The Court of Appeal has questioned the right of solicitors to claim privilege in communications with clients.

Nigel Hanson describes how a 500-year-old tradition faces its biggest challenge yet

Legal professional privilege may be a concept ingrained in every lawyer in the land, but following substantial judicial scrutiny of it recently, the scope of the ancient concept is uncertain.

Solicitors are nervously watching their backs, particularly in non-contentious commercial work, after a series of restrictive judgments from the Court of Appeal.

The first body-blow was delivered in March 2003, in Three Rivers District Council v Bank of England (No5) [2003] EWCA Civ 474, when the Court of Appeal settled on a narrow definition of 'client' for the purposes of deciding who benefits from legal advice privilege.

It was followed, on 1 March this year, by Three Rivers DC v Bank of England (No10), which many lawyers consider has further hobbled the concept.

Then, late last month, the CA rejected Lovells partner Andrew Foyle's assertion that advice privilege protected him from having to answer questions from the US Justice Department about his client's internal procedures in a $290 billion (158 billion) claim for damages against the tobacco industry (see [2004] Gazette, 25 March, 1).

Mr Foyle, retained by British American Tobacco (BAT) from 1985 to 1994, is not accused of any wrongdoing, but faces questions about his client's document-retention policy in relation to evidence of the harmfulness of smoking.

Colin Passmore, an authority on legal privilege and a partner at City firm Simmons & Simmons, says the very existence of privilege, which has been recognised by English courts for more than 500 years, could face further judicial challenge before what he describes as the 'torrent of new case law' ends.

As he explains, Three Rivers (No5) involved Bank of Credit and Commerce International (BCCI) liquidators seeking disclosure of materials from the Bank of England relating to its submission to the Bingham inquiry in 1992, about its regulation of the BCCI banking group.

The bank, represented by City firm Freshfields Bruckhaus Deringer, conceded it could only resist disclosure on the basis of legal advice privilege, which protects client-lawyer communications but not communications with third parties.

(The second strand of privilege - litigation privilege - was irrelevant because no proceedings were contemplated.)

The CA held that the client here was not the bank and all its staff, but rather three senior employees, known as the Bingham inquiry unit, who co-ordinated the submissions.

Consequently, the bank had to disclose a large amount of internal documentation prepared in the course of compiling submissions to the inquiry, which were not part of the unit's communications with Freshfields.

The court also held that these documents would not have been privileged in any event because they were not prepared for the dominant purpose of obtaining legal advice; compilation and provision of the documents had merely fulfilled the bank's duty to put relevant material before the then Lord Justice Bingham (who is now the senior Law Lord).

This ruling enabled the liquidators to withdraw their previous concession that communications even between the unit and Freshfields were covered by legal advice privilege and they returned to court, in Three Rivers (No10), contending that the main purpose of these communications was simply to co-operate with the Bingham inquiry.

The Master of the Rolls, Lord Phillips of Worth Matravers, ruled that the bank's communications with its lawyers were mainly to do with presentational issues: how best to present its evidence to the inquiry so as to avoid criticism, rather than obtaining advice on legal obligations.

As such, they were not privileged even though they were direct solicitor-client communications.

Lord Phillips said privilege applies only within 'justifiable bounds' and the fact that any work done is within the ordinary business of a solicitor does not necessarily mean that it attracts privilege.

His pronouncements have rung alarm bells among the profession.

Mr Passmore says: 'The real concern caused by this decision is that the Court of Appeal has put down a huge marker that the boundaries of advice privilege will be strictly confined.

'This will undoubtedly create nervousness in any situation where a solicitor's role may tend to go beyond dealing with strict legal rights and obligations.

'What if a solicitor becomes involved in commercial and strategic issues? Is the advice covered or not, and does the existing case law on this still hold good?'

He adds: 'The reality may well be that the very justification for privilege, namely encouraging full and frank disclosure to a lawyer, has been undermined by these decisions, with the result that clients may start to think even more carefully about what they put in writing.'

The Court of Appeal made clear it found this area of the law 'not merely difficult but unsatisfactory', adding that where litigation was not anticipated, 'it is not easy to see why communications with the solicitor should be privileged'.

It even questioned whether privilege should attach, for example, to conveyancing or will-drafting and suggested a review of the law.

Mr Passmore senses judges are beginning to ask what is so special about the lawyer/client relationship that it should attract privilege when private communications with, say, an accountant or priest do not.

'There is perhaps a debate to be had,' he concedes.

'Judges developed the law of privilege, but it's quite clear that some judges do not like it.

They are worried that it is used to keep evidence away from courts.'

However, the debate was had as one strand of the then Lord Chancellor's Department's 2002 'In the Public Interest' consultation, which asked whether legal professional privilege should be curtailed to litigation privilege, extended to other communications and professionals, or left as it is.

The government concluded there should be no alteration, in line with the majority of respondents (most of whom who were, of course, lawyers).

It expressed concern about extending privilege, as it could help people avoid the reporting obligation in respect of suspicious transactions.

John Goddard, a partner at Freshfields, says Three Rivers (No10) raises two points of particular importance.

'First, the Court of Appeal in its judgment thought we were seeking an extension of the law in claiming privilege for these documents,' he says.

'We didn't think we were.

We thought they were privileged under the law as it stood.

'Second, the documents now to be disclosed are affected retrospectively, so it's not just about people in future that know they have to be careful.

This applies to documents provided by the bank and lawyers in the belief that they were privileged.'

The bank has since petitioned the House of Lords for a further hearing after being refused leave to appeal by the Court of Appeal, Mr Goddard says.

Meanwhile, in USA v Philip Morris, Lovells partner Mr Foyle faces a grilling this month about his communications with BAT Co, a subsidiary of BAT.

He was left exposed after a 'letter of request' from the US authorities initiated discovery proceedings in London.

A judge will now decide, on a point-by-point basis, which questions he must answer and which are covered by privilege.

His solicitor, Val Davies, a litigation partner at City firm Norton Rose, says Three Rivers can be contrasted with the more expansive proposition in Balabel v Air India [1988] 2 All ER 246 that privilege attaches to the 'continuum' of transactions between lawyer and client in giving and seeking legal advice.

Ms Davies says: 'One wonders whether the judges have thought its ambit has begun to be too broad and they are reining it back.

'Three Rivers has certainly altered the situation.

It is virtually unprecedented for one party to litigation to seek to call evidence under compulsion from the opposing party's solicitors.'

The facts of Three Rivers, she adds, were unusual and the CA may not have foreseen all the ramifications of its rulings.

However, both she and Mr Passmore are confident that most solicitors' firms have spotted the risks and are reviewing their practices.

For those ubiquitous e-mails, Simon Halberstam, a partner and head of e-commerce at City firm Sprecher Grier Halberstam, recommends beginning and ending messages with a clause such as: 'This communication is made for the purpose of obtaining legal advice or preparing for legal proceedings and legal privilege will be claimed accordingly.'

He suggests it may help in negotiating or sorting documents, but he warns that even this device could be devalued if used indiscriminately and that courts will always scrutinise first the nature of any communication in deciding whether privilege attaches.

In the UK, privilege protects in-house legal teams and external lawyers equally, but since Australian Mining & Smelting Europe Ltd v Commission (CJEC 155/79 18 May 1982), there has been no protection for in-house lawyers under EU law.

This has meant Brussels-based competition regulators have enjoyed powers to seize lawyer/client communications from in-house lawyers for their investigations.

Two companies, Akzo Nobel Chemicals and Akcros Chemicals, are challenging this, having won interim relief from the Court of First Instance.

Following the companies' initial victory in October last year, a full hearing of the issue is expected later this year.

Privilege, then, may be down rather than out after its bouts with the British and European judiciary.

But is a knock-out punch just around the corner?

Mr Passmore, who is urgently revising the draft second edition of his textbook, Privilege, suspects more challenges lie ahead.

'Is it completely off the wall to suggest that Three Rivers (No10) may just be an inducement in the right case to attack even the scope of litigation privilege?' he asks.

'After all, how much presentational work goes into a witness statement?

'It may be that this case will start a debate as to whether privilege - confined as it is solely to communications with lawyers as opposed to other professionals - is justifiable in the 21st century.'

Nigel Hanson is a freelance journalist