Sports Direct and Privilege

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Sports Direct and Privilege

Published 30 marzo 2020

The Court of Appeal has handed down its judgment in Sports Direct International Plc v FRC [2020] EWCA Civ 177. This was Sports Direct’s challenge to the FRC, which had sought to compel production of privileged documents, where the privilege belonged to Sports Direct (an audit client, and hence not under FRC investigation). The FRC sought these documents for the purposes of its investigation into a recent audit of Sports Direct. 

The Judgment

The primary points emerging from the judgment are helpfully clear:

  1. Legal professional privilege is a fundamental right. Parliament can override a fundamental right, but must do so unambiguously. This can be through explicit wording, or because the override is an absolutely necessary implication of the statutory provision.

  2. SATCAR (the ‘Statutory Auditors and Third Country Auditors Regulations 2016’) was the relevant legislation. The wording of SATCAR did not come close to overriding the fundamental right to privilege.

  3. There was no general rule that a regulator could demand privileged documents belonging to another (ie. the audit client) for the limited purpose of investigating a regulated person (e.g. an auditor). 

  4. Sending a non-privileged document to a lawyer did not make the underlying document privileged. The Court recognised that this might produce some difficulties in the present case where the fact that Sports Direct sent the non-privileged documents to lawyers for the purpose of soliciting their advice might be disclosed. In other document production circumstances, one might not be able to tell that a non-privileged document was sent for the purpose of obtaining legal advice.

Commentary

The public policy underlying legal privilege is to enable clients to be open and frank with their lawyers. In reaching its decision in favour of Sport Direct, and declining to order disclosure of privileged documents to its auditor’s regulator, the Court follows a long line of cases protecting privilege as a fundamental human right. Any derogation from this right is always controversial, and this Court has chosen not to do so.

The Court did consider briefly whether an audit client might suffer damage from publication of the findings of an audit investigation. The tenacity with which Sports Direct fought to maintain its privilege in itself suggests the danger of such damage is more than theoretical. Audit failures of course rarely occur without some degree of blame attaching to management. Large corporates and their directors are concerned with their reputations as well as with the need to defend the company’s interests. They are fully aware of the degree to which regulators talk to one another.

We predict that in future we will see more anonymisation of audit investigations and/or the findings that result from that investigation, as was the case with a recently published investigation by the FRC. Anonymisation may detract from the FRC’s objective of ensuring that audit regulation is not only done, but seen to be done. However, audit exists to protect a number of classes of stakeholders, and it is a perverse outcome if publication of an audit investigation actually harms the positions of those stakeholders.

We can see that the FRC might find it more challenging to conduct investigations without sight of privileged documentation relevant to the audit. All sorts of accounting decisions turn on legal advice – complex tax planning, provisioning for liabilities in a contentious proceedings etc. However, the same strictures apply in both civil and criminal courts which recognise the fundamental right to legal privilege overrides the courts’, and society’s, interest in ensuring court decisions are based upon the best probative evidence.

We have sympathy with Sports Direct’s case in respect of email attachments which are not themselves privileged, sent to lawyers for the purpose of soliciting the lawyers’ advice. Disclosure of these documents may make it obvious what Sports Direct was seeking legal advice upon, which in a limited way erodes the protection of privilege. We predict this issue will come before the courts again, where such disclosure would prejudice the audit client (or regulated entity) in some real sense.

This may not be the last time this issue comes before the appeal courts as audit enforcement investigations grow more numerous and high-profile, and heavier regulation of audit is seen as in the public interest. However, there is also a public policy interest in encouraging audit clients to be open and frank with their auditors. Ensuring the effectiveness of statutory audit is key to protecting a wide pool of stakeholders who use financial statements – shareholders, creditors, lenders, pension beneficiaries, employees etc. As we commented in our earlier article on this case [Click Here to Read], ordering disclosure of audit clients’ privileged documents to the FRC might have a chilling effect on the willingness of audit clients to be transparent with their auditor. Therefore, we hope this Court’s decision stands the test of time.

Authors

Richard Highley

Richard Highley

London - Walbrook

+44 (0)20 7894 6470

Julian Bubb Humfryes

Julian Bubb Humfryes

London - Walbrook

+44(0)20 7894 6137

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