Abdulali Jiwaji and Alasdair Glass 9 Oct 2018 04:09pm

Sports Direct v the FRC: what it means

The High Court has recently reaffirmed the somewhat controversial principle that disclosure of privileged client documents by a regulated entity to its regulator does not infringe the client's privilege

Caption: All you need to know about the case brought by the FRC against Sports Direct, and the High Court's ruling

The case was brought by the Financial Reporting Council Ltd (FRC) against retail giant Sports Direct in the context of an investigation the FRC was conducting into Grant Thornton's audit of the company.

The FRC sought an order requiring Sports Direct to disclose certain documents pursuant to the Statutory Auditors and Third Country Auditors Regulations. The demand included documents disclosed to Grant Thornton that recounted advice previously provided to Sports Direct in relation to certain contentious tax issues. Predictably, Sports Direct claimed privilege over those documents and refused to provide them to the FRC. 

The judge residing over the case, Sir Richard Arnold, was required to decide three key points:

  1. Whether privilege could be asserted in respect of a document that was otherwise not privileged but which was attached to a communication between a client and its lawyers (the communication issue).
  2. Whether Sports Direct's limited waiver of privilege, by sending copies of privileged documents to Grant Thornton, extended to the FRC (the waiver issue). |
  3. Whether production of the privileged documents to the FRC would infringe that privilege (the infringement issue).

First, regarding the communication issue, Sir Richard found it a "startling proposition" by Sports Direct that privilege could be claimed over a non-privileged document merely because the document was attached to lawyer-client communication. Following a well-established line of authority, he rejected that proposition and found that Sports Direct was not entitled to legal advice privilege in respect of the email attachments.

Secondly, as to the waiver issue, it was common ground between the parties that Sports Direct's provision of privileged documents to Grant Thornton was a limited waiver of privilege. FRC contended however that any waiver of privilege against Grant Thornton necessarily entailed a waiver as against FRC as Grant Thornton's regulator. FRC relied on previous caselaw to the effect that where there are multiple stages which form part of a single process, waiver of privilege in relation to the first stage of that process applies to the entire process. However, in this instance, Sir Richard concluded that the FRC's regulatory process in respect of Grant Thornton was distinct from the audit process, under which Sports Direct had provided documents to Grant Thornton. As such, there had been no follow-on limited waiver of privilege as against FRC.

Thirdly, Sir Richard considered the infringement issue. Prior cases on this point had confirmed that a client's legal professional privilege was not infringed by limited disclosure to a regulator or tax authority for the purpose of investigations into the adviser of the client. In such a case, Morgan Grenfell & Co Ltd, Lord Leonard Hoffman noted there was no such infringement, as the Law Society was not entitled to use privileged client information disclosed by a solicitor for any purpose other than their investigation into the solicitor. Sir Richard noted that Lord Hoffman's findings in relation to this issue had been "trenchantly criticised". One of the key criticisms is that the use such privileged documents are put to by a regulator is often not black and white. Despite these criticisms, and despite finding that Lord Hoffman's comments were strictly obiter, Sir Arnold followed the findings in Morgan Grenfell & Co Ltd.

What does this mean for businesses? Well, it must be accepted that privileged documents in the hands of an adviser may at some point be provided to an authority investigating the activities of that adviser.

Some comfort can be drawn from the proviso in Morgan Grenfell & Co Ltd that the authority was not entitled to use privileged information disclosed to it for any purpose other than the investigation into the adviser (as supported by Sir Richard in this case).

However, that comfort requires the relevant authority to abide by the restriction. For example, would a tax authority, in the context of an investigation into an adviser, ignore evidence of a client's tax affairs in client material disclosed by that adviser? There has to be a risk that such evidence would influence the tax authority's dealings with the underlying client, albeit one would expect the Courts to take a dim view of any misuse of privileged material.

Sir Ricahrd’s decision may not be the final word on this issue, however, as leave to appeal his infringement findings has been granted.

Abdulali Jiwaji is a partner and Alasdair Glass is an associate, both at Signature Litigation