Legal privilege: A right under attack

The extent to which legal privilege should be protected is increasingly being debated in parliament, the courts, and by regulators. The question is supposedly a simple one: just how far should privilege be protected or limited when a greater good is at stake?

A number of scenarios come to mind, such as the fight against terrorism following the recent passing of the Investigatory Powers Act 2016 – described last week as ‘a beacon for despots’ – and the draft Finance Bill 2017 which aims to target aggressive tax avoidance. On this, the Law Society is seeking more detail on the government’s approach to protecting legal privilege and – to ensure lawyers are protected when giving legitimate advice – a more careful definition of ‘enablers’ of tax avoidance schemes.

There are also attempts by regulators to pierce privilege to increase corporate transparency and accountability. As Lord Neuberger explained in March, ‘particular problems appear to have arisen from the marked increase in the domestic and international fields when it comes to regulatory and criminal sanctions in the corporate environment’.

Just how far regulators have attempted to undermine legal privilege was demonstrated by the financial services watchdog earlier this year. Arriving in the wake of the 2008 financial crisis, the Financial Conduct Authority’s senior managers regime, which has been described as a ‘paper tiger’ by lawyers, relies on greater transparency and accountability to open up standard practice in the banking sector and stop senior bankers turning a blind eye to activity that crosses a legal or regulatory line.

In-house lawyers are the proverbial fly in the ointment, however, as the transparency and reporting required by the regulator is in direct conflict with their duty to keep certain conversations confidential. Should counsel be included in the sweep of senior management responsibility? As Solicitors Journal columnist Iain Miller, then of Bevan Brittan, wrote in April, there are significant problems aligning the entitlements of privilege against the SMR’s primary objectives. Yet, the tussle between regulator and regulated continues, with the FCA issuing a discussion paper on the subject.

Last month the Court of Appeal came at the issue from a different direction when it considered Shlosberg v Avonwick. Accepting the argument of leading Serle Court silk Philip Marshall QC that legal privilege was an important individual right, the Master of the Rolls, Sir Terence Etherton, sitting with Lady Justices Gloster and Sharp, went so far as to express privilege as a human right.

The circumstances of the case involved the bankruptcy of Mikhail Shlosberg, who had defaulted on a $200m loan, and the fact that one law firm – Dechert – was working for both the trustees in bankruptcy and main creditor, Avonwick. This meant Dechert had possession of confidential communications between Shlosberg and his lawyers, which its other client, Avonwick, wanted to use in a subsequent suit against the insolvent Russian businessman.

Had Shlosberg’s rights to legal privilege in those documents transferred from him to the trustees on the event of the insolvency? To this question, the Court of Appeal gave a resounding ‘no’ and in handing down its judgment made some strong statements emphasising the importance of legal privilege that will have significant ramifications far beyond the confines of the context of this case.

A new enthusiasm for protecting this individual right has massive implications for any situation where, in an attempt to expose wrongdoing, people use confidential papers between lawyers and their clients. Indeed, it may even call for a reappraisal of the use that can be made of certain documents in the Panama Papers. It may also have similar impacts on the dynamics in whistleblowing cases and influence how the SMR affects the role of in-house lawyers.

But is this a retrograde step for transparency, accountability, and the better regulation of business? Arguably, one of the most important tests of any regime must be what happens to innocent parties dragged through the system. Do they emerge at the other end unscathed and with their rights in tact? This is a point that should not be forgotten as lawyers continue to argue for the importance of privilege.

John van der Luit-Drummond is deputy editor of Solicitors Journal

john.vanderluit@solicitorsjournal.co.uk | @JvdLD