Litigation privilege did not apply to correspondence before litigation was "reasonably anticipated", judge says

Interbrew Central European Holding (ICEH) had tried to argue that the documents were covered by litigation privilege and so protected from disclosure to the buyer, Starbev, when it later re-sold the business to another company. However, Mr Justice Hamblen found that litigation was not "reasonably contemplated or anticipated" at the time of the correspondence, at that the exchanges did not have potential litigation as their "dominant purpose".

"This judgment serves as another reminder of the rules of privilege in the context of litigation," said expert Richard Twomey of Pinsent Masons, the law firm behind Out-Law.com. "Relevant advisory documents created by banks or accounting advisors will not be protected by privilege and will be required to be handed over to the other side. In some cases, these can be extremely damaging."

"It is also a reminder that the burden of proof rests with the party asserting privilege. The courts will investigate contested privilege claims and may require independent verification that privilege applies," he said.

ICEH sold its European business to Starbev in 2009 under a contingent value right (CVR) agreement, which entitled it to a share of the proceeds if the business was sold on for a value above a certain threshold. In 2012, Starbev entered into an agreement to re-sell the business under which part of the payment was deferred. ICEH claimed that the deal had been structured in this way to reduce its entitlement under the CVR.

In April 2012, ICEH received advice from Barclays Bank in relation to the structuring of the deal. In July 2012, accountants KPMG carried out some work for ICEH in relation to the CVR agreement. ICEH tried to prevent Starbev from inspecting documents in both categories, claiming that this was protected by litigation privilege. However, the judge said that neither the correspondence with the bank nor the correspondence with KPMG met the strict legal tests for establishing litigation privilege.

Litigation privilege protects a party to litigation's documents from disclosure to the other parties. However, it only applies to communications that have been created for the dominant purpose of obtaining legal advice, evidence or information in preparation for actual legal proceedings, or where legal proceedings are reasonably anticipated. Mr Justice Hamblen found that litigation was not yet anticipated at the time of the earlier correspondence with Barclays, and that the correspondence with KPMG did not have the legal proceedings as its dominant purpose.

"Barclays' role was investigatory," the judge said. "Unless and until they confirmed that there was substance to [ICEH's] suspicion there was no real reason to anticipate litigation. This is borne out by [statements from the company that suggested] no more than that such a dispute was a possibility. It does not connote that it was reasonably anticipated both that there would be such a dispute and that it would result in litigation. Whether or not it would do so was unlikely to be known until Barclays investigated and reported."

In relation to the work carried out by KPMG, the judge found that a retainer letter sent by the accountants to ICEH made "no mention of litigation"; and in fact stated that "the next stage contemplated was discussion and agreement rather than disputation and litigation". In addition, if litigation had been reasonably anticipated at that point ICEH's lawyers would have been "duty bound to advise [it] of the need to preserve disclosable documents".

"Having carefully considered the parties' evidence and submissions I am not satisfied that it has been shown that litigation had become the dominant purpose of instructing KPMG by 20 July 2012," he said.

"In so far as it is necessary I consider that it is reasonably certain that the witness evidence on this issue is incorrect when one has regard to the evidence as a whole , and in particular to the contemporaneous documents. It may be that by 20 July litigation was reasonably anticipated. It may also be that that contemplated litigation had become a purpose for instructing KPMG. However, I do not accept that it has been established that it had become the dominant purpose for so doing," he said.