A Piece-by-Piece Basis – Defining the Scope of the ENRC Decision: Sotheby’s v Mark Weiss Ltd

By 10th January 2019 General News

In the recent decision of Sotheby’s v Mark Weiss Ltd [2018] EWHC 3179 (Comm) the High Court has ruled that correspondence with experts, which was for the dual purpose of preparing for civil litigation and making a commercial decision, was not privileged because both purposes were of equal weight.

1. Background

Facts

Sotheby’s is an auction house that was engaged to sell a 17th century Dutch painting. In accordance with the sales contract, Sotheby’s was obligated to refund the buyer if the painting was subsequently found to be counterfeit.

Several years after the sale of the painting, the buyer questioned its authenticity. Sotheby’s engaged an expert to prepare a report, which was then peer reviewed by a second expert (“the Reports”).  Both experts concluded that the painting was likely to be a counterfeit.

Sotheby’s convened a committee to decide whether it should refund the buyer and, based upon the Reports, the purchase monies were subsequently refunded. Sotheby’s promptly provided a copy of the Reports to the seller, and then brought Court proceedings against them to recover the value of the refund.

The seller brought an application for inspection of the correspondence passing between Sotheby’s and the two experts. Sotheby’s claimed that its correspondence with both experts leading up to and following the provision of the Reports was subject to litigation privilege. The seller sought an order allowing inspection of the correspondence.

Issues for Determination

The key test for whether the correspondence was subject to litigation privilege is whether it was brought into existence for the “dominant purpose” of litigation which was in reasonable contemplation.

The Decision

Teare J of the High Court held that the dominant purpose test for litigation privilege was not satisfied, because the purpose of preparing for litigation was of equal and not greater importance than the commercial purpose of deciding whether Sotheby’s would refund the buyer.

The Court ordered Sotheby’s to allow inspection of the correspondence.

2. Discussion of the implications of the ENRC decision

In reaching its decision in Sothebys, the Court considered the Court of Appeal decision in Director of Serious Fraud Office  v Eurasion Natural Resources Corporation Limited and the Law Society [2018] EWCA Civ 2006.

ENRC not Precedent for Relaxing Dominant Purpose Test

In Sotheby’s, the High Court rejected the notion that the Court of Appeal in ENRC relaxed the dominant purpose test in situations where there is a dual purpose to the document in question. The purpose of preparing for reasonably contemplated litigation must outweigh any other purpose, and where there is another purpose of equal weight, litigation privilege would not attach.

Teare J stated:
“There was a suggestion that this decision [ENRC] changed or at any rate clarified the law in those cases where a document was brought into existence for two purposes, one of which was for use in litigation. However, I do not consider that the decision changed the law…”

Rather, Teare J emphasized the importance of a factual analysis to be applied on a case by case basis:
“The assessment of dominant purpose is fact sensitive and so it is unsafe to use the determination of dominant purpose in one case to assist in identifying the dominant purpose in another. That is particularly so where the facts of the two cases are so very different, as they are here.”

The “Stick” Analogy

A key factual difference between Sotheby’s and ENRC, is that ENRC related to a potential SFO criminal investigation into the company, whereas Sotheby’s related to a civil dispute.

The threat of criminal investigation is referred to as “the stick”, in the ENRC Court of Appeal judgment, that motivates companies to conduct appropriate internal investigations into allegations of criminality.

A key public policy consideration in ENRC was the “chilling effect” that would occur if companies avoided conducting internal investigations into potentially criminal activities, in fear of the documents being later exposed.

According to the Court of Appeal in ENRC:
“… the temptation might well be not to investigate at all, for fear of being forced to reveal what had been uncovered whatever might be agreed (or not agreed) with a prosecuting authority…”

This would be detrimental to the public policy of ensuring that standards of corporate accountability are met.

In Sotheby’s, however, Teare J stated that “the stick” analogy could not be applied in the same way, where the contemplated litigation was a contractual dispute between two corporate entities:

“The “stick” analogy was no doubt appropriate in SFO v ENRC where criminal proceedings were used to enforce appropriate standards of corporate governance. But in the present case whilst civil proceedings were in contemplation they were not a “stick” in the sense used in SFO v ENRC Ltd. I do not read the ENRC case as deciding that whenever litigation is the “inevitable” consequence of taking a particular commercial decision, the dominant purpose of documents produced for the making of that decision is necessarily their use in the contemplated litigation.”

This means that the rationale of the Court of Appeal in ENRC may be limited to documents prepared for a dual purpose that includes the investigation of potential criminal conduct, under the threat of a criminal prosecution, and not simply in circumstances in which there is a threat of potential litigation of any kind.

3. The Current Position

The Sotheby’s decision is important in clarifying how the ENRC decision could be applied in future cases.

It is clear from the Judgment in Sotheby’s that the High Court did not view ENRC as forming a precedent to relax the requirements of the dominant purpose rule. This is particularly as the public policy considerations which were pertinent to the context of internal investigations into corporate criminality could not be applied in the same way to a civil dispute.

Rather, a factual analysis on a case-by-case (or piece-by-piece, as the case may be) basis remains the key to determining the dominant purpose of contended documents. This means proving, on the facts, that the purpose of reasonably contemplated litigation must be the most dominant purpose, and not one that is equal to any of the other purposes for which the documents came into existence.

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