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Court of Appeal circumscribes Regulators' power to obtain privileged material

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United Kingdom

Sports Direct International Plc v Financial Reporting Council [2020] EWCA Civ 177

  Introduction 

The Court of Appeal has handed down a timely and important clarification regarding when regulators can require disclosure of material that would otherwise be subject to legal professional privilege ("LPP"). The Court dismissed any notion that there is a lower threshold for LPP, or a general exception to the usual rule that privileged communications are immune from disclosure in cases where a regulator is exercising a statutory information gathering power.   The statutory powers of the regulators of legal professionals to access documents reflects the nature of their investigations into the conduct of lawyers.

Factual background

The Financial Reporting Council ("FRC") requested that Sports Direct disclose all emails and attachments in their possession or control relating to the audit of their group accounts by Grant Thornton UK LLP in 2016. The FRC made this request pursuant to its powers under the Statutory Auditors and Third Country Auditors Regulations 2016 ("SATCAR"). The focus of the investigation was the alleged failure of auditors Grant Thornton UK LLP to ensure the disclosure of a relationship between Barlin and Sports Direct in the group's accounts. Sports Direct withheld forty documents from the FRC that appeared to meet the disclosure criteria on the grounds that theywere created for the purposes of giving legal advice (including tax advice) and therefore subject to LPP.

At first instance, the High Court – relying on Lord Hoffman's judgment in Morgan Grenfell v Special Commissioners [2002] UKHL 21 – held that disclosure would not have infringed privilege because regulators are entitled to obtain otherwise privileged material in order to discharge their regulatory functions.  In addition, such disclosure is limited to these functions and therefore does not breach the wider principle whereby privileged communications are essentially confidential.  The High Court held, in the alternative, that any breach was an authorised technical infringement under the SATCAR regime. Sports Direct appealed to the Court of Appeal on both grounds.

Determination

The Court stated that there was no justification for the High Court interpreting Morgan Grenfell as laying down a general rule that there is no infringement of legal professional privilege where a regulator makes a request under a statutory power. In that case, Lord Hoffman referred to the decision in Parry Jones v Law Society [1969] 1 Ch 1, a case in which a solicitor was compelled to hand over "privileged" documents under the Solicitors Act 1957.  Lord Hoffman had stated that in Parry-Jones there was no infringement of LLP because the Law Society, investigating the conduct of a solicitor, could only use the potentially privileged documents for the purposes of its investigation.  In other words, the wider principle of confidentiality attaching to privileged documents had not been breached.

The Court did not accept that Lord Hoffman laid down a universal rule regarding when privilege could be waived. Rather, the Court interpreted Parry-Jones (and its subsequent interpretation) more narrowly, as being confined to the particular statutory regime, namely the Solicitor's Accounts Rules 1945 (which took effect as if made under the statutory authority contained in s.29 Solicitors Act 1957). Section 29 gave the Law Society express statutory jurisdiction to create rules whereby it could obtain a wide range of material for regulatory purposes, and rule 11 of the Accounts Rules allowed it to obtain certain material that would ordinarily be considered privileged. If it were otherwise, the Law Society would not have been able to investigate fraud, since solicitors would never have to disclose matters relating to their clients' accounts; that was clearly untenable. 

Having analysed the case through the Parry-Jones/Morgan Grenfell prism, the court endorsed Lord Millets words in B v Auckland District Law Society [2003], that the "the task of the court is not to decide where the balance should be struck in the particular case, but where Parliament has struck it". The Court concluded that the public policy justifications for conferring privilege outweigh the potential to hinder the exercise of regulatory powers.
 
The Court of Appeal also allowed the appeal on the infringement issue. Paragraph 1 of Schedule 2 to SATCAR contains no express provision that LPP should be overridden, and given that sub-paragraphs 1(8) and (9) of SATCAR entitle interested parties to refuse to provide information protected by LPP. Accordingly, the Court was not satisfied that this was an authorised technical infringement or that Parliament intended that the statutory provision displaced LPP.

The decision will reassure those clients and solicitors subject to regulation that their right to communicate candidly with one another will ordinarily take priority over regulator's statutory powers to require disclosure. Notwithstanding this, the judgment does not close the door on regulators seeking access to privileged documents in cases where the legislation permits. It is important for lawyers and their clients to have a sound understanding of the scope of the investigatory powers relevant to them and their relationship with LPP.

Written by Ryan Borley, Trainee Solicitor

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