Iniquitous acts and sharp practice - fraud unravels all07 Nov 2012
This briefing explains the crime/fraud exception to legal professional privilege and considers the position in Jersey in light of the English case of BBGP Managing General Partner Ltd and others v Babcock & Brown Global Partners ("BBGP").
Legal professional privilege
The rationale for legal professional privilege is to allow clients to turn to a lawyer for advice and help and, if proceedings begin, for representation; it allows clients to find out what they can do under the law, what is forbidden, where they must tread carefully and where they run risks. Such advice is confidential and privileged, entitling clients to withhold it from production to a third party or Court. Legal professional privilege is divided into two categories:
- Advice privilege: attaching to confidential communications between a lawyer and his client for the purpose of obtaining advice within a certain legal context.
- Litigation privilege: attaching to confidential communications between a lawyer and his client or third party, made for the dominant purpose of either actual or contemplated litigation.
Legal professional privilege is an important, substantive right. Indeed, Lord Hoffmann described legal professional privilege as “a fundamental human right long established in the common law". However, it may be lost or overridden. A client may waive privilege.
Further, a client may lose privilege unwillingly or unwittingly, pursuant to the crime/fraud exception, the extent of which is uncertain under English law and has not been considered recently (or ever in any detail) in the Jersey Courts.
The crime/fraud exception - early English cases
The justification for an exception to this substantive right is that fraud (or crime) unravels all. In the wider interest, where acts are iniquitous, all documents must be produced in order for justice to prevail. Therefore, documented legal advice may be disclosed as part of the discovery process by order of the Court. The view taken by the Courts was that if a commercial act was sufficiently iniquitous, any legal advice given in relation to that act was not provided or received in the course of business and was therefore not privileged.
The circumstances in which a Court would make such an Order should be exceptional. The English law genesis of the exception related purely to crime, in order to prevent the perpetrators of monstrosities (such as treason and murder) taking legal advice in relation to such acts with impunity. However, over time, the test softened and the exception has been applied widely in civil cases as well. An early civil example was an attempt to defeat or delay the holders of floating debentures, which amounted to "commercial dishonesty".
At times, the English law test has appeared to be narrow. Crescent Farm (Sidcup) Sports Limited v Sterling Offices Limited  Ch. 553, concerned a conspiracy to breach a contract, in which production was not ordered. Goff J refused to "extend the principle" and stated: "I agree that fraud in this connection is not limited to the tort of deceit and includes all forms of fraud and dishonesty such as fraudulent breach of trust, fraudulent conspiracy, trickery and sham contrivances, but I cannot feel that the tort of inducing a breach of contract or the narrow form of conspiracy pleaded in this case comes within that ambit." Indeed, at one stage, it seems that "dishonesty" was certainly required. However, recent cases suggest a broader view of iniquity.
What was becoming clear, however, is that there must be prima facie evidence of an intention to further a criminal/fraudulent purpose, and not simply a mere allegation of such conduct. Further, there must be prima facie evidence that the document in question came into existence in furtherance of that fraud. Therefore, it is often the case that interlocutory applications for production fall at that evidential hurdle because the trial has not yet occurred and no determination has been made as to whether there was a fraud or whether the document was in furtherance of that fraud.
Later English cases - commercial "sharp practice" and the innocent client
Although the evidential burden is still high, the nature of iniquity appears to have broadened in recent years. In Barclays Bank plc v Eustice  4 All ER 511, CA, the Court of Appeal seemingly extended the exception. The defendant was alleged to have entered into transactions at an undervalue within the meaning of s.423 of the Insolvency Act 1986. Schiemann LJ noted the Court's reluctance to invoke the exception, but regarded the defendant's "sharp practice" in attempts to find a way of taking his assets out of Barclays’ reach as being sufficiently iniquitous. It did not matter that the defendant may well have thought that the transactions would not fall to be set aside under s.423 either because he thought that the transactions were not at an undervalue or because they thought that the court would not find that the purpose of the transactions was to prejudice the bank; the fact was that the Court thought that this conduct was "sharp" and should not be privileged from disclosure. Therefore, the judgment suggests that if a client acts upon legal advice, then he might lose privilege over that advice where the actions are subsequently adjudged to be "sharp practice" - a somewhat nebulous term. This imprecise extension of the exception is concerning and, subsequently, the judgment has been criticised.
Further, in R v Central Criminal Court, ex p. Francis & Francis (a firm)  1 AC 346 (HL), the fraud/crime exception was found to apply, even though both the solicitor and client were not implicated. There was an application to judicially review the issue of a production order requiring the solicitors to disclose documents relating to the purchase of properties. The solicitor’s client, who was related to a drug-trafficking suspect, had apparently been unaware that proceeds of crime had formed part of the purchase funds for the properties. Fraud unravels all, even to the detriment of an innocent client, it seems.
Recent application - breach of fiduciary duty
The recent English funds case of BBGP arguably further extended the principle of iniquity.
The Babcock & Brown Group (“B&B Group”) is a global investment, fund management and advisory group. It established Babcock & Brown Global Partners (“Global”), an English limited partnership, in order to make investments for investors (who included hedge funds, asset managers, trusts, individuals and partnerships) as identified by the B&B Group. The general or managing partner was BBMGP Managing General Partner Ltd (the “GP”), a Cayman company whose shares were owned by a member of the B&B Group. The original limited partners were B&B Group entities (which ultimately provided approximately 12% of the partnership commitments). A further 130 limited partners contributed the balance of the €372 million fund.
The GP, as a company, could act only by its board of directors and any agents to whom they had delegated relevant responsibilities. The board consisted of two Cayman professionals ("Mr M" and "Mr F") and an employee of the B&B Group ("Mr H", who was also a limited partner in Global as an investor in the fund). Mr H was seconded to the GP and he was its effective executive director (Mr M and Mr F were not in fact involved in the day-to-day investment management business of The GP). Mr H was assisted by two other employees of the B&B Group, and they constituted the fund management team. Global, as a partnership, is a collection of legal persons. Their rights and obligations as partners in relation to the outside world are created by the GP as general partner (which alone has authority to act on behalf of and in the name of Global and to commit Global to the performance of any obligation).
In 2009, the GP was removed as general partner of Global by the limited partners (which was disputed by B&B Group). In the process of handing over the books and records to the new general partner, solicitors acting for the B&B Group discovered, on the B&B Group server, legal advice from another firm of solicitors. It was unclear who the advice was provided to. It was addressed to Mr H at the Cayman address of the GP and sent to his B&B Group email address. Who was the client? Was the document privileged? The B&B Group sought clarification of the status of the advice from the High Court, arguing that the (relevant) client had no claim to legal professional privilege against the B&B group, nor against the world at large.
Looking carefully at the terms of engagement and circumstances, Norris J established that the client was in fact Global (the collection of limited partners/investors). The advice was sought by the GP (by its human agent Mr H) as managing partner on behalf of Global. Despite being on the B&B Group server, it was presumed to be confidential to Global and, thus, capable of being subject to a claim of legal professional privilege.
However, the evidence was that Mr H, who had become dissatisfied with the performance of the fund and the management of his employer, B&B Group, sought the legal advice about potential claims available to the investors against the B&B group, and even asked for advice about claims against the GP itself. Further, the partners of Global, acting through Mr H and other members of the fund management team, consulted the solicitors with regard to removing cash from the bank account and out of reach of the GP (to an escrow account) and then removing the GP as general partner without compensation. This act was in breach of Mr H and the fund management team's fiduciary duties to the GP. There was a strong prima facie case before the Court that they sought legal advice in order to be guided or helped in doing so. They had engaged in sharp practice. Having reviewed the case law outlined above, Norris J held that the conduct and evidence was "sufficient to engage the iniquity principle". If it was a case of innocent clients losing privilege (which the judge questioned in any case), then in light of Francis (above), the judge deemed this irrelevant. As a result, it was ordered that the GP and the B&B Group could use the legal advice freely.
The position in Jersey
There is only one case on point in Jersey: Shirley v Channel Islands Knitwear Company Limited and Sangan, in 1986. The plaintiff (who appeared in person) had been a director of the first defendant company, along with the second defendant. He was dismissed from employment and brought an action for breach of contract alleging a "plan" to remove him unlawfully without notice and requested production of legal advice provided to the company. Commissioner Le Cras did not order production: "Neither the allegations of Mr. Shirley nor his assertions as to the conduct….. come anywhere near to displacing the defendant’s privilege and I have no hesitation in ruling against him on that ground also." Not much can be gleaned from this case as there was a clear failure to meet the evidential hurdle.
As such, the nature of the exception under Jersey law is unclear. The approach of Commissioner Le Cras in the case of Shirley suggests that Jersey law would likely follow English law. However, with different concepts of fraud under Jersey law, including dol and erreur, for instance, this should not be assumed. The exception may only apply in Jersey to crime, or it may be as wide as commercial dishonesty, sharp practice, improper or illegal purpose. Being a highly regulated offshore finance centre, it is likely that a narrow approach will not be taken, especially in relation to fraud/iniquity carried out by Jersey professionals.
Falling foul of the exception - managing the risks
The erosion of professional legal privilege is concerning. It comes alongside increased regulatory scrutiny. Until the true position is ascertained in Jersey in relation to the crime/fraud exception, a cautious approach should be taken to ensure that clients are alive to the risks.
As such, the following practical points should be noted:
- Clients must be very careful to decide, and to define at the outset of the relationship with their lawyer, the precise identity and legal status of the client entity and its roles and duties.
- Clients wearing more than one hat in a corporate structure (in terms of legal duties) should take care when requesting legal advice and/or when using a single email address for different roles.
- Clients should consider the individuals who can instruct the lawyers and who will be able to see the advice; the larger the pool the greater the risk of privilege being lost inadvertently.
- Clients should always be open and transparent with their lawyers about their true motives and purpose when seeking advice.
- Clients should be aware that if they ask advice about matters which might subsequently be adjudged to be "sharp", there is a risk that such advice might not be privileged.
- In light of all of this, when sending an email or making a note in relation to legal advice, clients and lawyers should bear in mind that it might, possibly, be disclosed as some point. Further, the exception is not confined to legal advice privilege - it also applies to litigation privilege. So clients engaged in actual or contemplated litigation must be just as careful when corresponding with their litigation lawyers as with their corporate transactional lawyers.
- Of course, plaintiff clients may wish to take advantage of the exception and should discuss the merits of an interlocutory application with their litigation lawyers during the discovery process if legal advice provided to the defendant might be relevant and helpful. However, despite the uncertain state of the law, speculative applications should not be encouraged and the points made above about meeting the necessary evidential hurdle (rather than merely alleging fraud) are reiterated.
 See for instance, AM & S Europe Ltd v EC Commission (case 155/79)  QB 878, 913.
 See R (on the application of Morgan Grenfell & Co Ltd) v Special Commissioner of Income Tax  UKHL 21,  1 AC 563.
 A decision of the Supreme Court is needed to clarify the law.
 A lawyer would not be acting professionally when advising on or assisting with an illegal act, even if unaware of the illegality. If a client withholds his true intention from his lawyer, then there is no confidence.
 See R v Cox and Railton (1884) 14 QBD 153, 165-6. The actual crime in this case was not so monstrous, being the charge of conspiring to defraud a judgment creditor.
 Williams v Quebrada Railway, Land & Copper Co  2 Ch. 751.
 In Gamlen Chemical Co (UK) Ltd v Rochem Ltd (No 2) (1979) 124 Sol Jo 276, Goff LJ stated that, "the court must in every case, of course, be satisfied that what is prima facie proved really is dishonest, and not merely disreputable or a failure to maintain good ethical standards." However, he ordered production in the case where there was a conspiracy by former employees breaching their duty of fidelity and confidence to a company. A solicitor had been instructed by the employers of the plaintiff company to acquire three "ready made" companies to carry out business in the same field as that of the plaintiff.
 See further O’Rourke v Darbishire  AC 581.
 R. v. Gibbins  2 Archbold News 1, CA.
 See McE, Re (Northern Ireland)  UKHL 15 (11 March 2009), Lord Neuberger at paragraph 109 : "for my part I would leave open whether the latter case was rightly decided."
 This has been applied in the civil case of Owners and/or demise charterers of the dredger “Kamal XXVI” and the barge “Kamal XXIV” v Owners of the ship “Ariela” and another  EWHC 2531 (Comm),  1 ALL ER (Comm) 477. It was also applied/considered in BBGP, discussed below.
 Paragraph 73 of the BBGP case.
 Paragraph 64 of the BBGP case.
 Note that there were certain claims against B&B Group in relation to which the iniquity principle was not invoked. See paragraph 75 of the judgment.
 1985-86 JLR 404.
 Commissioner Le Cras appeared to favour a narrow approach under Jersey law in Shirley, but was persuaded by the narrow English case law at the time, especially Crescent Farm. However, submissions on the exception (especially from the litigant in person) appear to have been minimal.
 Kuwait Airways Corporation v Iraqi Airways Company  EWCA Civ 286,  1 WLR 2734.