The recent case of Kyla Shipping grappled with the question of whether, in the circumstances, litigation privilege applied to investigations by a third party expert. The Commercial Court ultimately upheld a challenge to the claimants’ assertion of litigation privilege over an expert report on the basis that it was not prepared for the dominant purpose of litigation. This case is another example of assertions of privilege in relation to third party investigation reports being successfully challenged (see our recent blog on the Banque Havilland case).
Key background facts
The parties entered into a number of freight-forwarding agreements (FFAs). The claimants alleged that the FFAs were void on the basis that they had been concluded on their behalf by the third and fourth defendants at off-market rates in order to enrich the first and second defendants, who were in the same corporate group.
Kyla Shipping was at the time partly owned by YPA, which is part of the same corporate group as the defendants. Prior to the alleged fraud being discovered, Kyla had been in a separate dispute with its shareholders over a dividend and allegations of mismanagement in relation to the FFAs. This ultimately led Kyla to instruct an expert to audit the FFAs in order to provide “ballast” in its correspondence with YPA. The expert’s work led to Kyla’s discovery of the alleged fraud.
The defendants argued that litigation privilege could not be claimed here over the expert’s investigation because it was a fishing expedition for potential claims relating to the FFAs.
The judge agreed with the defendants that the dominant purpose of instructing the expert was not litigation for the following reasons:
- there was no suggestion that a claim in relation to the FFAs was in reasonable prospect at the time the expert was instructed. The purpose of the expert instruction was to see whether one of the claimants had any legitimate grievance in respect of the mismanagement claim; and
- a witness statement filed by one of the claimants had made clear that the purpose of the expert instruction was for “ballast in the correspondence”, and this did not support their claim for litigation privilege asserted on the basis of the alleged fraud.
The case is a reminder that even where a party anticipates or is party to litigation, it does not necessarily follow that litigation privilege will apply to investigations of other potential claims or counterclaims.
Companies should be aware that litigation privilege will only apply if a report or expert advice is for the dominant purpose of litigation which is already in progress or which is in reasonable contemplation. It is always prudent to consider what material is being generated by a third party (as privilege may be challenged) and to document carefully the work and its purpose.
For more information on this decision, or advice on maintaining privilege when conducting investigations, please contact the individuals below.
Further information on privilege and investigations can also be found here.
With many thanks to trainee, Lubna Fahoum, for her contributions to this article.