Expert advice on the pricing of forward freight agreements, used to “make good any legitimate grievance” and “add ballast” in correspondence concerning alleged corporate mismanagement, was not covered by litigation privilege because that specific litigation was not reasonably in prospect at the time (although other litigation was): Kyla Shipping Co Ltd & anr v Freight Trading Ltd & ors [2022] EWHC 376 (Comm), 22 February 2022.
The decision is noteworthy as the deputy judge, Charles Hollander QC, is the author of a leading textbook on privilege.
This was a claim brought about the pricing of forward freight agreements (FFAs) which Kyla had entered into with the defendants (the Mispricing Claim).
The expert instruction
In late 2018/early 2019, a dispute arose between Kyla and its shareholders regarding a dividend distribution (the Dividend Dispute). During that dispute, the majority shareholder became concerned that there was some misconduct involving the pricing of, and payments under, the FFAs, which, it alleged, the minority shareholder had played some part in (the Mismanagement Allegation).
In connection with the Mismanagement Allegation, an expert was instructed to advise on the pricing of the FFAs, the concern being that Kyla had essentially been overcharged. In the claimants’ own words, the expert instruction would allow the majority shareholder “to make good any legitimate grievance that might exist, for the sake of providing ballast in the correspondence” with the minority shareholder.
It is this expert advice which the defendants sought from the claimant, and which the claimant claimed was protected by litigation privilege.
The test for litigation privilege
A party claiming litigation privilege must be able to show that the document in question was created for the dominant purpose of conducting litigation in progress or reasonably in contemplation (or prospect). As for the purpose element, it is insufficient if a document is prepared for two equal purposes if only one of the purposes is privileged. As for whether litigation is reasonably in contemplation, there must be a real likelihood of litigation – a mere possibility or general apprehension of future litigation is insufficient.
Could litigation privilege be claimed for the expert evidence?
A key question was whether litigation was in reasonable prospect when the expert was instructed.
The defendants argued that the instruction of an expert was a fishing expedition. They said that litigation in relation to the FFAs was not in reasonable prospect at that time, or alternatively there were two equal purposes and the dominant purpose test was not satisfied. The purpose of the expert instruction was to see whether there was any legitimate grievance in respect of the FFAs.
The claimants argued that litigation was in reasonable prospect in relation to the Dividend Dispute and the dominant purpose of instructing an expert was to provide evidence in support of a potential counterclaim in those proceedings.
The court found that the purpose of the expert instruction was for the majority shareholder to find support for the Mismanagement Allegation in correspondence. Litigation was not in reasonable prospect in respect of that specific matter at the time the expert was instructed, as:
- there was no suggestion in the correspondence that any proceedings were envisaged relating to the Mismanagement Allegation;
- the parties to any such proceedings would not have been the shareholders of Kyla (who were the parties to the correspondence in question); and
- the claimants’ “ballast in the correspondence” explanation was difficult to square with a claim for litigation privilege.
The court acknowledged that the Court of Appeal had been generous in respect of litigation being in reasonable prospect in SFO v ENRC when it held that adversarial litigation was in contemplation long before the SFO commenced its investigation into alleged bribery and corruption.
However, the judge remarked that the Court of Appeal had treated this as “something of an issue of principle”, since it was in the public interest that companies should be prepared to investigate allegations made by whistleblowers or investigative journalists before going to prosecutors like the SFO, without losing the benefit of privilege, otherwise it would tempt companies not to investigate at all for fear of being forced to reveal whatever they uncover.
Was privilege waived?
The court also considered whether the claimants had waived privilege in later expert investigations (which were accepted by the defendants as privileged) by referring to the investigations in a witness statement in support of an earlier application for permission to serve out of the jurisdiction.
The court acknowledged that the case law on whether reference to privileged documents in a witness statement or similar document amounted to a waiver of privilege was inconsistent. However, it focused on two general questions emerging from previous cases, namely: (i) has the content (ie substance) of the privileged material been revealed, or merely the effect of it, and (ii) has it been deployed or relied on to advance a party’s case, or has it simply been referred to? This classic test of reliance on the content of legal advice, following PCP v Barclays, needs to be viewed through the prism of:
- whether there was any reliance on the privileged material referred to;
- what the purpose of the reliance was; and
- the particular context of the case in question.
This gloss means that in a particular case, the fact that only the conclusion of the legal advice referred to is stated, as opposed to the detail of the contents, may not prevent there being a waiver.
The defendants argued that the claimants relied on the expert evidence when referring to the various stages of the process leading to the discovery of the Mispricing Claim and that this meant they had waived privilege in respect of the expert evidence and the associated documents (ie, collateral waiver).
The court dismissed those arguments. The claimants’ witness statement explained the circumstances surrounding the instruction of the expert and the steps leading to the discovery of the alleged mispricing, but only “in general terms”. No particular document was expressly referred to. There was no reliance on any documents which the claimants could be said to have referred to implicitly.
Comment
The question of when litigation privilege begins to apply is one that often taxes lawyers, given the unsettled state of the case law. The difficulty is compounded by the fact that a party has to act as the judge of its own case for privilege in the knowledge that, if its judgement is challenged, it will have to tread the tightrope of defending the challenge without being able to refer in detail to or rely on the material in question for fear of waiving privilege over it.
The ruling demonstrates in particular how the dominant purpose test and the question of whether litigation is in reasonable contemplation can become tricky, where multiple potential actions are in play, since each may involve litigation coming into contemplation at different stages. In this instance, the court applied both tests stringently: it determined not only that supporting allegations in correspondence could constitute a separate purpose from the primary subject of that correspondence, but also that making allegations or raising suspicions is not in itself sufficient to demonstrate that proceedings are in contemplation. In doing so, the court adopted a less generous approach than was taken in SFO v ENRC, a decision which suggests that a company can benefit from litigation privilege where it is investigating suspicions of possible misconduct.
However, the judge hinted at a desire to avoid creating too strict an approach to multiple purpose cases. He commented that it was not obvious that the two distinct purposes found in Sothebys v Mark Weiss (where the purposes of an investigation into whether a painting was forged were held to be (i) deciding whether the painting was fake, and (ii) enabling the claimant to defeat arguments in the anticipated litigation) were “other than two aspects of the same purpose”. This could be an indication that the court may in future take a more pragmatic approach to situations where it is possible to construe multiple purposes as comprising a single overarching purpose.
As a practice point, when obtaining expert advice at an early stage, parties will want to consider carefully the specific purpose for obtaining that evidence to determine whether litigation is more than a ‘mere possibility’ in respect of it.
The court was more generous on the question of waiver. The judge’s comments should be welcomed by those who find themselves in a position where it is necessary to make some reference to privileged matters. However, the ruling stresses the fact-specific nature of the court’s decision-making process in this type of privilege dispute. The safest course will always be to steer clear of any reference to privileged material but, when it cannot be avoided, care should be taken to make reference only in very general terms and to avoid relying on any particular documents.
