When litigation is either underway or in prospect, the unwary can fall into the trap of assuming that everything they do that is related to that dispute (however tenuously) will be covered by litigation privilege. This, of course, is not the case. In Kyla Shipping Co Ltd & Another v Freight Trading Ltd & Others[1], the High Court of England and Wales held that an exercise to add weight to claims that, whilst made in the course of correspondence regarding the dispute, were not in fact relevant to the issues in the case, was not covered by litigation privilege.
Background
In 2018, Kyla Shipping Co Ltd (‘Kyla’) was in dispute with its minority shareholder, YPA, regarding the payment of a dividend.
In the course of correspondence, YPA asserted that its principals had assisted Kyla in respect of payment of debts arising from various forward freight agreements (‘FFAs’). This was not germane to the dispute but was being used by YPA to draw an unfavourable comparison between the good behaviour of its affiliated companies in respect of the FFAs and the (alleged) bad behaviour of Kyla in respect of the dividend.
In response, Kyla asserted that far from receiving help in respect of the debt, one of YPA’s affiliated companies, Freight Trading Ltd (‘FTL’), had in fact mismanaged the payment of the debt. Again, this was not germane to the dividend dispute. However, following the assertion, Kyla instructed an expert to audit the FFAs. A lawyer acting for Kyla explained the purpose of this instruction as follows: ‘This would allow [Kyla] to make good any legitimate grievance that might exist, for the sake of providing ballast in the correspondence with YPA…’.
As a result of the audit, facts came to light that formed the basis of Kyla’s claim against FTL and three others in respect of the original negotiation of the FFAs.
The dispute
The question before the court was whether litigation privilege could be claimed for the ‘ballast exercise’, prior to the crystallization of the facts that formed the basis of Kyla’s claim against FTL and others. For the claim to privilege to be successful, Kyla had to show that any documents in question were created for the dominant purpose of conducting litigation which was ongoing or in reasonable prospect.
Kyla submitted that the auditor was instructed in circumstances where there was reason to believe there was material to justify the bringing of a counterclaim in the ongoing dividend proceedings. In the alternative, Kyla’s submitted that its instruction of the auditor and the audit itself was covered by privilege arising from the litigation against FTL and the others which was in reasonable prospect.
The High Court’s decision
Regarding the claim to privilege based on the ongoing dividend proceedings, the court held there was no evidence at the time the expert was instructed of any thought of bringing a counterclaim. Further any proceedings in respect of the FFAs would not be brought against YPA, so would not be a counterclaim in the dividend proceedings. Finally, this claim for privilege was difficult to square with the description of the purpose of the expert instruction being for ballast in the correspondence.
Regarding the claim to privilege based on the future litigation against FTL, the court reiterated that to establish litigation is in reasonable prospect, a party does not need to show that the prospect of litigation is more than 50% but must demonstrate that there is more than a mere possibility of litigation, or a distinct possibility that someone might at some stage bring proceedings, or a general apprehension of future litigation.
The court found that when Kyla instructed the auditor, there was no evidence of wrongdoing that would form the basis of a claim against FTL and/or the other parties. It was, at the outset, nothing more than a hunch regarding a potential issue. It therefore could not be said that litigation was in prospect as between Kyla and FTL and/or the other parties.
Accordingly, as the instruction of the expert was not for the dominant purpose of the litigation that was in prospect against YPA, and there was not yet a reasonable prospect of the future litigation against FTL, the claim for privilege failed.
Takeaway
When litigation is underway, there is a risk parties may become gung-ho in their attitudes towards document production in the mistaken belief that anything even vaguely related to the case will be covered by litigation privilege. This case is a salutary reminder to remain clear headed, particularly when embarking on potentially sensitive investigative exercises.
[1] [2022] EWHC 376 (Comm)
Contributors
Alex Radcliffe