FRC v Sports Direct – the latest update of legal privilege

3 October 2018

Introduction

Following the recent Court of Appeal decision in SFO v ERNC (see article ‘A real risk, but how likely is it?’), a further landmark decision as to the scope of privilege has been made by the High Court in The Financial Reporting Council Limited v Sports Direct.[1]

The Sports Direct case

The Financial Reporting Council (FRC) issued notices under its statutory powers requiring Sports Direct to provide certain documents to assist with its investigation into the conduct of an accountancy firm in relation to its audit of the company’s financial statements. Sports Direct refused to comply on the grounds that the documents withheld from FRC were subject to legal advice privilege. The FRC sought an order from the court to compel Sports Direct to disclose the withheld documents. There were three main issues for the court to consider:

  1. Non-privileged documents attached to privileged emails
    The court considered whether legal advice privilege applied to documents solely by virtue of them having been attached to emails passing between Sports Direct and its lawyers.  Unsurprisingly, the court held an existing, non-privileged document does not become privileged because it is attached to an email passing between a client and his lawyer.
  1. Implied waiver of privilege
    Sports Direct accepted that there was a limited waiver of privilege when it sent certain documents to its auditors but contended that the waiver was limited to its auditors only. The FRC argued that disclosure of privileged material to an auditor necessarily required the regulator of the auditor to have access to the material that had been provided to the auditor when conducting an investigation.  The court agreed with Sports Direct, finding that any regulatory investigation was entirely separate from the audit and therefore Sports Direct had not waived privilege in relation to the FRC.
  1. The infringement issue
    The court acknowledged that this was the most important and far-reaching issue for it to consider. The FRC argued that even if the documents were privileged and that privilege had not been waived by disclosing them to the auditor, disclosure to the FRC for the purposes of the investigation would not infringe said privilege. The court agreed and Sports Direct was ordered to hand the documents over to the FRC. However, the court found the “infringement issue” of sufficient import and complexity to grant Sports Direct permission to appeal on the point.

Conclusion

This is an important (and controversial) decision with far reaching implications. Corporate clients can now expect to face increased requests from regulators to produce privileged documents in connection with investigations into their outside advisers such as accountants and auditors.


[1] The Financial Reporting Council Limited v Sports Direct International Plc [2018] EWHC 2284 (Ch).


 

Peter Reynolds Author
Peter Reynolds
Senior Associate
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