Privilege disapplied: the “iniquity” exception

In Hotel Portfolio II UK Ltd (in liquidation) v SMA Investment Holdings Ltd and others [2019] EWHC 1754, certain privileged documents had been disclosed to the hotel portfolio company applicant during insolvency proceedings brought by its liquidator. The documents comprised of 8 email chains with attachments passing between a law firm and its clients, those clients being a number of companies not including the hotel portfolio company.

The applicant wished to disclose the emails during separate proceedings brought by the Serious Fraud Office – notwithstanding any legal advice and/or litigation privilege asserted by the respondents – on the grounds that the iniquity exception applied.

The general rule: disclosure and inspection

The general legal principle is that documents relevant to a dispute are subject to: (a) disclosure, whereby the parties formally state to one another which documents they hold that are relevant to the proceedings; and (b) inspection, whereby the parties provide copies of those documents which are not privileged.

Legal professional privilege: a recap

As the court noted in Hotel Portfolio, legal professional privilege acts as an exception to the general disclosure and inspection rule.

The law of privilege allows parties to maintain confidentiality in their legal communications. In particular, parties may rely on the law of privilege to refuse to produce documents or answer questions from third parties. Legal professional privilege has two parts:

• legal advice privilege – which applies to confidential communications between lawyers and their clients for the purpose of giving or receiving legal advice; and
• litigation privilege – which applies to confidential communications between parties, their lawyers and third parties for the purpose of obtaining information or advice in connection with existing or contemplated litigation when, at the time of the communication in question, certain conditions are satisfied.

The iniquity exception

Legal professional privilege is subject to a number of narrow exceptions, one of which is the “iniquity” exception, otherwise known as the “crime-fraud” exception. This exception is based on public policy.

In Hotel Portfolio, the court explained the iniquity exception principle as follows:

“If…the communications between lawyer and client are, whether or not the lawyer knows this, in fact conducted with the intention of pursuing a fraudulent purpose, then those communications are outside the course of a professional engagement, or, put in the alternative, qualify as an abuse of it, such that [legal professional privilege] does not apply.”

The test for relying on the iniquity exception

Having reviewed the case law, the court in Hotel Portfolio said that a party wishing to rely on the iniquity exception must get over two hurdles:

• it is not enough to allege fraud – the statement must be made in clear and definite terms and there must be prima facie evidence that has some foundation in fact; and
• if a prima facie case of fraud is established, it must be established that the iniquity put the legal advice outside the normal scope of the lawyer’s professional engagement – this is a question of fact and degree in the circumstances in question.

The Judge made clear that, “the court will be “very slow” to deprive a defendant of legal privilege on an interlocutory application”.

The decision in Hotel Portfolio

The court held that the hotel portfolio company had not discharged its burden (as the applicant) to prove iniquity. First, it was not entirely clear from the submissions made on the company’s behalf what the “iniquity” being relied on was. Secondly, bearing in mind this lack of clarity and taking the evidence at its highest, the company had not shown prima facie evidence of the iniquity alleged.

The court did not need to go further and consider the second issue of whether the alleged iniquity put the legal advice in question outside the normal scope of professional engagement. However, the Judge still commented that rather than amounting to evidence the solicitors firm was complicit in (or deceived into) facilitating the alleged iniquity, the emails in question showed the firm was performing its proper professional role of advising on the risks of the transaction.

The application was dismissed.

Comment

The general rule is “once privileged, always privileged”. This means that once a communication becomes privileged, the party to whom the privilege belongs may continue to claim privilege over that communication in different proceedings or investigations. This right continues indefinitely unless the privilege is lost – typically by loss of confidentiality, waiver of privilege and mistaken disclosure.

It will be an unusual case where a party already has copies of another party’s privileged documents in its possession (as the applicant did here), particularly where allegations of crime or fraud are involved, but the iniquity exception does crop up in the case law on a regular basis.

However, lawyers and their clients alike will take some comfort from the confirmation given in Hotel Portfolio of the relatively narrow scope of the iniquity exception and that that the court will not hurry to deprive a party of the protection of privilege on grounds of iniquity.