UK court rules audit documents are not legally privileged

The FRC is investigating a firm of auditors, known only as B, over the audit of a retail company, known as A. The FRC sought documents from B under its statutory powers, including executive committee minutes, board meeting minutes, a risk register and a draft script by the company’s chairman.

A said some of the documents requested were privileged, but B said it was entitled to make its own assessment as to whether the documents were privileged and should be withheld from the FRC. After A asked the court to resolve the question, B issued a counterclaim asking the court to make declarations as to whether the documents in respect of which A asserted privilege were in fact privileged.

Mr Justice Trower ruled legal advice privilege could extend to documents, such as internal company communications, which reproduce advice given in a legal context. However, he found that the five documents in question in this case were not covered by legal advice privilege.

With regard to the executive committee meeting minutes, the judge said the fact that A’s general counsel was the last person to edit the document did not mean the minutes were covered by legal advice privilege. Even if a lawyer is involved in the preparation of minutes of a meeting this does not mean that in carrying out that task the function he is performing is connected with the giving of legal advice, the judge said.

A said its risk register had been prepared by its general counsel for the dominant purpose of providing legal advice, while B said it was an “entirely conventional risk register” prepared to mitigate business interruption events. The judge said a document was not privileged merely because it takes into account legal advice, and instead is only privileged if the way in which it does so makes clear or communicates in an obvious manner, the substance of that advice.

Litigation expert Emilie Jones of Pinsent Masons, the law firm behind Out-Law, said the judgment provided valuable reminders to businesses and their in-house legal teams about when internal communications will and will not be privileged.

“For example, the judgment emphasises that just because a lawyer is involved in the production of a document, that does not mean the document has been prepared in connection with giving legal advice so as to attract legal advice privilege. Businesses must remember that simply copying in lawyers, having them present at a meeting or asking them to draft a document does not make the document privileged,” Jones said.

“For legal advice privilege to apply the document must be created for the dominant purpose of the giving or receiving of legal advice from the lawyer to their client, or at least must give away the nature or substance of that advice. Likewise, simply labelling documents as ‘privileged and confidential’ does not make them privileged. While labelling documents can be helpful, for example to remind people not to disseminate them, privilege is a matter of substance not form, and the question is always whether the ingredients of the relevant type of privilege are satisfied,” Jones said.

Jones said Mr Justice Trower’s comments on risk registers were particularly interesting, as these documents often contained sensitive information and were prepared with lawyer input.

“The fact that risk management solutions set out in such a register have been informed by legal advice will not make the content of the register privileged, unless it makes that advice clear or communicates it in an obvious way. Businesses should be aware of this and may wish to give consideration to whether and how the legal advice informing risk decisions can be interwoven into their risk register so that privilege might apply.” Jones said.

Litigation expert Michael Reading of Pinsent Masons said the decision would be challenging for auditors, who could potentially find themselves facing either a sanction for not handing requested documents to the regulator, or a claim from their client for inappropriately releasing privileged material.

“The auditor generally just wants to do the right thing to abide by the obligations it owes to both the regulator and its client. Sometimes there is a tension between these,” Reading said.

Reading said Mr Justice Trower’s decision could be particularly problematic for large group audits with audit files spanning multiple jurisdictions.

“The auditor’s client may assert privilege arising out of various jurisdictions over documents in those files. While the auditor should of course engage with their client to understand any assertions of privilege and challenge those that are unsustainable, dealing with foreign law issues will likely be outside the English auditor’s (and the English legal adviser’s) comfort zone. The auditor may well require specialist foreign law advice in addition to English law advice,” Reading said.

Reading said the case would be likely to prompt a renewed focus on auditors testing clients’ assertions of privilege following a document request by the regulator.

“We may well also see an increase in related court proceedings as either the regulators flex their muscles and challenge auditors’ or audit clients’ claims to privilege; or audit clients try to injunct their auditor if the auditor indicates that it disagrees with the client’s assertion of privilege,” Reading said.