidestepped by establishing that it never existed in the first place. The recent High Court judgment in Addlesee & ors v Dentons Europe LLP [3](‘Addlesee) is an excellent primer on CFE, not least because it highlights areas in which it may currently be underutilised or misunderstood.

The facts are relatively straightforward; investors put money into a scheme that it was claimed would recover and re-sell reconstituted gold-dust. Participants were assured that the investment was low risk, as there was sufficient insurance to repay their contributions should it fail. Unfortunately for them, the majority of investments (some £6.5m according to the claimants) were never returned.

The claimants sought damages from the defendant law firm, on the basis that its predecessor firm had recklessly or negligently facilitated a fraud by acting for the promoter of the scheme. In particular, the predecessor firm had provided ‘letters of comfort’ to investors which (wrongly) verified the underlying assets that purportedly underwrote the security of their investment.

In the application at hand, the claimants sought an order that, for the purposes of disclosure and inspection, the relationship between the defendant and its erstwhile client should not be treated as legally privileged, on the basis that either:

(i) The client had been knowingly and dishonestly involved in a fraud; or

(ii) The client had unwittingly facilitated the fraud. The fact that the client may have been an innocent stooge did not mean that the defendant had not been instructed for a fraudulent purpose.

For the defendant’s part, whilst it denied the substantive claim of recklessness or negligence, it did not admit or deny that the purpose of the scheme (whether masterminded by their client, or a third party) was fraudulent. The question for the court was therefore whether, on the evidence presented by the claimants, did CFE apply such that LPP had never existed between the defendant and its erstwhile client.

The test for CFE

Master Clark’s judgment records substantial agreement on the relevant principles:

  1. Lawyer-client communications are not protected by LPP if the lawyer was instructed for the purpose of furthering crime, fraud or iniquity (see, for example, Derby & Co Ltd v Weldon (No 7) [4]and subsequent authorities). Keen-eyed readers will note that the conduct which triggers the exception is not limited to crime and fraud, but also includes ‘iniquity’.As explained in JSC BTA Bank v Ablyazov [5]the exception extends to fraud or other equivalent underhand conduct which is in breach of a duty of good faith or contrary to public policy or the interests of justic”’.

Ablyazov goes on to provide some helpful guidance as to whether a lawyer has been instructed for such iniquitous purposes:

“…the touchstone is whether the communication is made for the purposes of giving or receiving legal advice, or for the purposes of the conduct of actual or contemplated litigation, which is advice or conduct in which the solicitor is acting in the ordinary course of the professional engagement of a solicitor. If the iniquity puts the advice or conduct outside the normal scope of such professional engagement, or renders it an abuse of the relationship which properly falls within the ordinary course of such an engagement, a communication for such purpose cannot attract legal professional privilege.

This extension of CFE beyond criminal misconduct and dishonesty means that, not only is the term ‘crime-fraud exception’ insufficient, but also that its application may be being overlooked in areas where it applies.

 

  1. CFE applies whether or not the solicitor is aware of the wrongful purpose (see Kuwait Airways Corpn v Iraqi Airways Co (No 6) [6]).

 

  1. CFE can apply even if the client is unaware of the wrongful purpose, i.e. if the client is being used by a third party to further the wrongful purpose. In such circumstances, it is a question of fact and degree as to whether the nexus between that third party and the client took the client-lawyer relationship beyond the scope of ordinary professional employment, such that it should not benefit from confidentiality and LPP (see R v Central Criminal Court ex p Francis [7]).

 

  1. The alleged wrongdoing need not be proved on the balance of probabilities. Rather, there need only be prima facie evidence.

Previous authorities have attempted to refine the standard of prima facie evidence required to establish CFE. Where the fraud or other wrongdoing is not in issue in the substantive claim, there should be ‘strong’ prima facie evidence (see Barclays Bank Plc v Eustice [8]). Where it is in dispute, there should be ‘very strong’ prima facie evidence (see Kuwait Airways Corpn at [42]).

In trying to unpick these terms, Master Clark concluded that ”the distinction between a strong and very strong prima facie case is not readily discernible in their practical application.” In making this observation, she might also have asked whether there is such a thing as a ‘weak’ prima facie case, thus illustrating the difficulty of trying to subdivide a standard that is both low and subjective. Rather, Master Clark indicated a preference for the analysis in Derby v Weldon, which emphasised that each case should be considered on its own facts as to whether the alleged misconduct is sufficient to displace the purported LPP.

Nonetheless, Master Clark concluded that the standard required was a ‘strong’ prima facie, noting in particular that (i) the defendant had not denied (only ‘not admitted’) that fraud had taken place and (ii) the fraud alleged was against the client and/or the third party, rather than the defendant. In other words, as fraud was not the issue in the substantive claim (rather, whether the predecessor firm had been negligent or reckless), the lower standard should apply.

Master Clark concluded that the claimants had established a strong prima facie case, even going so far as to describe it as ‘very strong and compelling’ (somewhat undermining her previous criticism of the strong/very strong delineation). Furthermore, even if the client itself had been ignorant of the fraud, the circumstances in which it had instructed the defendant (i.e. at the suggestion of the third party in order to produce the deceptive ‘comfort letters’) meant that the matter fell outside the ordinary scope of the lawyer/client relationship, and so should not benefit from LPP. As such, the documents held by the defendant in respect of the client should be disclosed because they fell within the CFE.

Master Clark should be praised for a judgment that successfully condenses and applies the sprawling authorities on CFE. In particular, the judgment illustrates its breadth and identifies areas in which it may currently be misapplied or underutilised.

Criminal and regulatory investigations

Various UK investigative agencies have powers to obtain evidence by compulsion, whether through search and seizure powers (either under a warrant or, for example, following arrest under Section 18 Police and  Criminal Evidence Act 1984 (‘PACE’) or through specific statutory provisions such as the SFO’s Section 2 powers granted by the Criminal Justice Act 1987. Such powers always preclude the seizure or compulsory disclosure of (inter alia) LPP material. However, as explained above, where material is created for an iniquitous purpose, it never attracts privilege at all.

With this in mind, it is surprising that investigators do not seek disclosure of such material more often. If the investigator can establish a strong prima facie case that the suspect or defendant instructed his lawyer (even unwittingly) for the purpose of (for example) advancing a fraud, or laundering the proceeds of crime, then that advice and the related communications are fair game. However, as far as the author knows, no UK agency has ever sought to use its powers to obtain ostensibly LPP material under the CFE on any basis other than that the underlying purpose was criminal. In other words, the more nebulous and versatile ‘iniquity card’ has never been played.

This reticence to expand the repertoire beyond alleged criminality may be reflected in the inconsistent drafting of the powers available to the SFO, the FCA and the police. Section 2 powers are limited such that the SFO cannot demand production of any document the holder could withhold during High Court proceedings on the basis of LPP. By implication therefore, if the SFO could establish that CFE defeats LPP, the restriction would not apply and disclosure could be compelled.

By comparison, the equivalent disclosure provisions available to the FCA are more limited. Section 413 Financial Services and Markets Act 2000 (‘FSMA’) excludes from disclosure any material falling under the definition of LPP, whilst noting that items held ”with the intention of further a criminal purpose” are not so protected. In effect, the FCA are not (at least for the purposes of FSMA) entitled to rely on the broader ‘iniquity’ exclusion. A similar limitation applies to the material excluded from LPP protection when seeking a search warrant under Section 10 PACE (i.e. only a ‘criminal’ purpose is sufficient to defeat privilege; mere iniquity is not enough).

It is unclear whether this was a deliberate legislative decision to gift broader powers to the SFO and/or restrict those available to the FCA or the police. It may simply have been a failure to appreciate that the scope of CFE is broader than criminality alone.

Private prosecutions

As private prosecutions become increasingly popular, it is only a matter of time before LPP and CFE are tested in respect of the prosecutor’s disclosure obligations.

Unlike a state prosecution, a private prosecutor and the complainant are usually the same party, or else closely connected. This means that, unlike a state prosecution, a private prosecutor often has absolute insight into the motives of the complainant. Whilst a state prosecutor might suspect that a complainant has an ulterior motive  in supporting a prosecution (revenge, for example, or to bolster related civil proceedings), provided that the evidential and public interest tests are fulfilled, the state prosecutor need not be concerned that he is also fulfilling the complainant’s alternative ambition.

Although it is permissible for a private prosecution to be brought for ulterior or mixed motives (for example, to encourage settlement in civil proceedings alongside securing a criminal fraud conviction), it is not acceptable to have an ‘oblique motive which is so dominant and so unrelated to the proceedings that it renders them an abuse of process’ (see R (G) v S and S [9]).

How, though, could a defendant ever possibly prove that the private prosecutor’s motive is so dominant and wholly unrelated to criminal justice that it amounts to an abuse of process?

A state and private prosecutor have the same duties under the Criminal Procedure and Investigations Act 1996 (‘CPIA’) with respect to ‘unused material’. They must disclose to the accused any undisclosed material that might reasonably be considered capable of undermining the case for the prosecution against the accused, or of assisting the case for the accused.

For a private prosecutor, such material may well include communications with lawyers that reveal the complainant’s motives. Ordinarily, the complainant could expect to be able to keep such privileged communications private. However, what if those communications confirmed that he had no interest in seeing criminal justice served, and instead revealed that the sole purpose of the prosecution was to publicly embarrass his opponent, or to exert pressure in civil proceedings?

Combining the tests in Ablyazov and R(G) v S and S, instructing lawyers to pursue a deliberate subversion of the court’s powers would surely go beyond any ordinary professional engagement (few, if any, lawyers advertise themselves as facilitators of abusive prosecutions). As such, no privilege would attach to the complainant’s communications with his lawyers. Such evidence of an abusive purpose would plainly (perhaps fatally) undermine the prosecution and assist the defendant, and so those communications would fall to be disclosed under the CPIA.

Conclusion

Although it sets no precedent, Addlesee does much to clarify the breadth of CFE. Both investigators and litigants are well-advised to examine the judgment and consider whether their current approach to supposedly LPP material is too narrow or too timid. Unfortunately for Master Clark, she may lose friends in judicial circles if her colleagues find themselves hit by a tidal wave of applications in which they must grapple with what constitutes a ‘strong’ or ‘very strong’ prima facie case, or whether a particular instruction falls within or without the ‘normal scope of professional engagement’.  Fortunately for them, they at least have clear guidance.

 

 

[1] [1996] A.C. 487

[2] [2018] EWCA Civ 2006

[3] [2020] EWHC 238 (Ch)

[4] [1990] 1 WLR 1156

[5] [2014] EWHC 2788 (Comm) [2014] 2 CLC 263 at [68]

[6] [2005] EWCA Civ 286 at [14]

[7] [1989] A.C. 346

[8] [1995] 1 WLR 1238

[9] [2017] EWCA Crim 2119 at [27]

[i] [2017] EWHC 3535 (Ch)

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