Jennifer Fox, a senior associate with Forbes Hare in the Cayman Islands, reports on how the emerging case law in relation to joint privilege may impact on a company and its directors.
The commentary on legal professional privilege, and the recent developments in case law that follows, is of particular relevance to the many independent directors acting on the boards of investment funds and other companies or investment vehicles registered in the Cayman Islands.
Legal professional privilege gives the person entitled to it the right to decline to disclose confidential communications with his lawyer, provided the communications or documents were exchanged for the purpose of giving legal advice or in contemplation of litigation. Once legal professional privilege has been recognised then it is absolute, and cannot be overridden by some supposedly greater public interest. Legal professional privilege can only be waived by the client.
Joint interest privilege, a somewhat obscure area of the law of privilege, arises in cases where two separate parties can claim a joint interest in communications with a particular lawyer, and therefore it can only be waived jointly (unless both parties are subsequently involved in the same litigation where neither party is entitled to rely on JP in order to refuse disclosure of relevant documents).
An example of where JP might arise is in the management of a company; where the legal interests of the company and its directors will often coincide or overlap. However, in such scenarios, unless the lawyer is formally retained by both the company and its directors (to advise the latter in their personal capacity) then it does not automatically follow that the directors can claim that any particular communication is subject to JP.
This issue will be relevant should the company and/or its directors become involved in litigation or regulatory action related to (but not limited to) the company’s demise.
Where a company waives its privilege in any particular documents or communications then the directors may be left in the position of having to establish that the communications were subject to JP and therefore not disclosable.
A recent decision of the English administrative court in R (Ford) v Financial Services Authority (Ford) provides useful clarification of the English test for JP. In Ford, the question was whether the directors of a company could claim JP in advice given by solicitors in respect of an FSA investigation at a time when the solicitors were formally retained by the company and not by the directors.
The issue was important because the company had been put into administration and the administrator had waived the company’s claim to privilege in legal advice, some of which related to the position of the directors. Ignoring the directors’ claims that the advice attracted JP, and that their consent was required before privilege could be waived, the FSA relied upon the advice in formal investigation reports and warning notices served on the directors pursuant to the statutory regulatory scheme.
Ford is an interesting decision as the English Court elucidated the English legal test for JP, and in the process of doing so, reviewed and ultimately did not follow the approaches adopted in both the United States and Australia. The American position, when dealing with corporations and their directors, is that once lawyers have been retained by a corporation, officers of that corporation cannot prevent it waiving privilege on advice concerning its affairs or those of its officers, even if the personal affairs of the officers are inextricably intertwined and they were in fact being given advice at the same time. This approach was not favoured by the English Court as it was underpinned by US public policy considerations, namely to assist the US Bankruptcy Code’s goal of uncovering insider fraud, which do not form part of English law.
In respect of the test for JP in Australia, which includes an evaluation of whether the person asserting JP reasonably believed he was the client of the lawyer in question, the English Court rejected the approach as it considered that this test…“begs too many questions. Is it to be judged subjectively or objectively? And what are the factors which must be established before a belief can be reasonable? Does the belief have to be shared by the others entitled to JP and by the lawyers?”
The English Court ultimately held that the same principles which establish legal advice privilege (comprehensively summarised in Three Rivers District Council and others v Bank of England (No 6)) are equally applicable when determining whether JP can be established. Consequently, a person will not be able to claim JP in a communication just because the advice had an impact on his personal position; he must be able to show that the advice was given to him as a client. In the absence of a formal joint retention letter, whether a JP arises requires a factual enquiry to be undertaken to determine the true position at the material time. The person claiming JP must establish that:
- he communicated with the lawyer in question for the purpose of seeking legal advice in his personal capacity
- he made clear to the lawyer that he was seeking legal advice in that individual capacity (as opposed to merely as a representative of a company)
- those with whom JP was claimed knew or ought to have appreciated the legal position
- the lawyer knew or ought to have appreciated he was communicating with the individual in that individual capacity
- the communication with the lawyer was confidential
On the facts in Ford, the English Court held that this test had been satisfied. Two out of a potential total of thirty communications were found to be covered by JP and the FSA could not consequently rely on them in regulatory proceedings against the directors. The FSA was also subsequently ordered at a later remedies hearing to send letters requesting certain steps to be taken to all recipients of the privileged material (interestingly including the Cayman Islands’ Monetary Authority).
The decision of the English Court in Ford will be “persuasive” in cases heard in the Grand Court of the Cayman Islands, and whilst the opportunity for the Grand Court to consider the appropriate Cayman Islands’ legal test for the establishment of JP has not yet arisen, it is likely that Ford would be followed.
Ford emphasises the need for company officers and directors to ensure that there is clarity in retainers with legal counsel (reviewed on an ongoing basis), particularly in relation to identifying on whose behalf the lawyer acts.
It also acts as a reminder to company officers and directors to consider, ahead of time, how they will obtain confidential and privileged legal advice both generally and should issues of their personal liability to the company arise.
Periods of trading difficulties or the appointment of insolvency practitioners, will often result in an examination of the conduct of directors for potential liability arising out of a breach of fiduciary duty or a failure to fulfil the expected standard of care during the twilight period before the difficulties or prior to the onset of insolvency, as was underlined in 2011 by the Grand Court in the case of Weavering Macro Fixed Income Fund Limited (in Liquidation) v Stefan Peterson and Hans Ekstrom, where the independent directors were found liable for the trading losses of the company for failure to perform their duties of care toward the relevant company to a sufficient standard.
Given the potential personal liability of directors and officers, they would do well to ensure that pre-existing arrangements are in place, which allow them to obtain independent confidential legal advice on their position should it become desirable to do so.